What Is a VA Home Loan?

A soldier and his family stand in front of a house
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DEFINITION
The Department of Veteran's Affairs (VA) guarantees a portion of a home loan when a veteran uses their benefits to buy a home. A VA home loan lets veterans get home loans with more favorable terms than a non-VA loan.

The Department of Veteran's Affairs (VA) guarantees a portion of a home loan when veterans use their benefits to buy a home. A VA home loan lets veterans get home loans with more favorable terms than a non-VA loan.

These loans have a lot of benefits, such as requiring no money down, no private mortgage insurance (PMI), and better rates than you might otherwise be able to get. Learn more about the benefits of a VA loan and how they work.

Definition and Example of a VA Loan

The U.S. Department of Veterans Affairs (VA) doesn’t loan money; mortgages are provided by private lenders. However, VA guarantees a portion of the loan that it will cover if you default, also called the entitlement. This may prompt lenders to offer more favorable terms for veterans.  

The VA loan was created in 1944 to reward veterans returning from World War II for their service, by making it easier for them to get into a home with an affordable mortgage. It remains one of the most popular mortgage programs today. For example, in 2021, over 1.4 million VA loans were granted for home purchases. There's a reason for the program’s popularity, and it has to do with some smokin' VA home loan benefits.

How Does a VA Loan Work?

VA loans are a great way to save money on a mortgage because of unique cost-saving tricks. Here are the main VA loan benefits.

No Down Payment

For most people, the biggest benefit of the VA loan is that you don't need to put any money down. It's one of the few remaining programs that still allows this. Since saving up for a down payment is often a barrier to homeownership for many people, this can be a huge help. 

Still, if you can afford it, it's a good idea to put as much money down as you can. There are even a few situations where a down payment may be required with a VA loan. This usually happens if the home appraises for less than your offer (a situation called an "appraisal gap," which is common in bidding wars where multiple buyers compete for the same property). It can also happen if you don't have full entitlement, which can happen if you've defaulted on a previous VA loan or have an unpaid VA loan on another property.

No PMI

Normally, if you put less than 20% down with a conventional loan, you'll have to pay for private mortgage insurance (PMI). This protects the lender if you default, and it can tack a hefty amount onto your monthly mortgage payment. 

There's no monthly PMI payment with VA loans, even if you put zero down. This eliminates a huge cost and makes your monthly payments more affordable right from the start.

Flexible Credit Requirement

The VA doesn't have a minimum credit requirement to get a VA loan. However, individual lenders have credit requirements that you'll need to meet to qualify for a VA loan. 

VA loan requirements are usually easier to meet than those for a traditional mortgage. Most lenders require a credit score of 620 to qualify. That's a lot lower than the 753 average credit score for traditional mortgage holders in 2020. It's also easier to buy another home sooner with a VA loan if you've run into credit problems in the past, such as a foreclosure (even if it happened on a VA loan). You'll only need to wait two years before you can use your VA loan benefits again.

Assumable

One unique benefit of a VA loan is that you can transfer the mortgage to the buyer when you sell your house. After they buy the home and the mortgage is transferred, you’ll be released from the loan, and the buyer will continue to make the payments.

Having this ability to transfer the mortgage can be a great selling point if you locked in a low rate at the beginning of your loan and rates have gone up since then. In addition, it saves the buyer the hassle of having to get an entirely new loan and may save them a significant amount of money on closing costs. Before you can transfer your mortgage, though, the buyer will need to undergo a review of their finances and credit just like you did when you took out the original loan. 

Limits on Closing Costs

If you get a VA loan, the seller will be required to pay certain closing costs, including the commission for the buyer's and seller's agent and a termite report. It's optional for the seller to pay other fees, such as the VA funding fee for your loan or the appraisal fee.

If you can negotiate to have the seller pay these optional fees, you can't ask them to pay more than 4% of the loan amount.

However, this does have a downside in a hot market. Because the seller is required to pay certain closing costs if you're using a VA loan, your offer may end up at a disadvantage to others that don't have this requirement. 

Lifetime Benefit

You can use your VA loan benefit over and over again for the rest of your life. So even if you've defaulted on a VA loan in the past, or your Certificate of Eligibility (COE) says "$0 basic entitlement," you may still be able to get a VA loan. In addition, there are no limits to the amount of loan you can get.

You may also be able to have two VA loans at one time or get a jumbo VA loan if you're buying a home above the FHFA conforming loan limits in your area—$647,200 for most areas and up to $970,800 in high-cost areas.

The only limitations of the benefit are that the VA only guarantees 25% of a loan above $144,000 or 25% of the county FHFA loan limit minus the amount of a previously used entitlement that has not been restored, whichever is less.

Lower Rates

VA loans have a higher up-front cost with the VA funding fee, which is calculated as a percentage of the total amount of your loan. The funding fee helps reduce the cost of VA loans to taxpayers.

VA loan rates are usually lower on average. For example, in September 2021, VA loan rates averaged .32% lower. That might not seem like a big difference, but it could save you tens of thousands of dollars throughout the life of the mortgage. 

There are even special VA loan refinance programs (Interest Rate Reduction Refinance Loan, or IRRRL) that allow you to stay with the VA loan program and refinance to get a better rate.

Frequently Asked Questions (FAQs)

What do you need to prove you’re eligible for a VA loan?

  • If you're a veteran, you'll need a copy of your DD-214 and be eligible to receive VA benefits.
  • If you're an active-duty service member, you'll need a statement of service detailing your personal information and service details.

What are the service requirements for a VA loan?

  • The service requirements vary depending on when you served, when you separated from service, and whether you were discharged with a service-connected disability.
  • Active-duty servicemembers and veterans have service requirements that vary between 90 days and 24 continuous months.
  • National Guard and Reserve members have a minimum of 90 days of active duty service.

Key Takeaways

  • VA loans require no money down, no PMI, and offer better rates than conventional loans.
  • VA loans charge an up-front VA funding fee, which can tack up to 3.6% onto your loan.
  • VA loans can be reused multiple times, even after foreclosure on a previous VA loan.


Article Sources

  1. U.S. Department of Veterans Affairs. "VA Home Loans Lender Statistics," Download "FY 2021 Lender Loan Volume." Accessed Jan. 9, 2022.

  2. U.S. Department of Veterans Affairs. "VA Home Loans." Accessed Jan. 9, 2021.

  3. U.S. Department of Veterans Affairs. "VA Home Loan Basics-Introduction to the VA Loan Program," Page 10. Accessed Jan. 9, 2022.

  4. Consumer Financial Protection Bureau. "How to Decide How Much to Spend on Your Down Payment." Accessed Jan. 9, 2021.

  5. Caliber Home Loans. "VA Fixed Rate Home Loans." Accessed Jan. 9, 2022.

  6. Experian. "Experian 2020 Consumer Credit Review." Accessed Jan. 9, 2022.

  7. U.S. Department of Veterans Affairs. "Rights of VA Loan Borrowers (Important Notice)." Accessed Jan. 9, 2022.

  8. U.S. Department of Veterans Affairs. "VA Funding Fee and Loan Closing Costs." Accessed Jan. 9, 2022.

  9. Federal Housing Finance Agency. "FHFA Announces Conforming Loan Limits for 2022." Accessed Jan. 9, 2022.

  10. U.S. Department of Veterans Affairs. "Maximum VA Guaranty Calculation." Accessed Jan. 9, 2022

  11. U.S. Department of Veteran's Affairs. "VA Funding Fee and Loan Closing Costs." Accessed Jan. 9, 2022.

  12. ICE Mortgage Technology. "September 2021 Origination Insight Report," Page 5. Accessed Jan, 9, 2022.

  13. U.S. Department of Veterans Affairs. "Interest Rate Reduction Refinance Loan." Accessed Jan. 9, 2022.

  14. U.S. Department of Veterans Affairs. "How to Apply for a VA Home Loan Certificate of Eligibility." Accessed Jan. 9, 2022.

  15. U.S. Department of Veterans Affairs. "Eligibility Requirements for VA Home Loan Programs." Accessed Jan. 9, 2022.