Department of Veterans Affairs Home Loans
Congress created the VA Loan Guaranty Program in 1944 to help returning service members achieve the dream of homeownership. Since then, the Department of Veterans Affairs has helped more than 18 million military members purchase homes.
What is a VA Loan?
A VA loan is perhaps the most powerful and flexible lending option on the market today. Rather than issue loans, the VA pledges to repay about a quarter of every loan it guarantees in the unlikely event the borrower defaults.
That guarantee gives VA-approved lenders greater protection when lending to military borrowers and often leads to highly competitive rates and terms for qualified veterans.
What are the key benefits of a VA Loan?
Far and away, the most significant benefit of a VA loan is the borrower’s ability to purchase with no money down. Apart from the government’s USDA's Rural Development home loan and Fannie Mae’s Home Path, it’s all but impossible to find a lending option today that provides borrowers with 100% financing.
VA loans also come with less stringent underwriting standards and requirements than conventional loans. In fact, about 80% of VA borrowers could not have qualified for a conventional loan. These loans also come with no private mortgage insurance (PMI), a monthly expense that conventional borrowers are required to pay unless they put down at least 20% of the loan amount.
- Competitive interest rates that are routinely lower than conventional rates
- No prepayment penalties
- Sellers can pay up to 6 percent of closing costs and concessions
- Higher allowable debt-to-income ratios than for many other loans
- Streamlined refinancing loans that require no additional underwriting
Despite the broad eligibility requirements, fewer than 10 percent of the nation’s nearly 25 million veterans have taken advantage of the home loan benefits earned by their service.
Some veterans believe they’re ineligible, while others are unsure of how to take action. A VA survey conducted in 2004 found that 20 percent of veterans were completely unaware of the VA Loan Guaranty Program and what it could mean for their families.
Who is eligible for a VA Loan?
Across the country, millions of veterans and active-duty service members are eligible to participate in the VA Loan Guaranty Program. Those who fit into one or more of these categories may be eligible:
- Military members who have served 181 days on active duty or three months during wartime
- People who have spent at least a half-dozen years in the National Guard or Reserves
- Spouses of those killed in the line of duty
Certificate of Eligibility
Veterans and active-duty service members have to obtain a Certificate of Eligibility from the VA. This is a formal document that basically certifies that the prospective borrower has a VA entitlement and is eligible to participate in the program. An entitlement is the amount of money the Veterans Administration will guarantee a loan.
Veterans can download a Request for Certificate of Eligibility online. VA-approved lenders will also help veterans obtain and fill out these forms automatically and electronically.
It’s important to remember that not everyone who is eligible for a VA loan will ultimately obtain one.
What can I buy with a VA Loan?
VA loans are primarily used for buying or building single-family homes, but these flexible loans can also help veterans improve their current living conditions or save more money each month through refinancing. Veterans can use a VA loan to:
- Refinance an existing VA-guaranteed or direct loan in order to lower the current interest rate
- Refinance in order to take out cash
- Repair, alter or improve a residence owned by a veteran
- Simultaneously purchase and improve a home
- Make energy efficiency improvements through an Energy Efficient Mortgage in conjunction with a VA purchase or VA refinance
- Purchase a one-family residential unit in a condo development approved by the VA
- Purchase a farm residence to be owned and occupied by the veteran
- Purchase a manufactured or modular home and/or the lot
Veterans and active-duty service members cannot use a VA loan to purchase an investment property. These are geared toward helping eligible veterans become homeowners, not landlords or entrepreneurs.
What is the VA Lending Limit?
Contrary to popular belief, there isn’t an actual maximum cap on VA loan amounts. The maximum VA loan amount will depend on a host of factors. Generally, VA-approved lenders will adhere to limits and guidelines established by the federal mortgage agencies, Fannie Mae, and Freddie Mac. Throughout most of the country, qualified borrowers can obtain a loan worth up to $417,000 without putting down any money. That limit is higher in some of the nation’s more expensive counties, where loan limits can rise to $625,000 and beyond.
Do veterans have to pay for anything?
VA loans allow most qualified veterans to purchase without putting down a single dollar toward a down payment or closing costs. The VA caps fees and costs that veterans can pay, although there are a few things, like appraisals, that veterans often have to cover out of their own pockets. Veterans also have to pay a VA Funding Fee, which is a charge on every loan that helps pay for the costs of the VA Loan Guaranty Program. Regular military and members of the Reserves and National Guard pay different rates. Here’s a look at the VA Funding Fees:
- 2.15% with no down payment
- 1.50% with a 5% or more down payment
- 1.25% with a 10% or more down payment
Reserves and National Guard
- 2.4% with no down payment
- 1.75% with a 5% or more down payment
- 1.50% with a 10 percent or more down payment
While veterans have to pay the VA Funding Fee, they can have it rolled into the cost of the loan.
Why would I not choose a VA Loan?
VA loans have made a difference in the lives of millions of veterans. They allow eligible veterans and active-duty service members with lower incomes and less-than-perfect credit to become responsible homeowners, but they may not be for every veteran.
Those who come to the table with greater liquidity and cash reserves may find a better interest rate with a conventional loan, but that is certainly not the vast majority of VA borrowers. VA loans can also be a turnoff to some sellers, who might need to pay an additional closing cost fee or make an extra repair.
VA loans also have some institutional stereotypes as being slow and difficult to process. The agency is much more streamlined and efficient today than it was in years past. In most cases, a VA loan is going to be the best fit for an eligible veteran, service member or spouse.
No other lending product can match the benefits and buying power.