Department of Veterans Affairs Home Loans (VA Loans)

VA loans can help you buy, improve on, or refinance a home

Pros and Cons of VA Loans include Pros: Lower costs upfront May offer better rates and lower terms Assumable by new homeowners Consumer-friendly loan terms Cons: Strict service requirements Not offered by all lenders Risky if home values drop

Image by Brianna Gilmartin © The Balance 2020

VA loans are a type of mortgage product reserved for military service members, veterans, and spouses and survivors of veterans. They’re unique from most other mortgages in that they do not require a down payment or mortgage insurance, and are assumable.

What Is a VA Loan?

A VA loan is a mortgage available to veterans, military members, and their spouses. They can be used to buy a home, improve on an existing home, or refinance a current mortgage. 

VA loans come with a guarantee from the Department of Veterans Affairs. Veterans Affairs will repay the lender if the borrower defaults on their loan. This extra protection for the lender encourages better terms and interest rates compared to many other loan programs. 

What Are the Pros & Cons of a VA Loan?

Pros
  • Lower upfront costs

  • May offer lower rates and better terms

  • Assumable by new homeowners

  • Consumer-friendly loan terms

Cons
  • Strict service requirements

  • Not offered by all lenders

  • Risky if home values drop

There are many advantages to using a VA loan over other mortgage products. The upfront costs are significantly reduced as there’s no down payment or mortgage insurance required. While there is a funding fee, you can finance it and pay that cost off over time.

Because VA loans come with a VA guarantee—and the promise of repayment (at least partially) if the borrower forecloses—they often lend themselves to lower interest rates and more favorable loan terms, too. 

The VA loan program is very consumer-friendly, imposing limits on fees that can be charged during the homebuying process and even asking sellers to pitch in on some traditionally buy-side charges. 

Finally, VA loans are also assumable. This means they can be transferred to a new homeowner if the borrower sells the house. This can be a huge perk for the buyer, as the new owner would enjoy the same low rates and terms currently on the loan. Buyers do not need to be veterans or service members in order to assume a VA mortgage. 

If the loan assumer defaults on your loan, it could have consequences for your future VA loan eligibility. Carefully research pros and cons before allowing someone to assume your loan. 

On the downside, new VA loans are only available to veterans, military members, and spouses meeting service requirements, and only VA-approved lenders can issue them. Additionally, if you forgo a down payment and finance your funding fee, you could find yourself owing more than your mortgage is worth if local home values drop.

What Kinds of VA Loans Are Available?

The Native American Direct Loan program offers VA loans issued directly by the Department of Veterans Affairs. Only Native Americans buying, building, or improving on a property located on federal trust land are eligible for these loans. 

There are also VA-backed loans, which are guaranteed by the VA, but issued by an outside mortgage lender. VA-backed loans come in three forms.

  1. Purchase loans: These can be used to purchase a property. 
  2. Interest Rate Reduction Refinance Loans: These are for homeowners with VA-backed loans who wish to lower the interest rate on their current VA loans, or move from a VA-backed adjustable-rate mortgage (ARM) to a fixed-rate loan.
  3. Cash-out refinance loans: These loans allow homeowners to refinance, and take equity out of their homes for other uses, including home improvements. 

Cash-out loans do require you to provide your lender with employment information and to get an appraisal of your home. 

Who Is Eligible for a VA Loan?

To be eligible for a VA loan, you or your spouse needs to be a veteran or active-duty military service member who has met certain service requirements. Some National Guard members, Reservists, and surviving spouses of deceased military members may also be eligible. 

Days of service requirements range widely. As little as 90 days of service are required if you served during historic times of war before May 7, 1975 (World War II, Korean War, Vietnam War). Up to 181 days of continuous service is required in non-wartime periods

For those served between 1980 and 1990, the requirement usually drops to 24 months of service or the full period for which you were called to active duty, for a minimum of 181 days.

Exceptions to service requirements are made for discharges due to a service-related disability or injury, certain medical conditions, and several other situations.

From 1990 to today, you can qualify by serving in any of these ways:

  • 24 continuous months of service
  • The full period for which you were called to active duty (at least 90 days minimum) 
  • 90 days if discharged due to hardship, reduction in force, or the convenience of the government

In some cases, reservists and members of the National Guard are also eligible for VA loans. Eligibility requirements include 90 days of active duty, six years of service, and one of the following conditions: Honorable discharge, retirement placement, transference to standby, or continued service.

Certificate of Eligibility

To prove you meet the above requirements, you’ll need to produce a Certificate of Eligibility from the VA. To do this, log into your eBenefits account at VA.gov.

How Much Can You Borrow With a VA Loan?

There are no official limits with VA loans. However, the VA will only guarantee a certain portion of your loan balance, so individual lenders may institute their own limits to offset any risk. Most lenders will loan you up to four times your basic VA loan entitlement, which is $36,000.

If you’re hoping to buy a home priced higher than this, the VA may guarantee a larger portion of your loan balance, up to 25% of your county’s conventional loan limits.

You can boost your loan amount if you can also offer a down payment.

How Much Do Veterans Pay?

There is no down payment required on VA loans, but borrowers do pay a funding fee in most cases. These fees vary based on your loan balance, military category, and other details, and range anywhere from 0.5% to 3.3% of your loan amount. You can choose to pay this fee upfront or roll it into your loan.

You will also pay for closing costs, the bulk of which are determined by your lender. The VA does stipulate that the seller must pay for any agent commissions, broker fees, and a termite report. You can also negotiate with the seller to pay other fees, including your funding and appraisal fees.

Some service members are eligible to have the funding fee waived, including those awarded a Purple Heart or for receiving service-related disability compensation from the VA. 

The Bottom Line

VA loans are one of the many benefits afforded to veterans, military members, and their families, and they come with a number of advantages that can make buying a home or refinancing an existing mortgage more affordable.

If you’re interested in using a VA loan to buy, improve on, or refinance a property, start by applying for your Certificate of Eligibility. You’ll then need to compare rates and terms from several VA-approved lenders to ensure you get the best deal.

Article Sources

  1. U.S. Department of Veterans Affairs. "VA Guaranteed Loan." Accessed April 22, 2020.

  2. U.S. Department of Veterans Affairs. "Eligibility Requirements for VA Home Loan Programs." Accessed April 22, 2020.

  3. U.S. Department of Veterans Affairs. "VA Home Loan Limits." Accessed April 22, 2020.

  4. U.S. Department of Veterans Affairs. "VA Funding Fee and Loan Closing Costs." Accessed April 22, 2020.