A VA loan is a type of mortgage product that's reserved for military service members, veterans, and the spouses and survivors of veterans. They're unique from most other mortgages in that they don't require that you make a down payment or pay for mortgage insurance, and they're assumable.
Definition and Example of a VA Loan
A VA loan is a mortgage that's 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.
These home loans come with a guarantee from the Department of Veterans Affairs. The VA 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.
How a VA Loan Works
You or your spouse must be a veteran or an active-duty military service member to be eligible for a VA loan. You must meet certain service requirements. Some National Guard members, Reservists, and surviving spouses of deceased military members may also be eligible.
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, such as in World War II, the Korean War, or the Vietnam War. Up to 181 days of continuous service are required in non-wartime periods.
The requirement usually increases to 24 months of service for those who served between 1980 and 1990, 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.
You can qualify by serving in any of these ways from 1990 through 2022:
- 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
Reservists and members of the National Guard are also eligible for VA loans in some cases. 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
- Continued service
You'll need to produce a Certificate of Eligibility from the VA to prove that you meet these requirements. You can get yours by logging into your eBenefits account at VA.gov, or your lender can get it for you through the Web LGY system online. You can start the wheels in motion and apply for a mortgage without a Certificate, but you'll have to take the necessary steps to get one eventually, or you won't be approved.
Pros and Cons of a VA Loan
Lower upfront costs
May offer lower rates and better terms
Assumable if the home is sold
Strict service requirements
Not offered by all lenders
Risky if home values drop
- Lower upfront costs: The upfront costs are significantly reduced because a down payment or mortgage insurance isn't required. You can finance the funding fee, including it in your mortgage, and pay that cost off over time.
- May offer lower rates and better terms: VA loans often lend themselves to lower interest rates and more favorable loan terms because they come with a VA guarantee and the promise of repayment (at least partially) if the borrower forecloses. The VA loan program is also 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.
- Assumable when the home is sold: VA loans can be transferred to a new homeowner if the borrower sells the house. This can be a huge perk for the buyer who would enjoy the loan's same low rates and terms. Buyers don't have to be veterans or service members to assume a VA mortgage.
It could have consequences for your future VA loan eligibility if the loan assumer defaults on your loan, so you should carefully research the pros and cons before allowing someone to do this.
Strict service requirements: VA loans are only available to veterans, military members, and spouses who meet strict service requirements unless they're assumed. Your spouse doesn't have to be a veteran or service member, but anyone else must meet the eligibility requirements for a VA loan if you buy and borrow jointly with someone else.
Not offered by all lenders: Only VA-approved lenders can issue these mortgages.
Risky if home values drop: You could find yourself owing more on your home than it's worth if local home values drop and you didn't make a down payment and financed your funding fee.
Types of VA Loans
The Native American Direct Loan program offers VA loans that are issued directly by the Department of Veterans Affairs. Only Native Americans who are buying, building, or improving on a property that's 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.
- Purchase loans: These can be used to purchase a property.
- Interest rate reduction refinance loans: These are for homeowners with VA-backed loans who want 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.
- Cash-out refinance loans: These allow homeowners to refinance and take equity out of their homes for other uses, including home improvements.
Cash-out loans require that you provide your lender with employment information and get an appraisal of your home.
How Much Can You Borrow With a VA Loan?
There are no limits as to how much you can borrow with a VA loan, but the VA will only guarantee a certain portion of your loan balance. Individual lenders may therefore 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 as of 2022.
The VA may guarantee a larger portion of your loan balance, up to 25% of your county's conventional loan limits, if you're hoping to buy a home that's priced higher than this.
You can boost your loan amount if you offer a down payment.
How Much Do Veterans Pay Up Front?
There's no down payment required on VA loans, but borrowers pay a funding fee in most cases. This fee varies based on your loan balance, military category, and other details. It can range anywhere from 0.5% to 3.6% of your loan amount. You can choose to pay this fee up front or roll it into your loan.
You will also pay for closing costs, the bulk of which are determined by your lender. The VA stipulates that the seller must pay for any agent commissions, broker fees, and a termite report. But you can 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 who have been 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.
Start by applying for your Certificate of Eligibility if you're interested in taking out a VA loan to buy, improve, or refinance a property. Compare rates and terms from several VA-approved lenders to make sure you get the best deal.
- A VA loan is a mortgage that can be used to purchase a home, refinance an existing mortgage, or make home improvements.
- You or your spouse (if you're married) must be a veteran or on active duty in the military to qualify for a VA loan, although some exceptions apply.
- Service requirements can vary depending on when and where you served.
- VA loans tend to be more affordable than conventional loans.