VA Home Loans: Eligibility, Requirements, And Rates

Written by Meagan DrewUpdated: 28th Dec 2021
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While 10% off at some chain restaurants is a nice perk that servicemembers get just for serving, the VA and the VA Loan program can do eligible service personnel one better.

VA Loans are a benefit available to some service members, veterans, and surviving spouses that provides low-cost and potentially $0 up-front mortgages.

What Is a VA Loan?

A VA is a loan offered to active-duty service personnel, veterans, and surviving spouses.

These loans are processed through a private lender and backed by the U.S. Department of Veteran’s Affairs up to a certain percentage so that those with a VA home loan do not have to pay a down payment or Private Mortgage Insurance (PMI).

These loans typically also carry lower interest rates and have more lenient approvals.

>> More: Best VA Mortgage Lenders

How Do VA Loans Work?

VA Loans are guaranteed by the federal government through the U.S. Department of Veteran’s Affairs. If a borrower defaults on the loan, the VA will pay a percentage of the loan.

This guarantee reduces the risk to the lender and allows lenders to offer more favorable terms. In other words, it is a government-backed home loan.

Who Qualifies for a VA Loan?

VA Loans are reserved for those Army, Navy, Air Force, Marine, Coast Guard, and Space Force personnel that have served at least 181 continuous days in any period of time after September 15, 1940.

This includes those active-duty, veterans, and some surviving spouses of those who passed while on active duty.

Veterans that got dishonorable discharges are not eligible to apply for a VA Loan. However, the Department of Veterans Affairs certainly does not forget about National Guard personnel.

National Guards members mobilized for at least 90 days during 6 years of honorable service qualify too!

What is the VA Loan Limit?

As of 2020, there is not a magic number limit determined by the VA for VA loans. The VA loan limit is now the maximum amount each person may borrow without making a down payment.

There are still limits from the VA for people who currently have a VA loan or have defaulted on a loan in the past, but new borrowers are not restricted by VA loan caps.

Different Types of VA Loans

  • VA Purchase Mortgage: VA Purchase Mortgages allow qualified personnel to purchase a home with no minimum down payment.
  • VA Cash-Out Refinance: VA Cash-Out Refinance is for personnel who have a different loan and want to replace it with a VA loan. This option can turn home equity into cash for the service member.
  • VA Streamline Refinance: VA Streamline Refinance is designed to help personnel with current VA loans refinance into VA mortgages with a lower interest rate or refinance to a fixed rate from an adjustable-rate mortgage.
  • Native American Direct Loan (NADL): These loans help Native Americans that are also veterans purchase, renovate, or build homes on federal trust land.
  • VA Renovation Loan: Qualifying personnel can use the VA Renovation Loan to fund home improvements but require special additional approval if they want to put carpet in a bathroom. Ok, that last part isn’t true, but it should be.

What Are the Benefits of a VA Loan?

VA Loans offer several benefits for qualified personnel. The most well-known benefit of a VA Loan is probably the absence of a down payment.

Other loans require a down payment and require the homeowner to pay private mortgage insurance (PMI).

VA Loans, on average, carry lower interest rates and the closing costs are much less than that of a conventional loan.

Competitive Interest Rates

While the individual lender establishes mortgage loan rates, VA Mortgage Loans typically have competitive and lower interest rates compared to conventional mortgage loans.

No Down Payment Required

Mortgage loans typically require a down payment as a safety deposit against loan default. Because VA Loans are guaranteed by the federal government, mortgage lenders can forgo the mortgage safety deposit, which waives the need for a down payment.

No Mortgage Insurance

Another attractive feature of VA Loans is the lack of PMI or mortgage insurance. Most lenders require borrowers to have PMI to protect the lender in case the borrower defaults on their loan unless there is a 20% down payment.

Again, the VA Loan has federal guarantees, so lenders do not require additional insurance for each borrower.

Easy to Refinance

VA Loans are uniquely suited for refinancing because the VA Streamline Loan allows borrowers to refinance up to 120% of their home’s value for a lower rate or shorter term.

In other words, owing more than your home is worth is not an obstacle to clutching a lower rate or better repayment term.

>> More: How to Refinance Your Mortgage

Low Closing Costs

VA Loans allow sellers to pay up to 4% of the purchase price towards closing costs even without a down payment, whereas conventional loans typically cap the seller’s portion at 3%.

VA Loans also allow borrowers to roll the mortgage closing costs, which keeps closing costs of potentially thousands being a barrier to homeownership.

Flexible Borrowing Requirements

Whether we like it or not, creditworthiness is determined by credit scores as this is a matrix that lenders can use to determine whether they’d be better off putting their money in a paper shredder or giving borrowers a loan.

Bottom line, mortgage lenders are in it to make money, and the federal guarantee on a portion of the VA Loan means that mortgage companies can be more relaxed about who they will and will not let borrow.

What Are the Disadvantages of a VA Loan?

The VA Loan isn’t without some disadvantages. There is a VA funding fee (similar to traditional mortgage origination fees) that borrowers will pay, which is used to ensure the program stays around.

Also, borrowers pay more interest in the long run without a down payment because they’re paying interest on the full loan price.

Furthermore, homes with $0 down are more likely to go upside down than homes with some down payment.

If your home becomes worth less than what you owe, selling your home on a timeline could be a nightmare.

Strict Eligibility Requirements

The eligibility requirements are understandably strict because the government is putting money on the table to guarantee these VA loans.

Only borrowers who served in the Armed Forces (Army, Navy, Air Force, Marines, Coast Guard, and now Space Force) for 181 continuous days during peacetime or at least 90 days, some or all being during wartime, may apply.

There are dispensations for National Guard members and reservists so long as they were on active-duty orders for 90 days or served a total of 6 years.

To secure a VA Loan, borrowers must have a certificate of eligibility before applying. Borrowers will also be required to meet financial requirements.

Surviving spouses may also qualify for a VA Loan if they passed while serving, were missing in action, were a prisoner of war, or died from a service-connected disability.

Funding Fee

The VA Funding Fee is a one-time fee ranging from 1.4% to 3.6% of the funding amount. This fee is used to offset the government’s cost and help fund the VA Loan program.

The VA funding fee is an exchange for no down payment and no PMI and can also be rolled into the loan making a VA Loan truly $0 down.

Disabled veterans currently receiving benefits from the VA are exempt from the funding fee.

How to Apply for a VA Loan (Step-by-Step)

#1. Certificate of Eligibility

Proving your eligibility is always the first step in the process of securing a VA Loan because lenders want to make sure you meet all the requirements before they do all the paperwork. You’ll need to get a VA Certificate of Eligibility

VA-approved lenders can request this on the borrower’s behalf, or borrowers may request it from the VA online or by mail.

#2. Get Preapproved

This step is not always necessary depending on your lender but is certainly considered a best practice. Mortgage pre-approval will ensure that your budget is within the limits of what you can afford and help sellers to know you are a qualified buyer when pre-approvals are attached to offers.

#3. Shop Around for Your New Home

This is the fun part! A VA Loan does not limit your choices as long as your top pick meets the VA’s Minimum Property Requirements.

MPRs aren’t designed to ruin your good time. The MPRs only establish that the home is structurally sound and safe, which is something you’d hopefully want anyway.

#4. Make an Offer

Offering and counter offerings can be the most stressful part of home buying, but having the pre-approval letter and the guarantee of the VA Loan can help sellers know that you’re a solid candidate.

#5. VA Appraisal

VA Appraisals aren’t a kick the tires and call it good kind of inspection. VA Appraisals are notorious for being much stricter than those on conventional loans.

VA Appraisers are specially trained and are expected to uphold the MPRs to ensure that homes are structurally sound, clean, and need minimal repairs.

#6. Close on Your Dream Home

By the time you are ready to close on your new home, you may feel like you have run a mortgage marathon with the amount of paperwork, negotiations, and approvals.

However, closing on your home is the final step and should be celebrated.

How Many Times Can You Use a VA Loan?

There is currently no limit on the number of times that eligible personnel can borrow through the VA. Borrowers may only borrow up to their VA Entitlement limit, which is determined by the lender.

This amount is how much you can borrow without a down payment and is determined by income to debt ratio, creditworthiness, and financial capacity.

What Are VA Loan Entitlements?

The VA Loan Entitlements are the actual name for “guaranteed by the federal government.” The VA will typically guarantee 25% of your loan, meaning if you default, the VA will pay that portion of your mortgage to your lender on your behalf.

This guarantee lowers the risk for the lender and allows them to offer borrowers lower interest rates, mortgages without PMI, and loans with no down payment.

Is the VA Loan the Best Option for Veterans and Active-Duty?

The VA Loan is absolutely a great option for Veterans and Active-Duty ready for homeownership, but it is not the blanket best choice for everyone.

Veterans and Active-Duty are encouraged to research their options based on their timeline, goals, credit history, and financial capacity to find the best option for them.

The VA Loan is worth adding to the research, especially for those Veterans and Active-Duty wanting a no-down-payment mortgage.

Bottom Line: What Is a VA Loan?

A VA Loan is a loan backed by the U.S. Department of Veterans Affairs and financed by private lenders that allows eligible service members to step into homeownership with no down payment and other benefits that keep costs low for the borrower.

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Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.