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What Is a VA Loan?
By Michelle Lambright Black MONEY RESEARCH COLLECTIVE
A VA home loan is a type of mortgage that’s available to veterans, active duty service members, and eligible surviving spouses, often with no down payment required. On top of the benefit of buying a home with zero money down, a VA home loan may feature lower interest rates for well-qualified VA borrowers.
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How do VA loans work?
The goal of the VA home loan program is to make homeownership available and affordable for eligible service members (both past and present) and their families. To accomplish this goal, the federal government offers lenders that issue VA loans a guarantee.
If a homebuyer defaults on his or her VA loan, the federal government will reimburse the lender for a portion of its loss. The basic VA entitlement promises to repay a lender up to $36,000 on a purchase loan under $144,000. For loans that exceed that amount, the federal government guarantees up to 25% of the loan amount.
VA loan limits
For eligible borrowers who still have their full VA loan entitlement, there’s no upper loan limit. If you can qualify for a loan amount based on your income and debts, you don’t have to worry about a maximum loan cap from the U.S. Department of Veterans Affairs.
VA loan fees
Any type of home loan may feature closing costs such as origination fees, attorney fees, escrow deposits, and more. But VA loans also feature an additional expense that you won’t encounter with other loans—the VA funding fee.
The cost of the VA funding fee can vary from 1.4% to 3.6% of your loan amount. Factors such as your down payment amount and whether it’s your first time using your VA entitlement will influence the final cost of your funding fee.
If you receive VA disability compensation for a service-related disability, you might be exempt from the funding fee. Fee exemption may be available for eligible surviving spouses as well.
VA loan eligibility requirements
The Department of Veterans Affairs sets the rules when it comes to who is eligible for VA loan benefits. Yet private lenders also play a role in determining who may qualify for this type of mortgage loan.
Below are some eligibility requirements you may need to satisfy to qualify for a VA loan.
Who is eligible for a VA loan?
You’ll need to meet certain service requirements before you can use a VA loan. Service requirements vary based on when you served (or are serving as an active-duty military member) in the armed forces, National Guard, or as a reservist.
Surviving spouses may also be eligible for a VA Loan if their veteran spouse fits into any of the following categories.
- Missing in action
- Prisoner of war
- Died while serving
- Died from a service-related disability.
Surviving spouses may not remarry before turning 57 years old (or prior to December 16, 2003) to qualify for the VA mortgage benefit.
If you don’t meet the minimum service requirements, you might still have options. If you were discharged for certain medical conditions, a service-related disability, or hardship, you can apply for a discharge upgrade to try to access VA loan benefits.
Credit score requirements
The U.S. Department of Veterans Affairs doesn’t set a minimum credit score for the VA loan program. However, individual banks and mortgage companies may have credit score requirements of their own.
Some VA-approved mortgage lenders may require a FICO score of 620 or higher. Even if a lender doesn’t set a minimum credit score requirement, a higher credit score could help you secure a better interest rate.
Documents required
With any mortgage application, a lender may request certain documents to prove your identity, income, employment status, and more. Below are some of the documents you may need to share with the lender when you apply for a VA loan.
- Driver’s License or Passport
- Recent Pay Stubs
- Financial Statements (Checking, Savings, Retirement Accounts)
- W-2 and 1099 Statements (2 Years)
- Tax Returns (2 Years)
- Certificate of Eligibility
What is a certificate of eligibility (COE)?
A Certificate of Eligibility (COE) is the document you’ll need to qualify for a VA loan. A COE tells a lender that you’re eligible to use the veteran’s home loan benefit.
Your lender may be able to help you with this step. You can also request a COE online or via mail before you begin the home purchase process.
Will a COE guarantee my VA loan approval?
You will be unable to take out a VA mortgage without a Certificate of Eligibility. But obtaining a COE doesn’t mean a lender has to approve your application. You’ll still need to meet a lender’s eligibility criteria—including any minimum credit score, employment, and debt-to-income ratio requirements.
Is a down payment required for a VA loan?
Eligible borrowers can get a VA loan with no down payment. However, if you already have an active VA loan or you’ve defaulted on one in the past, you might need to make a down payment to get another VA loan. More than 80% of VA loans require no down payment.
Tips to get a VA loan
The VA loan program has helped eligible service members, veterans, and their families secure more than 25 million home loans since 1944. If you’re trying to qualify for a VA loan yourself, the tips below could help.
Do your homework
It’s important to understand the requirements before you apply for a VA loan. When you learn what a lender will need to approve your mortgage application, you can work in advance to improve your qualification odds.
Pay attention to details like credit requirements and consider applying for a Certificate of Eligibility upfront. Review all three of your credit reports from Equifax, TransUnion, and Experian to search for negative or inaccurate information you might need to address.
Find an experienced VA lender
Comparing loan offers from multiple VA loan lenders could save homeowners a lot of money. According to a study by Freddie Mac, borrowers save an average of $1,500 when they get just one additional mortgage rate quote. (Tip: You can use a mortgage calculator to compare the cost of different loan options.)
If you’re worried about letting multiple lenders check your credit during the loan comparison process, there’s good news. The FICO scores that mortgage lenders use will count multiple loan-related credit checks (aka hard credit inquiries) that occur within 45 days as a single event for credit scoring purposes. So multiple mortgage check pulls in a 45-day period shouldn’t cause you any more credit score damage than a single credit inquiry.
Choose a lender that makes you feel comfortable
After you take the time to compare loan offers, you can choose the lender that seems like the best fit for you. The interest rate and fees a lender charges are, of course, important factors to consider. But you may also want to look at a lender’s reputation and loan process when you make your decision.
VA loans pros and cons
A VA loan can be a great financing option for military members. Yet before you decide whether this type of real estate loan is right for you, it’s wise to take a look at both the benefits and the drawbacks that VA loans have to offer.
Pros
- Interest rates are often competitive. Lenders take on less risk when they issue VA loans because the federal government guarantees a portion of the loan. This arrangement puts private lenders in a position to offer lower mortgage rates to well-qualified VA homebuyers.
- 100% financing available. Most VA loan borrowers do not have to supply a down payment to close on their home loan.
- No private mortgage insurance (PMI). Conventional loans require borrowers to pay for private mortgage insurance if they put down less than 20% of the purchase price of a new home. VA loans have no PMI requirement. So your monthly mortgage payment may be lower with this type of loan.
Cons
- VA funding fees can be pricey. You may have to pay 1.4% to 3.6% of your total loan amount in the form of a VA funding fee unless you qualify for an exemption. That cost can be as high as $14,400 on a $400,000 mortgage.
- You could borrow more than a home is worth. In some cases, you may qualify to finance up to 100% of a home’s value. When you add on the additional cost of the VA funding fee, you could start out with negative home equity—owing more than the home is worth on paper.
- There are extra qualification requirements. VA loans can be more lenient where credit requirements are concerned. But you’ll face other underwriting requirements that you wouldn’t encounter with a conventional mortgage or FHA loan, such as the need to get a Certificate of Eligibility and ensuring the property can satisfy a special VA appraisal.
Summary of VA loan guide
Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of CreditWriter.com, Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.