What is a VA Loan?
A VA loan is a mortgage loan program backed by the U.S. Department of Veterans Affairs (VA). It allows eligible veterans, active-duty service members, and surviving spouses to purchase homes with favorable terms not available through conventional financing.
The VA doesn't lend money directly. Instead, it guarantees a portion of the loan, which reduces the risk for lenders and allows them to offer better terms to borrowers, including:
- No down payment in most cases
- No private mortgage insurance (PMI)
- Competitive interest rates
- Limitations on closing costs
- No prepayment penalties
The VA will guaranty up to 25% of any loan amount if you have full entitlement. This guaranty protects the lender, enabling them to offer 100% financing without requiring PMI.
Who is Eligible for a VA Loan?
VA loan eligibility is based on your service history and duty status. Generally, you may be eligible if you are:
Active Duty Service Members
- Served at least 90 continuous days during wartime
- Served at least 181 continuous days during peacetime
- Currently serving with at least 90 days of active duty
Veterans
- Completed required service length and were honorably discharged
- Discharged for hardship, early out, or service-connected disability
National Guard & Reserve Members
- Served at least 6 years in the Selected Reserve or National Guard
- Completed at least 90 days of active duty service
Surviving Spouses
- Un-remarried spouse of a veteran who died in service or from a service-connected disability
- Spouse of a service member missing in action or a prisoner of war
VA Loan Benefits
No Down Payment Required
Unlike conventional loans that typically require 5-20% down, VA loans allow qualified borrowers to finance 100% of the home's purchase price. This is one of the most significant benefits, especially for first-time homebuyers.
No Private Mortgage Insurance (PMI)
Conventional loans with less than 20% down require PMI, which can cost $100-$300+ per month. VA loans never require PMI, regardless of down payment amount, saving borrowers thousands over the loan's lifetime.
Competitive Interest Rates
Because the VA guarantees a portion of the loan, lenders can offer lower interest rates than conventional mortgages. Even a 0.5% lower rate can save tens of thousands in interest over 30 years.
Flexible Credit Requirements
While lenders set their own credit standards, VA loans are generally more forgiving of past credit issues. Many lenders approve VA loans with credit scores as low as 620.
Limits on Closing Costs
The VA limits what closing costs veterans can be charged, and some fees that conventional borrowers pay are prohibited for VA loan borrowers.
VA Funding Fee Explained
The VA funding fee is a one-time payment that helps offset the cost of the VA loan program to taxpayers. The fee varies based on:
- Type of service: Regular military vs. Reserves/National Guard
- Down payment amount: Larger down payments result in lower fees
- First vs. subsequent use: First-time users pay lower fees
- Loan type: Purchase, refinance, or cash-out refinance
Funding Fee Exemptions
The following individuals are exempt from paying the VA funding fee:
- Veterans receiving VA disability compensation (any rating)
- Veterans entitled to receive disability compensation but receiving retirement or active duty pay instead
- Surviving spouses of veterans who died in service or from service-connected disabilities
- Service members with a proposed or memorandum disability rating
- Purple Heart recipients currently serving on active duty
How VA Loans Work
- Obtain Certificate of Eligibility (COE): Request your COE from the VA to prove your eligibility
- Get Pre-Approved: Work with a VA-approved lender to get pre-approved for a loan amount
- Find a Home: Shop for a home within your budget
- VA Appraisal: The VA orders an appraisal to ensure the home meets minimum property requirements
- Close the Loan: Complete the closing process and receive your keys
VA Loan Guaranty
The VA guaranty is the amount the VA will repay to the lender if you default on your loan. For loans up to $144,000, the VA guarantees 50% of the loan. For loans above $144,000, the VA guarantees 25% of the loan amount.
For a $350,000 loan: $350,000 x 25% = $87,500 VA guaranty. This is the maximum amount the VA would pay to the lender if you defaulted.
VA Loan Limits
As of 2020, there are no loan limits for veterans with full entitlement. If you have full entitlement (never used VA loan benefit or fully restored), you can borrow any amount the lender approves without a down payment.
For veterans with reduced entitlement (existing VA loan or previous foreclosure), loan limits may apply based on the county's conforming loan limit.
VA vs. Conventional Loans
| Feature | VA Loan | Conventional Loan |
|---|---|---|
| Down Payment | 0% required | 3-20% typically |
| Mortgage Insurance | None (funding fee instead) | PMI if less than 20% down |
| Credit Score | Often 620+ accepted | Usually 680+ for best rates |
| Interest Rates | Generally lower | Generally higher |
| Closing Costs | Limited by VA | No limits |
| Prepayment Penalty | Never | Possible |
| Eligibility | Veterans/Service members only | Anyone who qualifies |
Frequently Asked Questions
Can I use a VA loan more than once?
Yes! VA loan benefits can be used multiple times. You can have more than one VA loan at a time (if you have enough entitlement), or you can restore your entitlement after paying off a previous VA loan.
Is there a VA loan limit?
For veterans with full entitlement, there is no loan limit. You can borrow any amount a lender will approve without a down payment. Limits only apply to those with reduced entitlement.
Can I buy any type of property with a VA loan?
VA loans are for primary residences only. You can buy single-family homes, condos (in VA-approved buildings), manufactured homes, and multi-unit properties (up to 4 units if you live in one).
How long do I have to live in the home?
You must certify that you intend to occupy the home as your primary residence. There's no minimum time requirement, but you must move in within 60 days of closing in most cases.
Can the funding fee be financed?
Yes, the VA funding fee can be rolled into your loan amount. This means you don't have to pay it out of pocket at closing, though it will increase your monthly payment and total interest paid.
What if I have bad credit?
The VA doesn't set minimum credit score requirements, but lenders do. Many VA lenders accept scores as low as 580-620. If you've had past credit issues, VA loans may be more forgiving than conventional options.