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Guide to VA Home Loans
VA loans are government-guaranteed mortgages made almost exclusively to veterans and military members. These loans offer some significant benefits for those who qualify, including more lax credit guidelines and the ability to purchase with no down payment.
VA loans were created in 1944 as part of the original GI Bill and have played a key role in helping build generational wealth for veterans and military families. They’ve become increasingly popular since the Great Recession.
The Department of Veterans Affairs backs these loans, which are made by traditional banks, independent mortgage banks, credit unions and other lenders. There are both purchase and refinance options. We’ll take a closer look at potential uses and more in this guide.
First, let’s dig into the benefits of VA loans.
While they’re a mortgage product, VA loans are also a job benefit for those who’ve served our country. They were built to expand access to homeownership, and that mission is still reflected in the advantages VA loans offer to qualified borrowers.
Some of the key benefits of VA loans include:
No down payment
Qualified Veterans can purchase with $0 down. VA and USDA loans are the only major mortgage options that allow for no down payment. For comparison, mortgages backed by the Federal Housing Administration, or the FHA, need a 3.5% down payment, while conventional mortgages often require at least 5% down.
No mortgage insurance
VA loans do not require the additional expense of mortgage insurance. Conventional buyers often need to pay for private mortgage insurance (PMI) unless they can put down 20%. FHA loans and mortgages backed by the U.S. Department of Agriculture come with both upfront and annual forms of mortgage insurance.
Mortgage insurance costs can add $50 to $100 or more to your housing costs every month.
Less stringent credit guidelines
Like other mortgage products, there isn’t a universal credit score requirement for VA loans. Credit minimums can and will vary by lender and other factors. But common benchmarks for VA lending are often lower than needed for conventional financing.
VA loans also tend to have shorter waiting periods following derogatory credit events like a bankruptcy or foreclosure. For example, consumers will often need to wait four years following a Chapter 7 bankruptcy before being able to secure a conventional mortgage. With VA loans, that waiting period gets cut in half.
Lower interest rates
VA loans stand alone when it comes to borrowing costs. They’ve had a lower average fixed rate than both conventional and FHA loans for more than six years in a row, according to data from Ellie Mae.
Closing cost limits
The government limits what lenders can charge to originate and process these loans. Beyond that, sellers can pay all of a buyer’s loan-related closing costs and up to 4% in concessions. Concessions can cover prepayment of property taxes and homeowners insurance, or paying off a borrower’s collections or judgments before closing, or an array of other things.
Unlike most conventional mortgages, VA loans are assumable. That means a buyer can essentially take over the terms of the loan, including its interest rate. When mortgage rates are on the rise, VA homeowners might be able to offer consumers something they can’t find anywhere else – below-market rates. That applies even if the buyer isn’t a vet or active-duty military.
Like any mortgage product, VA loans come with a few caveats and drawbacks, but the list is short.
VA loans come with a mandatory governmental fee, known as the VA Funding Fee. It ranges from 0.5% to 3.6% depending on the type of loan and whether the veteran has used the benefit before. Some borrowers, primarily veterans receiving compensation for a service-connected disability, are exempt from this fee. The fee goes to the government, not the mortgage lender.
Limited home equity options
The VA has a cash-out refinance option (we cover VA refinance loans later in this guide) that allows qualified homeowners to tap into their home equity. But the VA does not guaranty home equity loans or home equity lines of credit (HELOCs).
No vacation homes
Veterans cannot use a VA loan to purchase vacation homes, second homes or other properties they don’t intend to live in full time. But you can use a VA loan to purchase a multiunit property (up to a four units), provided you plan to occupy one of the homes as your primary residence.
Still a niche product
VA loan utilization is significantly higher today than it was a decade ago. But it’s still a small percentage of the overall mortgage market. Some lenders understand this product better than others, and only a handful truly specialize in VA loans.
The VA loan program backs both purchase and refinance loans. There are fixed- and adjustable-rate options. Veterans can often find VA loan terms ranging from 10 to 30 years.
Whether it’s a purchase or refinance, veterans will need to occupy the home in most cases.
First, let’s look at some of the primary uses of VA purchase loans:
This is the most common option for veterans and military families. There are no age limits or size restrictions when it comes to the home.
Veterans can purchase a condo unit in a development that has received VA approval. Talk with a VA lender for more information if you’re considering a condominium.
VA loans can be used to purchase multiunit properties, provided the Veteran intends to occupy one of the units as their primary residence. Duplexes are the most common multiunit property, but the VA allows for the purchase of up to a four-plex.
Qualified veterans may be able to build a home using their VA loan benefit. Finding lenders that will make a $0 down VA loan can be difficult.
Veterans can also use a VA construction loan to purchase and install a new modular house.
Similar to new construction, buying a manufactured home with a VA loan is possible but potentially challenging. Not all lenders make loans for manufactured housing.
The VA also backs two refinance options for qualified homeowners. One is open only to veterans with an active VA mortgage on their property. The other is open to all qualified homeowners and allows veterans to tap into their home equity.
Here’s a quick look at these refinance products:
Interest Rate Reduction Refinance Loan (IRRRL)
The Interest Rate Reduction Refinance Loan (IRRRL) helps veterans with VA loans refinance into a lower-rate loan or get out of a VA adjustable-rate mortgage. These are not available to veterans with non-VA mortgages. You might also hear these referred to as VA Streamline refinances.
The IRRRL is intended to be a simple, low-cost refinance. Veterans cannot extract cash from their equity with this option. The funding fee on an IRRRL is 0.5 percent.
VA Cash-Out Refinance
This refinance option is open to all eligible veterans, regardless of the type of loan they currently hold. Qualified homeowners can typically refinance up to 90 percent of their home’s value and turn their home equity into cash. This is a primary loan with a new interest rate, and not a second mortgage or home equity product.
Veterans aren’t required to take out cash with a cash-out refinance. Homeowners with non-VA loans can use this option as a rate-and-term refinance. The funding fee on a cash-out refinance varies depending on prior use of the benefit.
While private lenders make VA loans, only the government can determine whether a veteran is eligible for one. Veterans don’t need to know whether they’re eligible to start the VA loan process, but it is something lenders will have to nail down before a loan can close.
Generally, veterans are eligible for a VA loan if they’ve served:
- 90 consecutive days on active duty during wartime, or
- 181 consecutive days on active duty during peacetime, or
- 6 years in the National Guard or Reserve
National Guard members activated under Title 10 or Title 32 orders can be eligible after 90 days of service in some cases. Surviving spouses of veterans killed in the line of duty or from a service-connected disability also have VA loan eligibility.
Lenders will often request a Certificate of Eligibility from the VA to verify a veteran’s eligibility for the home loan benefit. Most Certificate of Eligibility requests are processed instantly through the VA’s automated system.
In some cases, veterans may need to provide supporting documentation to complete a Certificate of Eligibility request. This can include separation and discharge paperwork, a statement of service and more.
Veterans can try to obtain the document themselves using the VA’s eBenefits portal. But this isn’t a form veterans need to get secure before talking with lenders.
There are a couple ways to consider VA loan requirements. Because the VA backs the loan, the government has some guidelines and requirements that veterans and prospective properties must meet. But the lenders making these loans will often have additional requirements, known as overlays.
The VA’s guidelines are broad-based and give lenders a lot of discretion. That’s in part because this is a benefit program created to expand access to homeownership. Overlays can vary by lender.
Here’s a look at some common VA loan guidelines and considerations:
The VA wants lenders to ensure that veterans represent a satisfactory credit risk. But it doesn’t stipulate a minimum FICO score for VA loans. Lenders will usually have a credit score overlay.
For VA loans, a FICO score anywhere from 620 to 660 is a common minimum. Score minimums can vary by lender, the size of the loan and more.
There’s also no hard-and-fast rule when it comes to debt-to-income (DTI) ratio in VA lending. VA loans look only at your so-called back-end ratio, which is the relationship between your gross monthly income and your major monthly debts, to include the new housing payment.
Similar to credit scores, the VA doesn’t specify a cap when it comes to DTI ratio. These limits will vary by lender and other factors.
This is a unique VA loan guideline that helps the government and lenders assess a veteran’s overall financial health and stability. Residual income looks at how much gross income a veteran has left over each month after paying their major expenses. The VA has minimum benchmarks depending on the size of the veteran’s family and where they’re buying.
For example, a family of five buying in the Northeast typically needs at least $1,158 in residual income each month to satisfy guidelines.
Veterans whose DTI ratio exceeds 41 percent need to meet a higher residual income benchmark. In those cases, the veteran must exceed their guideline by 20 percent.
Veterans can have one or more co-borrowers on a VA loan. Lenders will consider the credit, debts and income of any co-borrower. The larger consideration with VA loans is the relationship between the veteran and the co-borrower(s).
Veterans may need to make a down payment in the event a co-borrower is not the Veteran’s spouse or another Veteran intending to live in the home. The size of the down payment can depend on several factors. Talk with a VA lender for more details.
The VA appraisal is a two-part process. The first part looks like any other appraisal, where recent comparable home sales are used to develop a fair market value for the property. The second part is a high-level look at the property in light of some broad-based property condition guidelines.
Homes do not need to be in pristine condition to work for a VA loan. But homes with obvious health and safety defects will often need repairs in order to satisfy the VA. The seller or buyer can pay for the cost of these repairs.
Similar to other government-backed loan products, VA loans come with occupancy guidelines. Veterans typically need to intend to occupy the new home within 60 days of closing. Exceptions can be granted, although occupancy must occur within 12 months of closing at most.
Spouses can fulfill the occupancy requirements for active duty service members.
There is one unique wrinkle regarding occupancy and VA refinance loans. Veterans need only show prior occupancy in a home in order to obtain an Interest Rate Reduction Refinance Loan.
The VA’s loan limits no longer have a significant bearing on the loan process for most veteran buyers. In years past, these county-level limits represented a cap on how much veterans could borrow before needing to make a down payment. Legislation enacted in 2020 removed these limits for qualified buyers.
Today, most veterans don’t need a down payment regardless of the loan amount.
The loan limits become a factor for veterans wanting to maintain multiple VA loans simultaneously, and for veterans who have defaulted on a previous VA-backed mortgage.
Costs and fees on VA loans will vary based on a range of factors, including the property, the contract stipulations, the lender and more. VA loans tend to have lower average costs compared to other loan products, according to federally collected mortgage data.
Lenders can charge VA buyers no more than 1% of the loan amount to cover their overhead and related expenses. Veterans can choose to pay reasonable discount points, typically no more than two points in a given transaction.
The VA allows sellers to pay all costs directly related to the loan and up to 4% in concessions, which can cover prepaid expenses for taxes and insurance and more. There are also some costs VA buyers are not allowed to pay.
The VA doesn’t set costs or fees outside of the VA Funding Fee. Lenders and the VA don’t have control over third party charges, such as title insurance, homeowners insurance and other costs for which buyers can typically shop.
Veterans and military members have turned to the VA loan program in waves over the last 15 years. The surge in VA lending has helped spur greater awareness of this benefit and how it can help those who have served our country.
But misconceptions and stereotypes about VA loans still abound. Some keep veterans from considering their benefit as a home financing option. Others can lead real estate agents to push both buyers and sellers away from VA loans.
Here’s a quick look a six of the most common VA loan misconceptions:
- VA Loans cost more than other loans
We’ve already hit at this one in multiple places in this guide. VA loans typically have the lowest average rates, costs and fees on the market.
- VA loans are a single-use benefit
Once they gain eligibility, veterans can reuse their home loan benefit over and over throughout their life. Qualified veterans can also maintain multiple VA loans simultaneously.
- VA loans force sellers to pay closing costs
Sellers are not required to pay anything toward a VA buyer’s closing costs, even for those costs veterans are not allowed to pay.
- VA loans take a long time to close
Every transaction is different, but the average conventional purchase loan closes a few days after than the average VA purchase transaction, according to data from ICE Mortgage Technology.
- VA loans don’t allow for fixer-uppers
Veterans can purchase homes that need some TLC. It’s more a question of how extensive the problems are and who pays for any necessary repairs noted in the VA appraisal.
- VA loans are risky mortgage products
VA loans have an incredible safety record even though most veterans purchase without a down payment. In fact, they’ve had the lowest foreclosure rate of any mortgage option for most of the last dozen years.
VA loans are an important job benefit available almost exclusively to veterans and service members. They offer a range of potentially powerful advantages, particularly the ability to purchase without a down payment. Like any type of mortgage loan, they also feature some drawbacks and limitations worth considering.
Generations of veterans and military members have become homeowners because of this loan program. Decades later, VA loans are still doing exactly what they were created to do – make homeownership more accessible for those who safeguard the American Dream.