How VA Loans Work
Knowing how VA loans work can help you through the homebuying journey.
VA loans are a type of mortgage loan available to U.S. military members, Veterans, and their spouses. They can be used to both purchase a house or refinance an existing mortgage, as long as the borrower meets the necessary military service requirements.
How do VA loans work?
The Department of Veterans Affairs (VA) backs VA loans, so private lenders are able to issue them to eligible homebuyers with additional benefits not found in other mortgages. The first step to getting a VA loan is to determine your eligibility.
If you’re interested in using a VA loan to purchase a home, follow these steps:
- Make sure you have your COE: To qualify for a VA loan, you’ll need a Certificate of Eligibility from the VA. You can get this from your eBenefits portal or through your regional VA loan center. The easiest option is to get your COE through your chosen lender using your DD-214 form.
- Get your finances in order: Pull your credit report and look at your full financial picture. Most VA lenders will want a credit score of at least 620 and a debt-to-income ratio (DTI) of 41% or below. This means that your total monthly debts (loan payments, credit card payments, new mortgage, etc.) take up no more than 41% of your monthly income.
- Determine your VA loan entitlement: Though there are no hard limits on VA loans, there is a cap on the dollar amount the VA will insure for your lender — dubbed your “entitlement.” In most parts of the country, the VA will guarantee $36,000 or 25% of the home’s price — up to the conforming loan limit for that county.
- Get prequalified or preapproved: Lenders often use these terms interchangeably, but they typically mean the same thing — an initial, cursory approval of your loan application. You’ll need to provide some basic details about your finances, home purchase, and credit, and then your VA lender will assess your eligibility for the loan and determine how much you can borrow. This is critical before you start shopping for a home, as it helps you set an appropriate price range to search in.
- Submit an offer: After you’ve found your dream home, submit an offer and include your VA loan preapproval letter. If the seller accepts your bid, your lender will begin processing your loan.
- Let your lender take over: From there, your lender will order an appraisal to assess the value of the home, and they’ll move your loan into underwriting. This is when a specialist verifies all the information on your application and double-checks that you can repay the loan.
- Close on your mortgage: Once your loan is fully approved, you’ll attend your closing appointment, sign the paperwork, and get your keys. This is also when you’ll pay your closing costs and any down payment you’re making.
Benefits of VA Loans
When compared to traditional mortgages, VA loans offer buyers a significant number of benefits, including:
- No down payment: Unlike other mortgage options out there, VA loans require zero down payment whatsoever.
- Interest rates are low: VA loans come with the backing of the U.S. government, which lowers the risk for lenders, enabling them to offer lower interest rates than other loans typically have available.
- No PMI: Most other loans require mortgage insurance — both upfront (at closing) and as part of your monthly payment. VA loans have no mortgage insurance or down payment requirement, saving you significantly in the long run.
- Credit score requirements are looser: Conventional loans often require credit scores in the high 600s or low 700s. VA borrowers can have credit scores much lower than this as long as they meet other requirements.
- Closing costs are capped: The VA limits what borrowers can pay in closing costs, lowering the barrier to homeownership significantly.
VA loans also have no loan limits, allowing borrowers to purchase larger homes or homes in pricier markets.
Common Questions About VA Loans
What is a VA loan?
A VA loan is a mortgage that’s guaranteed by the U.S. Department of Veterans Affairs. This allows VA lenders to loan money to borrowers with lower credit scores, no down payments, or other risk factors. It also means lower interest rates as well.
Do VA loans require PMI?
Unlike other loan types, VA loans do not require mortgage insurance, saving borrowers significant money both upfront and over the loan’s term.
Can I have more than one VA loan?
Yes, you can have multiple VA loans at once. To qualify for two loans, the total of those mortgages would need to fall under your VA loan entitlement threshold. If you go beyond your entitlement, you’ll need to increase your down payment.
What types of property can I purchase with a VA loan?
VA loans can be used to buy single-family homes, condos, duplexes, triplexes, and quadplexes. You can also use a VA loan to build one of the above properties from the ground up.
Can I use my VA loan benefit for an investment property?
VA loans are designed to help Veterans purchase their primary residences. If you do wish to use your VA loan benefit to buy an investment property, you’ll need to make at least one of the units on the property your primary home. You can then rent out the others.
Is there a limit to how much I can borrow?
There aren’t any hard-and-fast limits for VA loans, though each Veteran has what’s called an “entitlement.” You cannot borrow more than your entitlement without making a down payment.
What is the VA funding fee?
The funding fee is a one-time fee you’ll pay at closing or roll into the loan. Currently, this fee clocks in at 2.15% for first-time borrowers and 3.30% for second-time borrowers. Some borrowers — including those with disability ratings of 10% or higher — can have the funding fee waived.
What is a VA loan guaranty?
A VA home loan guaranty means that a purchaser obtains a loan through a private lender, such as a bank, credit union, or mortgage company. VA then works with the lender to guarantee the loan. If the homeowner defaults on the loan, VA will pay the debt to the lender. A VA home loan guaranty offers less risk for a lender.