Our nation is indebted to those who have served in our armed forces, and VA home loans are one of the rewards for their contributions. These loans for military veterans and active duty service members have helped millions enjoy the benefits of home ownership by making it easier and more affordable to get a mortgage.
VA loans are available through authorized lenders throughout the country. Because they're guaranteed by the U.S. Department of Veterans Affairs (formerly Veterans Administration), VA Loans can offer some significant advantages over conventional mortgages. And VA loan rates are some of the best around.
Here's how they work:
VA Loan benefits
100 percent financing available
VA loans are one of the few ways you can buy a home with no down payment. Because the VA guarantees these military home loans, the lender doesn't need any cash up front as a hedge against default. Result: 100 percent financing, the entire amount of your home purchase, up to fairly generous limits.
Do VA loans have PMI?
Another major advantage is that of VA loans don't require mortgage insurance. On most mortgages, borrowers have to pay for private mortgage insurance (PMI) if they make a down payment of less than 20 percent of the purchase price of the home. That means additional annual fees equal to about one-half to one percent of the loan amount.
Because of the VA loan guarantee, no additional insurance is necessary. The VA loan program insures the loan for you. Result: You not only get a mortgage with no down payment, you get one with no PMI either. How's that for a deal?
Low mortgage rates
VA home loan rates are very competitive with those offered on conventional mortgages. Because the loans are guaranteed, that reduces the risk for VA home loan lenders, who are willing to charge lower rates as a result. You'll often find that VA 30-year mortgage rates can be anywhere from a quarter-percent to even a full percentage point lower than other mortgages for borrowers with a similar credit and financial profile.
VA loan limits
There is no limit on how much you can borrow with a VA home loan. However, there is a limit on the VA Loan Guaranty, which effectively caps how much you can borrow without making a down payment. Those VA loan limits, which are identical to FHA loan limits, are $417,000 in most of the country but go as high as $625,500 in counties with high real estate values.
You can borrow more than that, but you'll need to put up some of your own money as a down payment on the portion that exceeds local VA loan limits.
For more information, see the explanation of the VA Loan Guaranty further down the page.
Limited closing costs
With a VA home loan, your closing costs are limited. VA mortgage guidelines state that borrowers may pay only those closing costs deemed "allowable and customary." These include the appraisal, credit report, property survey, flood or other hazard insurance, title fees and the VA funding fee (more on that later).
Other fees MUST be paid by either the lender or seller – they cannot be paid by the borrower. These include attorney fees, brokerage fees, loan application fees, lender appraisals, document preparation, loan closing or settlement fees, rate lock fees and many others.
VA loan minimum credit score requirements
Borrowers with diminished credit may have an easier time qualifying for these military loans than for other types of mortgages. VA mortgage guidelines do not require a minimum credit score, but individual lenders will have their own standards.
Some VA home loan lenders will approve a mortgage for borrowers with a FICO credit score as low as 580, though 620-640 is the more common minimum.
Borrowers with no established credit history may be able to meet the qualifications for a VA loan by demonstrating a record of timely payments on recurring expenses such as rent, utilities or cell phone bills.
VA mortgage guidelines have shorter waiting periods following a foreclosure or bankruptcy than most other types of loans. Homeowners who have been through foreclosure can re-qualify for a new VA loan in as little as two years. Those with a Chapter 7 bankruptcy may apply for a VA home loan as soon as two years after the discharge date, while those with a Chapter 13 may qualify after as little as one year of making timely payments on the bankruptcy obligations.
VA loan income guidelines
VA loan requirements for buyers are similar to other mortgages when it comes to debt loads and income.
VA mortgage guidelines on income requirements are similar to other mortgages when it comes for debt-to-income limits, VA home loan lenders typically like to see a borrower's total monthly debt payments, including the mortgage, at no higher than 41 percent of gross monthly income, similar to other types of home loans. No more than 28 percent of gross monthly income should be for your mortgage payment, including property taxes and homeowner's insurance. They may go higher in some situations, however.
Allowed uses for VA loans
A VA mortgage loan can be used for a wide range of purposes related to home ownership. You can use one to buy a single-family home, a unit in a residential condominium or a manufactured home and lot.
A VA cash-out refinance lets eligible veterans and service members borrow money for any purpose, including home repairs and improvements, or as a military consolidation loan to pay off existing bills. There's also a VA Energy Efficient Mortgage that lets you borrow up to $6,000 for energy efficiency improvements on top of what you need to purchase or refinance your home.
There's a VA Streamline Refinance option that makes it easy to refinance an existing VA loan to a lower mortgage rate. Eligible veterans can also use a VA mortgage loan to refinance another existing mortgage, even if the current mortgage is not a military loan.
VA loans for military veterans and personnel
Home purchase loans
VA home loans are available as either fixed-rate or adjustable-rate mortgages (ARMs). The most popular option is the VA 30-year fixed-rate mortgage, while 15-year loans offer lower rates and are often used for refinancing. Also available, but less common, are fixed-rate loans with terms of 20 or 25 years.
VA adjustable-rate mortgages are available as hybrid ARMs, where the initial rate is fixed for a period of 3, 5, 7 or 10 years before adjusting, or as a standard ARM, where the rate resets every year. Rate resets on VA ARMs are typically based on current rates for 1-year U.S. Treasury bonds.
VA Streamline Refinance
Another benefit of VA home loans is the VA Streamline Refinance. Also known as a VA Interest Rate Reduction Refinance Loan (IRRRL), this offers an expedited way to refinance an existing VA loan to a new loan at a lower rate.
In general, all you need to qualify is to 1) currently have a VA home loan 2) be current on your mortgage payments and 3) had no more than one late payment over the past year. That means no income verification, income documentation or home appraisals.
In addition, the new loan must either have a lower monthly payment than your current loan, or be to refinance from an ARM to a fixed-rate mortgage. It's a good choice when VA mortgage rates today are lower than what you're currently paying.
You can even do a VA Streamline Refinance if your home has fallen in value, leaving you underwater on the mortgage (owing more than the property is worth).
VA cash-out refinance
A VA cash-out refinance allows you to borrow against your home equity to obtain funds for any purpose you wish. These are sometimes referred to as military consolidation loans when they're used to pay off other debts. But you can also use the funds for home improvements, investing in a business, paying for college or other big-ticket expenses.
You can also use a VA cash-out refinance to refinance a non-VA mortgage into a VA home loan.
The VA allows you to tap up to 100 percent of your home equity in a cash-out refinance, so you can still do one even if you don't have a lot of equity to work with.
A VA cash-out refinance can be a particularly good way to borrow against your home equity if today's VA mortgage rates are lower than the rate you're currently paying. However, if rates are higher than what you're currently paying, you might want to explore other options, such as a non-VA home equity loan (see below).
VA Energy Efficiency Mortgages
Though the VA does not offer conventional home improvement loans, it does offer an option for homeowners to borrow additional funds to pay for energy efficiency improvements at the time they buy their home.
A VA Energy Efficiency Mortgage (EEM) allows homebuyers to borrow up to an additional $6,000 to pay for energy improvements on top of what's needed to purchase their home. These funds can be used for new windows, insulation, a high-efficiency furnace or water heater and more.
The amount borrowed is rolled into the VA home loan, so there's only one loan and monthly mortgage payment to deal with.
VA home equity loans
The VA does not guarantee home equity loans or home equity lines of credit (HELOCs). Instead, it allows eligible homeowners to borrow against up to 100 percent of their home equity through a cash-out refinance (see above).
Note that you must have an outstanding VA loan/first lien on your property to be eligible for a VA cash-out refinance. You may not do a VA cash-out refinance on a property you own free and clear.
You can also apply for a conventional home equity loan outside the VA system. For example, if you're only looking to borrow a small amount of money, the fees for a conventional home equity loan may be less than you'd pay for a VA cash-out refinance. Furthermore, if mortgage rates have risen since you obtained your VA loan, a cash-out refinance would mean giving up the low rate you presently have.
VA home improvement loans
The VA does not support any conventional home improvement loans. You can obtain funds for home improvements by a cash-out refinance backed by the VA, but the VA does not offer an option for taking out a second lien specifically for home improvements or any other purpose. See the explanation of home equity loans, above.
There is the Energy Efficient Mortgage for funding energy efficiency improvements but that must be included with the VA home loan used to buy the property (see above).
VA small business loans
The VA itself does not guarantee small business loans or have a dedicated program for VA business loans. However, the VA can provide veterans with assistance in arranging a startup or other small business loan through the VA Office of Small & Disadvantaged Business Utilization. This typically involves arranging loans through the U.S. Small Business Administration, which has several programs designed for veterans.
Depending on how much money you need, some veterans may also opt to use a VA cash-out refinance as a startup loan for a small business.
VA auto loans
There are no VA auto loans as such. There is a one-time automobile grant that may be awarded to veterans and service members with certain disabilities.
How to get a VA loan
You can apply for a VA loan through any VA home loan lender. These are regular banks and other mortgage lenders that have been approved to handle VA loans.
The first step in applying for a VA loan is to complete a Request for Certificate of Eligibility, VA Form 26-1880, available from VA-authorized lenders. With many VA home loan lenders, you can obtain and submit your request online. You will need to provide proof of your military service or other eligible status. Once you receive your certificate, you can apply for the mortgage with any VA-authorized lender.
When applying for a VA loan, you want to shop around to be sure to find the best VA loan lenders. Check with at least three and perhaps more, and compare both VA loan rates and closing costs to see who has the best deal. Shopping for online can make it easier to compare multiple lenders and find the best one.
Do I qualify for a VA loan?
While primarily intended to be home loans for military veterans, VA loans are also available to active-duty personnel who have met certain service minimums. Loans for military spouses are allowed for survivors of deceased veterans in certain situations, as are those employed in certain other government branches.
The general rule is that veterans or active-duty personnel are eligible after 90 days of wartime service or 24 months of peacetime duty. Currently, that means personnel on active duty can qualify after 90 days. Different rules may apply to service prior to 1990.
Members of the National Guard or Reserve need six years of service to qualify unless called to active duty during war, in which case they can qualify with 90 days of service.
VA loans for military spouses are available if you are the surviving unmarried spouse of a veteran who died in service or of a service-related disability. Surviving spouses of veterans totally disabled from a non-service related cause may be eligible as well.
More information: VA loan eligibility standards explained
What is the VA Loan Guaranty?
The VA Loan Guaranty is the key to how VA home loans work. The VA doesn't actually make loans for military veterans itself, but instead guarantees part of the loan amount on approved mortgages issued by authorized lenders. This typically is 25 percent of the purchase price, up to $104,250 in most of the country, or enough to purchase a $417,000 home with no money down. Higher home price limits, up to $1.1 million, are allowed in certain counties with more expensive real estate (2013 limits).
For the lender, the VA's guaranty is like having a 25 percent down payment as a hedge against default. So the VA borrower gets all the benefits of a hefty down payment – low interest rate, easier qualifying, no PMI – without having to put out the cash. Of course, he or she is still responsible for paying off 100 percent of the loan.
You can use a VA loan to buy a home that costs more than the local VA loan limit, but you'll need to make a down payment of 25 percent of the excess. So if the VA loan limit for your county is $417,000 and you buy a home that costs $497,000, you'd need a down payment of $20,000.
If you don't use all of your VA Loan Guaranty, you can apply the remainder toward buying a second or vacation home. You can also apply to recover the full amount of your original guaranty once you pay off the mortgage, although you can only do that one time.
More information: What is the VA Loan Guaranty?
About the VA funding fee
The VA funding fee is an upfront fee charged on all VA mortgage loans. For members and veterans of the regular military getting their first VA loan, it is 2.15 percent of the amount borrowed for mortgages with less than 10 percent down, including those with no down payment.
Overall, the fee ranges from 0.5 – 3.3 percent, with the lowest fee charged to those who are refinancing an existing VA loan. Otherwise, the fee varies according to the size of the down payment, whether the borrower is a member or veteran of the Reserve or National Guard, and whether the borrower has previously used a VA loan. The fee is waived for those with certain disabilities and surviving spouses of those who died in service.
On manufactured homes, the VA funding fee is 1 percent.
The fee may be rolled into the loan amount, so you don't have to pay it up front.
Can I afford a VA mortgage?
Need a VA loan calculator to determine what you can afford? Use our Mortgage Qualifying Calculator to figure what your payments would be and what you can afford to buy with a VA home loan with your income.