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What Is a VA Home Loan

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It’s a big decision to join the military. Members of the Armed Forces face a slew of risks to their physical safety and psychological well-being. They make many trade-offs in their personal lives as well, from frequent moves to new towns around the United States to overseas deployments that challenge even the strongest families.

To help offset personal sacrifices, Armed Forces personnel enjoy many direct and indirect financial benefits.

If you’re a current or former member of the Armed Forces and you’re weighing whether to buy a home, there’s one benefit you need to know more about: the VA loan. See how you can save thousands of dollars as a homeowner with the VA home loan program.

What Is a VA Loan?

Like conventional mortgages, most VA loans are issued by private lenders. But they’re backed by the full faith and credit of the U.S. government, up to limits set by federal regulation.

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This limit adjusts every year. In 2022, the limit is $647,200 in most of the country. Certain higher-cost areas have higher loan limits, up to $970,800 in 2022.

The federal guarantee reduces the risk for lenders and allows them to offer more favorable terms. That often means lower interest rates and a private mortgage insurance (PMI) waiver on loans with loan-to-value (LTV) ratios higher than 80%.

It also allows lenders to originate VA purchase loans with no down payment required, which puts homeownership within reach for service members who have limited personal savings. Conventional loans require down payments: 20% or more of the property’s value if you want to avoid PMI. Other loan types, such as FHA loans, also require money down.

VA Loan Eligibility Requirements

VA loan eligibility requirements vary by the applicant’s branch of service, service length and dates, and discharge status. Dishonorably discharged service members are not eligible for VA loans under any circumstances.

Eligibility Requirements for Service Members

Armed Forces personnel who gave at least 24 consecutive months of service in active or nonactive-duty roles after Sept. 8, 1980, are eligible for VA loans. Those called to active duty at any point during their careers are eligible after serving at least 90 to 181 days on active duty, depending on when the service occurred. Those currently on active duty are eligible after serving at least 90 consecutive days on active duty.

National Guard and Reservist personnel who gave at least 90 consecutive days on active duty after Aug. 2, 1990, are eligible for VA loans. National Guard and Reservist personnel who did not give at least 90 consecutive days on active duty are eligible once they log at least 6 years in their respective service branch and meet any of the following criteria:

  • Retired (placed on the retired list)
  • Transferred to Reserve status other than Selected Reserve (including Standby Reserve or Ready Reserve)
  • Remain on Selected Reserve status

For more information, check the VA’s eligibility guidelines.

Who Else Is Eligible For a VA Loan?

Some other groups of people also eligible for VA loans. All must have close ties to the U.S. military, however.

Surviving Spouses of Eligible Service Members

Several types of surviving service member spouses are eligible for VA loans:

  • Unremarried spouses of service members who died in service
  • Unremarried spouses of service members who died from a service-connected disability
  • Surviving spouses who remarried after Dec. 16, 2003, and after reaching age 57
  • Surviving spouses of totally disabled veterans whose death cannot be conclusively attributed to the disability

Naturalized U.S. Citizens Who Served in Allied Militaries

This covers people who served in certain foreign militaries allied with the United States during World War II and subsequently became naturalized U.S. citizens. Few if any naturalized World War II vets remain in the market for mortgages, unfortunately. (Time catches up to us all.)

Members of Certain Military-Aligned Service Organizations

This covers people who served as:

  • Cadets at the U.S. Military Academy, Air Force Academy, or Coast Guard Academy
  • Midshipmen at the U.S. Naval Academy
  • National Oceanic & Atmospheric Administration officers
  • Public Health Service officers

Credit: Benefits.com

How to Obtain a Certificate of Eligibility for a VA Home Loan

Once you’ve determined that you’re eligible for a VA loan, you may need to obtain a certificate of eligibility (CoE) to show to your lender. Your lender won’t originate a VA purchase or cash-out refinance loan without a valid CoE.

The evidence you need to get your CoE depends on your Armed Forces branch and active duty status. The general requirements are as follows:

  • Armed Forces Veterans: Department of Defense Form 214 (DD214), including a full explanation of the nature of separation and character of service.
  • Active Duty Service Members: A signed statement of service outlining the service member’s service entry date, personal information (including date of birth and Social Security number), and lost service time (if any).
  • Current or Former Reservists and National Guard Members With Active Duty Experience: Department of Defense Form 214 describing the nature of separation and character of service.
  • Current Reservists and National Guard Members Without Active Duty Experience: A signed statement of service outlining the total duration of service and any lost time.
  • Discharged Reservists Without Active Duty Experience: Evidence of honorable service (can vary on a case-by-case basis) and a copy of the most recent retirement points statement.
  • Discharged National Guard Members Without Active Duty Experience: Service records and separation reports for each stretch of National Guard service or a retirement points accounting statement with accompanying evidence of honorable service.
  • Surviving Spouse Receiving Dependency and Indemnity Compensation (DIC) Benefits: The veteran’s DD214 (if available) and VA Form 26-1817.
  • Surviving Spouse Not Receiving DIC Benefits: The veteran’s DD214 (if available), VA Form 21-534, death certificate or Department of Defense casualty report (DD1300), and marriage license. These documents must be sent to the spouse’s local VA Compensation and Pension office for processing.

The easiest way to apply for a CoE is online, at the VA’s eBenefits portal. You may also be able to apply with your lender during the underwriting process, though not all lenders have this capability.

If you prefer to apply offline, you can fill out and mail VA Form 26-1880 (Request for Certificate of Eligibility) with the appropriate CoE evidence for your service class. If you’re a surviving spouse, you must fill out a paper copy of VA Form 26-1817 and either give it to your lender for forwarding to the VA or mail it directly to the VA.

Once you have your CoE in hand, you can use the VA’s website to find a qualified lender that originates VA loans and begin the underwriting process. Learn more about applying for a CoE on the VA’s Certificate of Eligibility page.

Types of VA Loans and Grants

VA loans come in several different flavors. The VA also offers financial grants to make veteran-occupied housing more accessible for people with disabilities.

Purchase Loan

A VA purchase loan helps you buy the home you plan to live in most of the time with no money down. Use one to do any of the following:

  • Buy an existing detached home
  • Buy a condominium unit in a VA-approved project
  • Build a new construction home
  • Simultaneously purchase and renovate a home (similar to an FHA 203k rehabilitation loan)
  • Buy a manufactured home or lot for a manufactured home you already own

Cash-Out Refinance Loan

A cash-out refinance loan does two things.

First, it replaces the existing mortgage on a home you already own. Your existing mortgage doesn’t have to be a VA loan.

Second, it gives you a lump sum cash payment that you can use with no restrictions.

Cash-out refinance loans are similar to home equity loans, which also let you borrow against the value of your house. But they differ in some important ways: 

VA Cash-Out Refinance Home Equity Loan
Replaces Existing Mortgage Yes No
Interest Rates Lower Higher
Closing Costs Higher Lower
Loan-to-Value Ratio Up to 100% Up to 80%

VA cash-out refinance loans’ loan-to-value ratios are unusually lenient and give you lots of freedom as a borrower. As an example, if you still owe $100,000 on a $150,000 mortgage and your house is worth $200,000, your cash-out refinance loan can be as large as $200,000. Of that total, $100,000 is available to cash out and do with as you see fit.

Interest-Rate Reduction Refinance Loan (IRRRL)

Also known as the VA Streamline Refinance Loan, an IRRRL allows you to refinance an existing VA loan and secure a lower interest rate without going through the VA loan application process a second time.

Unlike cash-out refinance loans, IRRRLs can’t be used to tap your home equity for cash, with the exception of a $6,000 allowance for energy-efficient home improvement projects. You don’t need to get a credit check or go through extensive mortgage underwriting, but you do need to prove you live in the home you’re borrowing against.

Native American Direct Loan Program (NADL)

This is a newer, less common type of VA loan designed specifically for Native American service members and veterans who meet certain additional criteria.

Unlike VA purchase and refinance loans, NADLs are direct loans. The VA acts both as the lender and servicer.

NADLs are always fixed-rate, 30-year loans. They must be used to buy, build, or renovate homes on Federal Trust Land (reservation land), or to refinance and reduce the interest rate on existing NADLs.

Adapted Housing Grants

The VA offers two nonloan grants for veterans with permanent and total service-connected disabilities: Specially Adapted Housing Grants and Special Housing Adaptation Grants.

Eligible disabilities must qualify for 100% disability compensation under the VA Schedule for Rating Disabilities. They must not be expected to improve with time. They include:

  • Loss of use of both legs or arms
  • Loss of use of one leg and one arm
  • Severe burns
  • Blindness in both eyes
  • Severe respiratory injuries

If you qualify, you can use either or both types of grants to finance or offset the cost of building disability-adapted housing from the ground up. You can also use the grants to buy housing that has already been adapted, buy and renovate housing that hasn’t been adapted yet, or adapting a home you already live in.

VA Funding Fee

VA mortgage loans carry a special fee that doesn’t apply to other mortgage loans: the VA funding fee.

This fee varies depending on your down payment amount and loan type, but generally ranges from 0.5% to 3.6% of the purchase price. You can pay it at closing or wrap it into your loan value, though wrapping results in a slightly higher monthly payment. 

The fee structure for first-time purchase and cash-out refinance borrowers is as follows:

1st Down Payment Amount Funding Fee
Under 5% 2.3%
5% to 9.99% 1.65%
10% or higher 1.4%

The funding fee is higher your second time around (and third, and fourth, and on and on) if your down payment remains under 5%:

Subsequent Down Payment Amount Funding Fee
Under 5% 3.6%
5% to 9.99% 1.65%
10% or higher 1.4%

For cash-out refinancing loans, the funding fee is always 2.3% your first time around and 3.6% for subsequent loans. It doesn’t change based on your down payment amount.

What about the rest of the VA loan lineup? Funding fees for IRRRLs, NADLs, and other less common loan types are as follows:

Loan Type Funding Fee
NADL (purchase) 1.25%
NADL (refinance) 0.5%
IRRRL 0.5%
Manufactured home 1.0%
Assumed loan 0.5%

Finally, the VA waives funding fees on loans to eligible veterans with service-connected disabilities, regardless of loan type, down payment amount, or previous VA borrower status.

For a complete overview of VA funding fees, check the VA’s Funding Fee Charts.

VA Loan Pros and Cons

A VA loan is very often a great deal, but the program has some drawbacks too. Evaluate the pros and cons for yourself.

VA Loan Pros VA Loan Cons
No down payment required Cap on loan principal ($647,200 in most areas)
No PMI required Appraisal required for cash-out refinance
Relatively lenient underwriting Difficult to qualify for an IRRRL when rates are high
Caps on closing costs Restrictions on use of IRRRL proceeds
No prepayment penalties
Thorough inspection for newly built homes
Can be transferred to the next owner

VA Loan Pros

VA loans have several useful (and potentially lucrative) benefits not available to nonmilitary borrowers:

  1. No Down Payment Required: For cash-strapped borrowers, this is the single biggest advantage of a VA-backed loan. Most other mortgage loan types require at least 3%, and many lenders prefer 10% or more. Be warned that some lenders do still ask for down payments on VA loans, but the industry is competitive and you’ll likely be able to shop around to avoid this requirement.
  2. No PMI Required: VA-backed loans don’t require private mortgage insurance. By contrast, conventional loans issued at greater than 80% LTV do require PMI until the borrower’s LTV drops below 78% (or 80% if the borrower requests PMI removal early). Depending on the loan principal and down payment value, this can save anywhere from a few dollars to several hundred dollars per month relative to a conventional loan with PMI.
  3. Relatively Lenient Underwriting: Lenders hold qualified VA loan applicants to lower credit standards than applicants for conventional mortgage loans. Even if you have fair or average credit, you may still qualify for a VA-backed loan.
  4. Limits on Required Closing Costs: Borrowers eligible for VA loans don’t have to pay certain closing costs, including underwriting fees, escrow charges, attorneys’ fees, and document processing fees. The lender can partially offset its losses on these items by charging the borrower an origination fee up to 1% of the loan principal.
  5. VA Inspection for New Construction Homes: When a VA loan is used to finance a new construction home, the VA sends licensed inspectors to evaluate construction progress and confirm that the home fits the VA’s specifications. At a minimum, the builder is required to provide a one-year warranty on the new home. Some builders offer warranties as long as 10 years, providing crucial peace of mind for new homeowners.
  6. No Prepayment Penalties: VA loans carry no prepayment penalties. If you wish to avoid interest charges by accelerating your loan’s payoff or making additional payments toward its principal, you’re free to do so with no penalties. Some lenders charge substantial prepayment penalties that amount to thousands of dollars per loan.
  7. Assumable Loans: VA loans are assumable, meaning they can be transferred from the seller to the buyer with minimal (or no) change to rates and terms. This is extremely useful in a rising interest rate environment. However, the buyer still has to cover the difference between the remaining loan balance and the appraised value of the home, either by putting cash down or taking out a second mortgage.

VA Loan Cons

VA loans do carry some significant limitations and restrictions. These are the most important for borrowers to know upfront.

  1. Limits to Loan Principal: While there is no upper limit to the actual property value, the VA guarantees loan principals only up to $647,200 (though this figure increases with inflation most years). The upper limit is higher in certain regions with high housing costs, mostly in Alaska, Hawaii, and major coastal metropolitan areas. If you want to buy a home that costs more than the limit in your area, you need to come up with the difference in cash.
  2. Cash-Out Refinance Appraisal Requirement: You need to get your home appraised when you apply for a VA cash-out refinance loan. This injects some uncertainty into the underwriting process, especially in soft housing markets.
  3. IRRRL Interest Rate Restrictions: Unless you’re refinancing an adjustable-rate mortgage (ARM) into a fixed-rate loan, your IRRRL’s interest rate must be lower than your original loan’s rate. In practice, it’s difficult or impossible to qualify for an IRRRL when interest rates are high.
  4. IRRRL Restrictions on Proceeds: You must use the proceeds from your IRRRL to pay down the existing VA loan or invest in qualified energy efficiency upgrades.

History of the VA Loan Program

The federal government has guaranteed housing loans to veterans since 1944 when Congress passed the Servicemen’s Readjustment Act (SRA). The SRA authorized the VA to guarantee home loans made by qualified lenders.

Initially, this authorization only covered loans made to veterans purchasing non-modular homes. In 1970, Congress amended the SRA to cover loans made on mobile homes. In 1992, Congress further expanded the law to cover virtually all active duty and honorably discharged Armed Forces veterans, as well as Army Reserve and National Guard members who served with honor for at least six years. In some cases, service members’ former spouses are eligible for VA loan guarantees too.

The SRA provides other financial benefits and protections for certain service member classes, including a hard cap of 6% on mortgage interest rates during active duty.

Final Word

Serving in the Armed Forces is a heavy task. So is choosing to spend your life with a career service member. The least the federal government can do to honor and reward the sacrifices made by service members and their loved ones is to make it easier for them to buy homes of their own. It’s no wonder that private lenders have issued nearly 20 million VA-backed loans since the program’s inception.

In an ever more tumultuous and uncertain world, those charged with keeping the peace deserve secure spaces of their own.

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