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A VA loan is a special type of low-cost mortgage available to certain U.S. service members, former service members and surviving spouses through the U.S. Department of Veterans Affairs (VA).
If you qualify, a VA loan can help you get into a new home, usually at better interest rates than you'd find with another type of loan. Read on to learn how VA loans work and how to qualify.
How Does a VA Loan Work?
Banks, credit unions and mortgage lenders issue VA loans with the understanding that the VA will cover a big portion of the lender's loss if the borrower fails to repay the loan.
When you take out a VA loan, the government provides you an entitlement (or guarantee) of up to 25% of the value of a home you're buying as your family's primary residence, up to a maximum value based on the cost of local housing.
To determine that maximum value, the VA uses purchase-price limits—known as conforming loan limits—that apply to mortgages backed by other government home loan agencies. You can look up those limits, which are subject to annual revision, at the Federal Housing Finance Agency's website.
The 2019 baseline limit, applicable to most counties in the U.S., is $484,350. The VA loan entitlement for those counties is 25%, or $121,087.50. The top limit for 2019, which applies to counties where housing costs are highest, is $726,525. The VA entitlement in those counties is $181,631.25.
Note that if you can afford a home that costs more than the top conforming loan limit for your county, you can still use your VA entitlement toward the purchase—but you'll have to finance (or put down cash) to cover the additional cost yourself. This option will still result in significant savings versus financing the whole property yourself.
Conversely, you don't have to use your full entitlement if you find a property you like at a price lower than the conforming limit, and you may be able to apply any unused portion of your entitlement to a future home purchase.
VA Loan vs. Conventional Loan
Veterans Affairs backing, along with lending requirements stipulated by the VA, make VA loans significantly more affordable than comparable conventional mortgage loans.
If you're not sure whether you'd get a better deal with a VA loan than you would with a conventional loan, check out these differences between the two:
- You can get a VA loan with a zero down payment. Conventional mortgages typically require cash down payments of at least 10%.
- You won't have to pay private mortgage insurance (PMI) with a VA loan. On conventional mortgages with down payments of less than 20%, lenders require purchasers to buy PMI to cover their losses in case of default on the loan.
- VA loans typically come with lower interest rates. Lenders usually charge higher rates on conventional mortgages than on VA loans.
- You're more likely to qualify for a VA loan with lower credit scores. Lenders typically have less restrictive credit requirements for VA loans than they do for conventional mortgages.
- You can use your VA entitlement more than once. If you pay off your first VA home loan, you can apply for another, as long as you're using it for your primary home.
What Fees Come With VA Loans?
As with conventional home loan lenders, financial institutions that issue VA loans may charge origination fees to cover the costs of processing the loan. The amount of these fees varies by lender, and is typically higher for applicants with lower credit scores.
In addition, most VA loan recipients must pay a percentage of the purchase value, known as the funding fee, to help offset the cost of VA benefits to U.S. taxpayers. Details are spelled out at the VA website, but the fee varies depending on several factors, including:
- The nature of your service (reservists pay higher fees than full-time military)
- Whether or not you make a down payment on the purchase. As with origination fees on many conventional mortgages, you can "buy down the points" on your funding fee by making a down payment on the loan.
- Whether you're using your VA entitlement for the first time, or applying it to a new loan after paying off your initial one. (Fees are higher the second time around.)
This table summarizes the 2019 funding fees for first-time VA loan borrowers:
|VA Home Loan Funding Fees (First-Time Use)|
|Type of Service||Down Payment||Funding Fee|
|5% or more||1.50%|
|10% or more||1.25%|
|5% or more||1.75%|
|10% or more||1.50%|
The following individuals are exempt from paying VA funding fees:
- Those receiving VA compensation for a service-related disability
- Those who would be eligible for compensation for a service-related disability if they were not receiving retirement or active-duty pay
- Surviving spouses of those who died in service or from a service-related disability
Lender origination fees and VA funding fees can be added to the purchase price of your home and financed over the life of the loan. This increases your monthly payments somewhat and adds to the total cost of the loan over its lifetime, but enables you to close on the loan without having to pay any cash up front.
How Do I Qualify for a VA Loan?
The first step in obtaining a VA home loan is reviewing your service record (or that of your spouse) to make sure you meet the necessary eligibility requirements.
Next, you must obtain a Certificate of Eligibility (COE) as proof to the lender that you are a legitimate candidate for a VA loan. You can get a COE in any of three ways:
- Complete an online form at the VA's eBenefits website.
- Provide records of your military service to a lender that issues VA loans, and they can generate a COE for you.
- Fill out and submit a COE request form by mail.
Documenting your eligibility to receive a VA loan doesn't automatically entitle you to one. You still must apply for and qualify for a loan by meeting the lender's credit and income qualifications. The VA sets guidelines for these qualifications, but each lender has some discretion in determining their lending criteria.
Working within VA guidelines, lenders also set their own interest rates and fees. Many financial institutions advertise and promote their VA loan offerings, but if you need help finding a VA loan issuer, you can contact the VA Regional Loan Center that serves the area where you plan to buy a home.
It's a good idea to identify a lender and get prequalified for your loan before you start shopping for a home. Prequalification will let you know how much you have to spend on your home. To get prequalified, you'll typically need to meet the lender's minimum credit score requirement and show proof of sufficient income to make the monthly mortgage payments.
It's also smart to apply to multiple lenders when seeking a VA loan. If your credit score is on the low side, you may not be approved by all lenders. And even if all your applications are approved, there's a chance one lender will offer a better interest rate than another. As with any loan, seek out the best rate and terms you can get.
Do I Need a Good Credit Score to Qualify?
Lenders that issue VA loans set their own credit score requirements, but typically the criteria on VA loans are more lenient than those for conventional loans. While many conventional mortgage issuers look for a FICO® Score☉ of 670 or greater, issuers of VA loans may accept applications from borrowers with a FICO® Score as low as 620.
As with conventional mortgages (and other forms of consumer credit), it's a good idea to check your credit score before you apply, so you have a good idea where you stand. Higher credit scores generally mean better lending terms, including interest and fees, that can save you thousands of dollars over the lifetime of the loan.
It's not common, but it is possible to be turned down for a VA loan application if your credit history contains significant negative events, such as bankruptcy. If that happens, or if you'd just like to improve your credit standing before you apply for a VA loan (which can also help you get a lower interest rate), follow these tips for improving your credit score, and apply again once your score is higher. Persistence is a military virtue, and in time, you should be able to get the loan you deserve.