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A VA loan is a low-cost mortgage exclusively available to certain U.S. service members, veterans and surviving spouses through the U.S. Department of Veterans Affairs (VA). They are offered through private lenders. VA loans usually have lower interest rates and down payment requirements than conventional mortgages, but their fees and restrictions mean they're not always the best option.
How Does a VA Loan Work?
While VA loans are backed by the U.S. government, they're issued by private financial institutions such as banks and credit unions. Homebuyers apply through a specific mortgage lender, and the VA insures the loan behind the scenes, covering a portion of the lender's loss if the borrower can't repay.
VA loans are best known for their rare 0% down payment requirement, making homeownership more accessible. According to the VA, 90% of their traditional purchase loans are made without any money down. However, homeowners can contribute an optional down payment, which reduces fees and increases equity.
Lenders must abide by certain government policies for VA loans, such as offering mortgages on primary residences only, and they must charge a VA funding fee. However, lenders have some discretion with approval criteria and can set their own interest rates and some fees.
Before applying for a VA loan, you must obtain documentation proving your eligibility (more on that below). Then you can get prequalified with a lender and start home-shopping. After you've made an offer that's accepted, the lender sends a VA-approved appraiser to estimate the home's value and ensure it meets the VA's minimum property requirements.
Depending on your situation and location, you may or may not have limits on how much you can borrow with a VA loan. In some circumstances, you can borrow more by providing a down payment.
Common Types of VA Loans
While VA loans are usually used for traditional home purchases, they come in several forms, including:
- Home purchase loan (this can be used to buy or build a home)
- Interest rate reduction refinance loans (IRRRLs)
- VA-backed cash-out refinance loans
- Native American direct loan
- Manufactured home loan
- VA direct loan
Common VA Loan Fees
VA loans have unique fees, along with some of the same ones found with other mortgages. It's important to be aware of the fees so you can properly calculate if a VA loan is your best deal.
Most VA loan recipients must pay a "funding fee," a one-time payment calculated as a percentage of the purchase value. It helps offset the cost of VA benefits to U.S. taxpayers. The fee varies depending on factors, including:
- The nature of your service (reservists pay higher fees than full-time military).
- Whether you make a down payment. An optional down payment reduces the fee.
- 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 after the first use.
For 2023, VA funding fees for first-time users range from 1.25% to 2.15% of the home's purchase price. For subsequent VA loans, the funding fee ranges from 1.25% to 3.3%. There are tiers making it so the more you contribute, the lower the fee.
Some individuals are exempt from paying VA funding fees.
In addition to the VA funding fee, lenders may also charge their own origination fee. According to the VA, the fee is often around 1% of the total loan amount, which could be a minor or major headache depending on the home's price.
Just like other mortgages, VA loans come with closing costs, which can vary by lender. However, VA loans limit some closing costs to the seller to aid affordability. In addition to an origination fee, a buyer's costs often include:
- VA funding fee
- VA appraisal fee
- State, local and real estate taxes
- Loan discount points
- Title insurance
- Recording fee
Note that both lender origination fees and VA funding fees can be added to the home's purchase price and financed over the life of the loan. This increases monthly payments and adds to the total cost of the loan, but it reduces closing costs.
How to Qualify for a VA Loan
Ready to get started? Follow these steps to buy a home with a VA loan.
1. Ensure Eligibility
Avoid wasting time by reviewing the VA's requirements and your service record (or that of your spouse) to make sure you meet eligibility criteria.
2. Get Proof of Eligibility
Next, you must obtain a Certificate of Eligibility (COE) as proof to the lender that you're a VA loan candidate. There are three ways:
- Online at the VA's eBenefits website
- By providing your military records to a VA lender who generates your COE
- Submitting a COE request by mail
3. Find Lenders
Not all lenders offer VA loans, so if you need help finding one that does, contact the VA Regional Loan Center in your area.
4. Get Prequalified
It's wise to get prequalified for your loan before viewing homes. This process indicates how much you can borrow, so you're considering properties in your price range. Getting prequalified also indicates to sellers that you're a serious buyer. Know that documenting your eligibility to receive a VA loan doesn't automatically entitle you to one; you still must apply and qualify by meeting the lender's credit and income qualifications.
It's ideal to get prequalified with multiple lenders, since requirements, rates and terms can vary. Consider asking a lender to provide a quote for a conventional mortgage so you can compare and determine if the VA loan actually has the lowest overall cost.
5. Start Looking for Eligible Properties
Find a real estate agent and start the fun part! Keep in mind that VA loans are limited to a primary residence and single-family homes up to four units, a VA-approved condo project or a manufactured home or lot.
Pros and Cons of a VA Loan
If you're trying to decide on whether to use a VA loan, here are some benefits and drawbacks to be aware of.
Pros of VA Loans
- Zero down payment: Conventional mortgages typically require down payments of at least 10%, while VA loans require nothing down unless you want to borrow a high amount or reduce your funding fee.
- Competitive rates and fees: VA loans don't charge private mortgage insurance (PMI), which is usually required for conventional mortgages with down payments under 20%. Plus, VA loans often have slightly lower interest rates and closing costs.
- Lower credit scores OK: Lenders typically have less restrictive credit requirements for VA loans than they do for conventional mortgages.
- Multiple uses: 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.
Cons of VA Loans
- Funding fees: VA funding fees are commonly under 3%, but if you're buying in a pricey area, this fee can be a burden.
- Property restrictions: VA loans are only for specific types of primary residences. They require a VA-approved appraisal and are scrutinized to ensure the property meets certain basic standards.
- Minimal equity: Requiring 0% down is a massive perk for cash-strapped homebuyers, but it means borrowing a larger amount and starting off with no equity—and therefore greater risk. If the home loses value, you may owe more than what it's worth. You also won't have home equity to borrow against for a while, and you'll pay more interest over the life of the loan.
- Seller bias: Some sellers reject offers with VA loans because they mistakenly believe they'll have to pay all the closing costs. While VA loans limit the buyer's closing costs, and there are some extra hoops like the VA appraisal, it's incorrect that sellers cover everything. Still, this misconception could make you a less competitive buyer.
The Bottom Line
VA loans require certain hoops to jump through and fees not found with other mortgages, but they provide incredible value to buyers who can't afford a down payment. It can be worth comparing your VA loan offer to other loan types to ensure you get the best deal overall. If you check your credit report and it's in tip-top shape, and you don't mind putting some money down, it's possible you'll get approved for a conventional mortgage with a similar interest rate and potentially fewer fees. But if you have minimal cash available to put down upfront, a VA loan could be a lifesaver.