Coming up with a down payment for a home can be a tall order for first-time homebuyers. However, it’s possible for veterans, service members, and their families to buy a home without the need for a down payment, thanks to VA loans.
“Most lenders require insurance if you aren’t putting 20% down,” says Lacey Langford, a U.S. Air Force veteran, blogger, and host of the Military Money Show. “With a VA loan, you can put no money down and not need to pay for that mortgage insurance, although there are some other fees you need to be aware of,” she adds.
Here’s what you need to know about the different types of VA loans available, and what to consider before getting one.
What Is a VA Loan?
A VA loan is a mortgage that’s backed by the U.S. Department of Veterans Affairs. VA loans aren’t actually issued by the federal government, says Doug Nordman, a U.S. Navy veteran and author of “The Military Guide to Financial Independence and Retirement.” Instead, VA guarantees that it’ll pay your lender up to 25% of the loan amount if you default on the loan. It’s a way to reduce the risk for approved lenders and encourage them to make loans to military service members and veterans.
“One of the biggest benefits of the VA loan is that borrowers can get a mortgage without a down payment,” Nordman says. “Additionally, it’s possible to finance the closing costs as part of this arrangement, all without the need to pay mortgage insurance,” he adds.
For those who can’t make the down payment amount required by conventional mortgages or even FHA loans, a VA loan can be a good alternative. Additionally, with a conventional mortgage, you’re typically required to pay for private mortgage insurance when you put down less than 20% percent. A VA loan can get rid of that expense.
On the downside, though, Nordman points out that there are often more stringent requirements for VA loans. The home has to meet certain inspection and appraisal criteria that might not be required with a conventional mortgage. As a result, the time to close can be longer, and that can be an issue for some sellers.
“While the VA loan is frequently a great deal for buyers, sellers might decline an offer that’s contingent on obtaining a VA loan,” he says. “In a seller’s market, buyers using a VA loan might not even get a counteroffer.”
Who Qualifies for a VA Loan?
Since VA loans are originated by private lenders, not the federal government, lenders can set their own requirements on top of the ones set by VA. For example, even though VA loans don’t require down payments and there aren’t minimum credit requirements, your individual lender may have additional criteria.
“Not every lender will approve you for zero down or if you have poor credit,” Langford says. “You also have to be aware that if you don’t have a down payment you, will need to pay a higher funding fee,” she adds.
Other than that, though, the main requirement is to get a certificate of eligibility (COE) from the Department of Veterans Affairs. In order to get a COE, you generally need to have been on active duty for at least 90 days at some point during your military career or have served at least six years in the Selected Reserve or National Guard. Qualifying surviving spouses of service members may also be eligible to receive a COE.
You can use your COE more than once, according to Langford. However, you need to have your first loan paid off, or you can only borrow up to the amount that you’ve paid off.
What Types of VA Loans Are Available?
There are different types of VA loans, and which one you should get depends on where you’re at on your homeownership journey. With a VA loan, you just need to have a current COE that you can show your approved lender.
All VA loans have funding fees, which are set based on the type of loan you get as well as how much you put down. The number of times you’ve used your COE is another factor that influences your funding fee. Some borrowers, such as those with a disability or Purple Heart recipients, can get the funding fee waived.
Here’s what you need to know about the different types of VA loans.
VA Purchase Loan
The VA purchase loan is designed to buy an existing home. In general, these loans are designed to purchase a primary residence. It’s possible to buy a property with up to four units, for example, if you want to rent out the other units. You just need to live in one of the units in order for it to be considered your primary residence.
“VA purchase loans are great for first-time homebuyers,” Nordman says. “The VA’s guarantee to the lender means that buyers might still be able to qualify for no money down on a larger mortgage loan even if they have lower credit scores,” he says.
VA Cash-Out Refinance
If you’ve built up equity in your home and you want immediate cash, a cash-out refinance can be one way to go about it. Nordman suggests using a VA cash-out refinance to refinance a loan that might have a higher interest rate, or use it to take out 100% of the equity you’ve built up.
Whether you can use your COE on a cash out refinance depends on whether you’ve already used it in the past. If you’re refinancing a VA loan, you might only be able to cash out an amount equal to what you’ve already paid down. However, if you got a conventional mortgage or other loan on your home and you want to use a VA cash out refinance, you should be able to take full advantage of your COE.
VA IRRRL (Interest Rate Reduction Refinance Loan)
The IRRRL offers a streamlined process to refinance your existing VA loan. If you’re hoping for a lower interest rate or monthly payment, an IRRRL can be a good choice. Additionally, Nordman points out, if you qualify for a funding fee waiver, you can essentially refinance your VA loan at no cost.
On top of that, Nordman explains, if you can certify that the residence in question used to be your primary residence, you might be able to qualify for the IRRRL even if you don’t currently live in the property.
“This is particularly useful for active-duty military families who have transferred to a new duty station yet still own the property and want to take advantage of lower interest rates,” he says.
VA Renovation and Home Improvements Loan
A VA Renovation loan can provide you with a way to get a home that might not meet the strict standards required for a VA purchase loan.
“A portion of the loan is used to bring the home up to those standards after the purchase, but it also requires the homeowner to use VA-approved contractors and additional VA appraisals for the after-renovation value,” Nordman says. “The loan can only be used to bring the existing home up to standards, not for luxuries or adding new structure,” he adds.
For home improvements on an existing home, Nordman recommends looking at other loan products offered by your lender. Instead of using a VA loan to make the improvements, it’s possible to use a more conventional home improvement loan and then, after the improvements are finished and the home has a higher value, use a VA cash-out refi to pay it all off.
Which Loan Type Is Right for You
When deciding which type of VA loan is right for you, it’s important to understand how each one works and figure out how they match up with your situation. Nordman recommends sitting down with a mortgage broker who has knowledge of the VA Lender’s Handbook to help you work out what’s best for your situation.
If you have access to a military base, speak with someone at the family support center for an objective look at VA loans and information about how to qualify.
Additionally, Langford points out, a VA loan might not be the right choice for you. Depending on where you live and your income level, you might be able to get a USDA loan with no money down and avoid some of the requirements of a VA loan. An FHA loan can also be a good alternative to a VA loan, Langford says, because it’s often easier to get. However, it can be more expensive because you need at least 3.5% down and you’ll need to pay mortgage insurance. It’s worth carefully considering all your options and shopping around for the best rate before you commit to a loan product or a lender.
“Compare other mortgage options,” Langford says. “Sometimes the VA loan can be the best deal, but it’s not always the least expensive.”