What Is a VA Loan and How Does It Work?

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With mortgage rates at competitive lows and a booming housing market, now is the perfect time for many to buy a house. But for some prospective homebuyers, stringent lender requirements and hefty down payment present significant barriers to entry.

For Veterans, though, there’s an alternative to conventional mortgages: the VA loan.  

“Veterans and service members have earned access to what’s arguably the most powerful mortgage option on the market today,” says Chris Birk, director of education for Veterans United Home Loans, a dedicated VA mortgage provider based in Missouri. “VA loans have some truly unmatched benefits for qualified homebuyers. They also have more flexible and forgiving credit guidelines than many conventional loans.”

In contrast to conventional mortgages, veteran home loan qualifications have undergone fewer changes in recent months. This can offer a path to homeownership for service members who might otherwise be shut out of home financing in this age of historically low rates.

What Is a VA Loan?

VA loans have been around since 1944, when the GI Bill of Rights was passed toward the end of World War II. The goal was simple: to provide veterans with better access to homeownership. The fundamentals of the VA loan program remain in place today: veterans who qualify can access mortgages with no money down, competitive interest rates, and extremely low closing costs.

How Does a VA Loan Work?

There are four types of home loans available through the U.S. Department of Veterans Affairs. The first is a direct loan in which the VA acts as your mortgage lender, although this loan type is only available to Native American veterans. The other three are VA-backed loans, which means an approved private lender issues you a mortgage guaranteed by the VA. These include purchase loans, interest rate reduction refinance loans, and cash-out refinance loans.

What Are the Eligibility Requirements for a VA Loan?

There are a few different qualifications for a VA loan, but the main one is you must be a current or former member of the military or a surviving spouse of someone who served. Active duty members can qualify for a VA loan after 90 days. Conditions for former military personnel depend on the years you were on active duty; wartime veterans generally have shorter minimum service requirements. If you’re unsure whether you qualify, you can refer to the VA home loan eligibility list.

While the VA does not publish official credit score guidelines and leaves these requirements up to each lender, the consensus among experts is that it’s easier to get approved for VA loans compared to a traditional mortgage. “Credit score requirements can vary by lender and other factors, but the minimum score veterans need for a VA loan is often lower than conventional benchmarks,” says Birk. “VA loans also allow veterans to bounce back faster after derogatory credit events like a bankruptcy or foreclosure.”

All things considered, VA home loan eligibility has remained relatively stable as mortgage availability plummeted in 2020 in response to the pandemic. “Credit score minimums went up slightly, but they still remained a very flexible option for individuals who might not qualify for conventional loans,” says Crooks, Jr. “The VA also helped facilitate transactions in several ways, including allowing exterior-only appraisals and waiving termite inspections in moderate to heavy areas.”

Pros and Cons of VA Loans

Veterans who qualify for a VA loan can benefit from many advantageous terms. For one, no down payment is required, and buyers who go this route are not required to purchase mortgage insurance as they normally would. VA loan rates also trend lower than conventional mortgage rates, which can lead to thousands saved over the life of the loan. 

Instead of a down payment and other upfront costs paid by those getting a mortgage, VA loans come with a one-time funding fee. This fee is charged based on a percentage of the total loan amount, which varies by loan type. “The funding fee protects taxpayers in the event a VA loan goes into default since VA loans don’t come with a mortgage insurance requirement,” explains Kevin Crooks, Jr., a branch manager with AAFMAA Mortgage Services, a Virginia nonprofit that provides financial support to military families. “Disabled veterans and servicemembers can be exempt from the funding fee.”

VA ProsVA Cons
No down payment neededOnly available to veterans
Low interest ratesInvolves a funding fee
Reduced closing costsCan be subject to price limits
Mortgage insurance not requiredNo standardized financial requirements

Pro Tip

As with all types of loans, there are pros and cons to financing a home through the VA. But for most qualified veterans, the terms available through a VA loan can’t be matched by conventional mortgages.

How to Apply for a VA Loan

  1. Apply for a VA home loan Certificate of Eligibility (COE)

Before you apply for a VA loan, you must get a Certificate of Eligibility to show your lender that you qualify for the benefit. You can apply online at the official VA home loan website, where you can also find more information about required documents and other methods of application.

  1.  Find a lender and get pre-approved

After you obtain a COE, the next step is to find a lender and apply for a loan. Native American veterans have access to the Native American Direct Loan (NADL) program, where the VA services as your mortgage lender, but others will need to find a separate private lender who’s willing to work with a VA-backed loan. Be sure to do your research and shop around to find a lender who meets your needs. 

Once you find a lender, make sure to get pre-approved before shopping around for a house. Getting pre-approved will give you an idea of how much you can borrow and show sellers that you can finance the house you’re purchasing. 

  1. Get a home appraisal

Unlike conventional mortgages, VA loans require a home appraisal. The purpose of the appraisal is to estimate the market value of the house so that lenders can decide what the loan amount should be. Note that an appraisal is different from a home inspection, ensuring there are no issues with the house itself and is a separate cost. Although a home inspection isn’t required for a VA loan, most people choose to get both a home inspection and a home appraisal. 

  1. Apply for a loan

After you’ve gotten an appraisal for the house you intend to buy, it’s time to officially apply for a loan with the lender you plan to work with. If you’re going with a private lender as opposed to a VA direct loan, the application process should be similar to a conventional mortgage, with perhaps a bit more bureaucratic red tape. Your lender will look at factors such as your credit score, debt-to-income ratio, and income to decide whether to approve your loan application.

  1. Navigate the underwriting and closing process

Once you’ve applied for a VA loan and make an offer on the house, the underwriting and closing processes are similar to a conventional loan. Your lender will review all your materials to make sure they’re in good order. Then you’ll sign the final contract and pay any closing costs. You’ll also need to pay the VA funding fee, which is unique to VA loans. The exact amount varies based on your down payment amount, and you may be exempt from the fee if you meet certain qualifications.

Is a VA Loan Right for You? 

Veterans are free to choose between a VA loan and a conventional mortgage, and the best option isn’t always obvious. “VA loans tend to have a few more pieces of red tape tied to the loan process and may not be as attractive to a seller in an apples-to-apples comparison with someone bringing a conventional loan to the table,” says Nathaniel Hovsepian, a Marine Corps veteran and owner of The Expert Home Buyers, a real estate investment firm in Georgia.

Bureaucracy notwithstanding, Hovsepian views VA loans as the best long-term option for veterans. “We always recommend using a VA loan if you are able to qualify. This is especially true if you don’t have enough of a down payment to qualify for a conventional loan.”

The best way to decide whether a VA loan is the right option for you is to apply. Meanwhile, you can also talk with lenders about conventional mortgages. By comparing rates and terms of different available options, you can make an informed decision on which type of mortgage makes the most sense for your personal situation. For assistance, contact your regional loan center to speak with a VA home loan representative.

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