Updated and reviewed: Jul 10, 2013
Our nation is indebted to those who have served in our armed forces, and VA mortgages are one of the rewards for their contributions. Guaranteed by the Veterans Administration, these loans have helped countless veterans and active duty service members enjoy the benefits of home ownership.
VA mortgages are available through authorized lenders throughout the country. Because they're insured against default by the Veterans Administration, they can offer some significant advantages over conventional mortgages. Here's how they work:
VA Loan Benefits
100 percent financing available
VA mortgages are one of the few ways remaining that you can get a home purchase loan with no down payment. Because the VA guarantees the loan, the lender doesn't need any cash up front as a hedge against default. Result: 100 percent financing, the entire amount of your home purchase, up to fairly generous limits.
Conventional mortgages require that borrowers obtain mortgage insurance if they make a down payment of less than 20 percent of the home value. This is usually in the form of private mortgage insurance, or PMI, which can add an additional cost of 0.5 – 1 percent of the loan amount annually. Because the VA is already guaranteeing the loan, additional insurance isn’t necessary.
Result: You can not only get a mortgage with no down payment, you can get a mortgage with no down payment and no mortgage insurance. How’s that for a deal?
Attractive mortgage rates
Because VA loans are guaranteed, that reduces the risk for lenders. As a result, VA mortgage rates are competitive with those offered on conventional mortgages, and may be lower than conventional loans with minimal down payments.
No maximum loan amount
There is no limit on how much you can borrow with a VA loan. There is a limit on the VA Loan Guaranty, which effectively limits how much you can borrow with no money down to $417,000 in most of the country. (Higher limits apply in certain counties with elevated home values.) However, it’s possible to borrow more by choosing to put up some of your own money for a down payment. For more information, see the explanation of the VA Loan Guaranty further down the page.
VA loans can be used for a wide range of purposes related to home ownership. They can be used to buy a home, a unit in a residential condominium or a manufactured home and lot. They can fund repairs, alterations or improvements on a veteran’s home, or to purchase and install energy-saving features. VA loans can also be used by veterans to refinance an existing mortgage, regardless of whether the current home loan is a VA mortgage or not.
Borrowers with diminished credit may have an easier time qualifying for a VA loan than for other types of mortgages. The VA itself does not require a minimum credit score, but lenders will have their own standards.
Some lenders will approve a VA mortgage for borrowers with a FICO credit score as low as 580, though 620-640 is the more common minimum, Even then, you may have better luck qualifying for a VA loan than for other mortgages with similar minimum scores, because the VA is guaranteeing the loan.
Borrowers with no established credit history may be able to qualify by demonstrating a record of timely payments on recurring expenses such as rent, utilities or cell phone bills.
VA loans also have shorter waiting periods following foreclosure and bankruptcy than most other types of loans. Homeowners who have been through foreclosure can re-qualify for a new VA loan in as little as two years, though they may have to repay losses the VA suffered on the previous mortgage in order to do so. Those with a Chapter 7 bankruptcy may reapply in as little as two years after the discharge date, while those with a Chapter 13 may qualify after as little as one year of making timely payments on the bankruptcy obligations.
As for debt-to-income levels, lenders typically like to see a borrower’s total monthly debt payments, including the mortgage, at no higher than 41 percent of gross monthly income, similar to other types of home loans. They may go higher in some situations, however.
Limited closing costs
With a VA mortgage, your closing costs are limited. By VA regulations, the borrower may pay only those closing costs deemed “allowable and customary,” including the appraisal, credit report, property survey, flood or other hazard insurance, title fees and the VA funding fee (more on that later).
Most other fees MUST be paid by either the lender or seller – they cannot be paid by the borrower. These include attorney fees, brokerage fees, loan application fees, lender appraisals, document preparation, loan closing or settlement fees, rate lock fees and many others.
About the VA funding fee
The VA funding fee is an upfront fee charged on all VA home loans. For members and veterans of the regular military getting their first VA loan, it is 2.15 percent of the amount borrowed for mortgages with less than 10 percent down, including those with no down payment.
Overall, the fee ranges from 0.5 – 3.3 percent, with the lowest fee charged to those who are refinancing an existing VA loan. Otherwise, the fee varies according to the size of the down payment, whether the borrower is a member or veteran of the Reserve or National Guard, and whether the borrower has previously used a VA loan. The fee is waived for those with certain VA disabilities and surviving spouses of those who died in service.
The fee may be rolled into the loan amount, so you don’t have to pay it up front.
Types of VA loans
VA mortgages are available as either fixed-rate or adjustable-rate mortgages (ARMs). The most popular option is the VA 30-year fixed-rate mortgage, while 15-year fixed-rate loans offer lower rates and is often used for refinancing. Also available, but less common, are fixed-rate loans with terms of 20 or 25 years.
VA adjustable-rate mortgages are available as hybrid ARMs, where the initial rate is fixed for a period of 3, 5, 7 or 10 years before adjusting, or as a standard ARM, where the rate resets every year. Rate resets on VA ARMs are typically based on current rates for 1-year U.S. Treasury bonds.
Another benefit of VA mortgages is streamlined refinancing. This means you can refinance an existing VA loan to a new loan at a lower rate without having to re-qualify. That means no income verification, income documentation, and home appraisals. You can even do a streamlined VA refinance if your home has fallen in value, leaving you underwater on the mortgage (owing more than the property is worth).
VA loans can also be used to refinance a non-VA mortgage into a VA home loan. Standard VA funding fees apply. A cash-out refinance option is available for those who wish to borrow against their home equity by refinancing either a VA or non-VA mortgage, at up to 100 percent of the home’s current value.
Home equity loans
The VA does not guarantee home equity loans or home equity lines of credit (HELOCs). Instead, it allows eligible homeowners to borrow against up to 100 percent of their home equity through a cash-out refinance (see above).
A VA cash-out refinance may be an attractive option, particularly if it allows you to reduce your interest rate in the process. However, in some cases you may be better off obtaining a conventional home equity loan outside the VA system. For example, if you’re only looking to borrow a small amount of money, the fees for a conventional home equity loan may be less than you’d pay for a VA cash-out refinance. Furthermore, if mortgage rates have risen since you obtained your VA loan, a cash-out refinance would mean giving up the low rate you presently have.
The VA Loan Guaranty
What is the VA Loan Guaranty?
The VA Loan Guaranty is the key to how VA mortgages work. The VA doesn’t actually make home loans, but instead guarantees part of the loan amount on approved mortgages issued by authorized lenders. This typically is 25 percent of the purchase price, up to $104,250 in most of the country, or enough to purchase a $417,000 home with no money down. Higher home price limits, up to $1.1 million, are allowed in certain counties with more expensive real estate (2013 limits).
For the lender, the VA’s 25 percent guaranty is like having a 25 percent down payment as a hedge against default. So the VA borrower gets all the benefits of a hefty down payment – low interest rate, easier qualifying, no PMI – without having to put out the cash. Of course, he or she is still responsible for paying off 100 percent of the loan.
Buying a more costly home
If a VA borrower wants to purchase a home that costs more than four times the maximum guaranty amount – say, a $480,000 home in a county with the standard loan limit of $417,000 – they can still do that by putting up some of their own money to cover the difference between the guaranty and what would be required for down payment (usually 25 percent).
So in this case, a 25 percent down payment would be $120,000, minus the $104,250 maximum guaranty, for a borrower contribution of $15,750 at closing.
Buying another home
A veteran or active duty service member may use a VA loan to buy a second or even third residence if they have not used up their maximum guaranty entitlement for the county where the property is located. The actual calculation can be complicated, but basically the total loan guarantees used for all homes cannot exceed the loan guaranty for the county where the property being purchased is located. Examples of how the guaranty may be calculated are provided here .
Restoring the guaranty entitlement
Once a veteran or active duty service member uses any portion of their guaranty entitlement, that portion of the guaranty is no longer available to you as long as you own the home. For example, if you buy a $300,000 home and use a $75,000 guaranty, that $75,000 is locked up and not available to you again until the home is sold and the loan is paid off.
There is an exception to this rule where a veteran may have their entitlement restored after they have fully paid off the VA loan it was used for but retain possession of the property. However, this exception can only be used once.
Eligibility and applying
How to apply
The first step in applying for a VA Loan is to complete a Request for Certificate of Eligibility, VA Form 26-1880, available from VA-authorized lenders. With many lenders, you can obtain and submit your request online. You will need to provide proof of your military service or other eligible status. Once you receive your certificate, you can apply for the mortgage with any VA-authorized lender.
Who is eligible?
VA Loans are generally available to active duty members and veterans of the U.S. armed services who have met certain active duty minimums. Current members and veterans of the National Guard or Selected Reserve with at least six years of service are generally eligible as well, as are unmarried surviving spouses of service members who died of service-related causes, or those who remarried at or after age 57.
VA Loans are also available to cadets and midshipmen of the U.S. military academies, to officers of the U.S. Public Health Service or National Oceanic and Atmospheric Administration, and selected other groups as well.
Merchant seamen with WWII service and U.S. citizens who served in the armed forces of certain allied nations during WWII are also eligible.
Those who have received a dishonorable discharge from any of the armed services may not receive a VA loan.
For more details, see the section below.
Detailed eligibility criteria
Active duty members of the military are currently eligible for a VA guaranteed loan after 90 days of continuous service.
Veterans are eligible for a VA loan if they meet the following requirements:
- 90 total days of service during the defined periods for WWII, the Korean War or Vietnam War, or
- 181 continuous days of peacetime service through Sept. 7, 1980 (Oct. 16, 1981 for officers) , or
- 24 months of continuous service for the period beginning Sept. 8, 1980, (Oct. 17, 1981 for officers) or
- Completed the full period called or ordered to active duty, with a minimum of 181 days for the period Sept. 8, 1980 (Oct. 17, 1981 for officers) through Aug. 8, 1990.
- Veterans not meeting the above criteria may still be eligible for a VA loan if they were discharged due to 1) hardship, 2) the convenience of the government, 3) reduction-in-force, 4) certain medical conditions, or 5) a service-connected disability.
- Those who received a dishonorable discharge are not eligible for a VA loan.
Members of the National Guard and Reserve may qualify for a VA loan if they meet the following guidelines:
- 90 days of active service in the Gulf War era (Aug. 2, 1990 to present), or
- At least six years of service in the National Guard or Selective Reserve AND,
- Received an honorable discharge, or
- Were placed on the retired list, or
- Were transferred to the Standby Reserve or Ready Reserve after honorable service, or
- Continue to serve in the Ready Reserve.
A widow or widower of a veteran may be eligible for a VA loan if they meet any of the following:
- The unmarried surviving spouse of a veteran who died in service or of a service-related disability, or
- A surviving spouse who remarried at age 57 or above, and after Dec. 16, 2003, or
- The surviving spouse of a totally disabled veteran; the disability need not have been the cause of death.