Mortgage BasicsEverything You Need to Know About VA Loans

Everything You Need to Know About VA Loans

VA-backed loans offer some of the most advantageous mortgage terms for would-be homeowners. They include no down payment, low interest rates, lenient credit score requirements, low closing costs, and no mortgage insurance.

Here is everything you need to know about this loan, how to qualify for it, and how to buy a property using a VA-backed loan.

What Is a VA-Backed Loan?

A VA loan is a mortgage issued by a traditional lender (such as a bank, credit union, or mortgage company) and guaranteed by the U.S. Department of Veterans Affairs (VA). In other words, the VA offers to pay back part of the loan if the borrower was to default. 

This program is offered exclusively to members of the military, past and present, and their families. It is designed to encourage lending institutions to provide more advantageous terms to these categories and help them access affordable mortgages and housing. VA loans may be used multiple times, and borrowers can still qualify even with a history of foreclosure and bankruptcy.

The VA home loan program was created in 1944 as part of the GI Bill of Rights. It has helped over 24 million service members become homeowners since then.

Who Qualifies for a VA Loan?

VA-backed loans are offered exclusively to U.S. veterans, active-duty military personnel, and some surviving spouses. To qualify, you must satisfy the following requirements.

Those who have served in the Armed Forces must meet at least one of the following criteria:

  • At least 181 days of active service during peacetime
  • At least 90 consecutive days of active service during wartime
  • Six or more years of service with the National Guard or Reserves or 90 days under Title 32, with at least 30 of those days being consecutive.

Since 2012, spouses and surviving spouses of military personnel must meet one of the following criteria to qualify for a VA-backed loan:

  • The military spouse died in service or from a service-related disability
  • The military spouse was missing in action or a prisoner of war for at least 90 days
  • The military spouse was rated disabled from their service and died of unrelated causes
  • You didn’t remarry after losing your spouse

The specific eligibility criteria may vary depending on the type of loan. In addition, like any other mortgage, the applicants will need to satisfy the requirements established by the lending institutions regarding their credit score (typically over 580), income, debt-to-income ratio, and so on.

What Do I Need to Know Before Buying a House With a VA Loan?

If you intend to buy a property using a VA-backed loan, you must be aware that they are restrictions regarding what type of home can qualify for a VA mortgage.

The property must be your primary residence

The home can be a single-family home, condo, manufactured home attached to the land, or modular housing, as long as it is your primary residence. Smaller multi-family buildings with four units or less may also qualify as long as the homeowners occupy one of the units. Besides, the property must be in move-in ready condition, with a functional kitchen and bathroom, utilities, etc.

VA loans are attached to a one-time funding fee

The one-time funding fee can be rolled into the mortgage payment. The amount varies depending on the loan amount, the type of loan (buying, building, tapping equity, etc.), if the borrowers are paying for a down payment, and how many times they have used their VA home loan benefits.

The amount VA agrees to back depends on the borrower’s VA loan entitlement and the county’s VA loan limit

The VA loan entitlement is based on the number of days the borrower served in the military. For borrowers who have access to their full entitlement (they do not own any other VA-financed properties), the VA agrees to pay the lender the lesser of up to $36,000. However, most lenders allow borrowing four times that amount, up to $144,000, without requiring a down payment. In addition, some borrowers in expensive areas may qualify for a bonus entitlement (or second-tier entitlement) that allows them to purchase a property in a competitive. Since 2020, there are no longer loan limits as long as the borrower still has their full entitlement intact.

What Are the Different Types of VA-Backed Loans?

VA loans can be for different purposes. Note that not all lenders offer these mortgages.

  • VA Purchase Loan: the most common type of VA loan allows current and former military members to purchase a home with no minimum down payment.
  • VA Interest Rate Reduction Refinance Loan (IRRRL): IRRRL, also known as VA Streamlines, is the most popular form of VA refinancing program among veterans. It allows VA loan holders to reduce their interest rate while rolling in the closing costs into the new loan. In many cases, the process does not require an appraisal, proof of income, or any additional paperwork.
  • VA Cash-Out Refinance: it allows borrowers to replace their existing VA or conventional loan while tapping equity up to 90% of their home’s value.
  • VA Energy Efficient Mortgage: this loan can be used to borrow up to $6000 to finance qualified permanent improvements, such as storm or thermal windows, heat pumps, and solar heating and cooling systems, when buying or refinancing a house with a VA loan.
  • VA Renovation Loan: although they are relatively uncommon, renovation loans allow borrowers to finance home improvement projects when purchasing or refinancing a fixer-upper with a VA loan.
  • VA Construction Loan: borrowers may finance their newly-built home with no down payment. VA construction loans may use a one-time close (the mortgage automatically converts to a permanent loan at completion). They can also be two-time close, with one dedicated loan for building the property, followed by a second loan for paying off the construction loan.

Step-By-Step Process of Applying for a VA Loan

Here is how to apply for a VA-backed loan.

1. Find a VA-approved lender

Shopping for a lender is part of any home buyer’s journey. However, only lenders approved by the U.S. Department of Veterans Affairs may originate VA mortgages. Besides, not all lenders offer all the available VA-backed loans. Depending on your needs, finding a VA specialty lender with the knowledge to guide you through the application process can be tricky.

2. Gather the necessary documents

Any mortgage application process requires a significant amount of paperwork, but VA-backed loans can be even more involved. Here is a list of some of the documents you may need to qualify for a VA loan:

  • DD-214 (Discharge or Record of Separation paperwork)
  • Leave and earning statement (if on active duty)
  • VA disability award letter (if applicable)
  • Social Security award letter (if applicable)
  • Nearest living relative statement
  • Childcare statement and divorce statement (if applicable)
  • Income documentation: two years of W2s, 60 days of bank statement, most recent paystubs, etc.

3. Obtain a Certificate of Eligibility

Your Certificate of Eligibility (COE) is one of the most critical documents you need to apply for a VA-backed loan. It proves that you meet the initial eligibility standards for VA loan benefits. It also includes the amount the Department of Veterans Affairs will guarantee. Your VA-approved lender can obtain the COE for you.

4. Get pre-approved for a mortgage

Once you have your COE in hand and have found the right lender, it is best to get pre-approved for a VA loan early in the home buying process. It will ensure that all the chances are on your side for your offer to be approved once you find the right property.

5. Find a house

If you are using your VA-backed loan to purchase a house, you will need to find a property that satisfies the requirements for a VA mortgage.

6. Make an offer

Your real estate agent will negotiate a contract on your behalf. It may be best to work with an agent familiar with the VA process so they can guide you and avoid any time-consuming mistakes.

7. Undergo the VA appraisal and underwriting process

Beware that VA loans may be more time-consuming and expensive than traditional loan applications. The real estate appraiser must be certified to perform appraisals to VA standards. They will ensure that the property meets the standards to qualify for a VA loan. The property will also need to pass a home inspection, while the underwriter will examine your income and other financial documents. As long as no issues arise during the underwriting process, you’ll be issued a clear to close and move on to your loan closing.

8. Close on the property

You will receive ownership of the property during closing. You will also need to provide proof of homeowners insurance and, if required, pay closing costs.

Final Thoughts

VA loans offer advantageous mortgage terms and are exclusive to military members and their families. However, the process could be more complicated than applying for a conventional loan. Keep in mind that the favorable terms come with longer underwriting princess, and the appraisal might take longer than anticipated. If your want to purchase a home in the next three to six months, you should start looking for a VA-approved lender in your area now.


Alix Barnaud

After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.