Coming up with the down payment on a home can feel like an insurmountable hurdle, especially when you factor in all the other upfront costs. That’s why a VA-backed home loan -- which requires no down payment and allows for lower credit scores -- could be your ticket to home ownership. To qualify for a VA loan, you or your spouse must be a current or former member of the US military.
Here is everything you need to know about what a VA loan is, VA loan eligibility requirements and whether it’s the right choice for you.
What is a VA loan?
VA home loans aren’t issued by the US Department of Veterans Affairs -- they’re just backed by the agency. By guaranteeing VA home mortgages, the government provides confidence to lenders and financial institutions that the loans are low-risk. You’ll still go through a private lender to obtain a VA loan. But if you stop making payments on your VA home loan, the government will be held responsible for the loan.
Because the government shares the risk, you should also get better terms and interest rates for a VA-backed loan than you would on other loans, and no down payment is required. You can also qualify for a VA loan with a lower credit score than most conventional mortgages.
Who is eligible for a VA loan?
Veterans or service members who are or were on active duty must meet one of the following requirements to qualify:
- Served at least 90 consecutive days during times of war
- Served at least 181 consecutive days during times of peace
- Were discharged from duty because of a service-connected disability
- Are currently on active duty
National Guard or Reserve members must meet the following requirements in order to be considered eligible:
- Served at least six years in the Selected Reserve or National Guard
- Served at least 90 days of active duty
Learn more about VA loan eligibility at the VA’s website.
What are the different types of VA loans?
Purchase loan: If you’re planning to buy a home, a basic VA purchase loan will help you get decent interest rates with private mortgage lenders.
Native American Direct Loan: This loan is available to Native American veterans or veterans married to Native Americans to buy, build or improve a home on federal land.
Interest Rate Reduction Refinance Loan: If you’re struggling financially to keep up with your VA loan, an Interest Rate Reduction Refinance Loan can help make your monthly payments smaller.
Cash-out refinance loan: If you’re looking to make improvements to your home, pay off debt, or make strides toward your retirement fund, the VA can back cash-out refinance loans.
How to apply for a VA loan
If you think you’re eligible, you first need to apply for a Certificate of Eligibility, either through your private lender or the VA’s eBenefits online portal. Veterans and former National Guard or Reserve members who have been activated must provide discharge or separation papers (DD Form 214). Current service members, as well as National Guard or Reserve members, will need to show a statement of service that’s signed by their commander, adjutant or personnel officer.
The following information must be included in your statement of service:
- Full name
- Social Security number
- Date of birth
- Date you entered the service
- Any lost time
- Command providing the information
What are the pros and cons of getting a VA loan?
As with all types of loans, there are benefits and disadvantages to consider.
No down payment: You can skip the scramble to come up with cash upfront, since the government is backing up your loan.
Reduced closing costs: Yes, you still have to pay closing costs even if you qualify for a VA loan. However, some closing costs will not apply to you and origination fees are limited up to 1% of the loan total.
Low rates: Compared with traditional and Federal Housing Administration mortgage rates, VA loan mortgage rates are significantly lower. Currently, the average interest rate for a 30-year VA loan is hovering between 4% and 5%, whereas interest rates for a 30-year fixed-rate conventional mortgage are closer to 5.5%. Lower rates are beneficial because even a slightly higher interest rate can add tens of thousands of dollars to the cost of your loan over its lifetime. A VA loan mortgage calculator will help you estimate your rates.
No mortgage insurance: With a VA loan, not only can you opt-out of a down payment, you can also skip paying for mortgage insurance since your loan is guaranteed by the government.
Primary homes only: Let go of your dreams of financing a vacation home with a VA loan. VA loans can only be used for the borrower’s primary place of residence and they must live there.
Property eligibility: Not all properties are eligible under VA home loans. An appraiser approved by the VA will need to evaluate your potential new home in order to make sure it meets the property requirements established by the VA. Unfortunately, this means if you were hoping to buy a fixer-upper, you may not be able to with a VA loan.
VA funding fees: One of the upsides of a VA loan is you won’t have to pay for mortgage insurance. But you will have to pay a one-time funding fee when you close on your new home, which you can either pay up front or roll into the cost of your mortgage. The fee is based on the type and size of your loan, but is typically between 1.4% and 3.6% of the loan.