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VA home loans: What they are and who's eligible

Current and former military members can avoid the scramble for a down payment.

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A VA-backed loan means you don't have to come up with a down payment. 

Angela Lang/CNET

Coming up with the down payment on a home can be 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 -- could be your ticket to home ownership. 

You or your spouse must be a current or former member of the US military. And not all properties are eligible. 

Read on to learn more about how to get a VA loan and whether it's right for you. 

What is a VA loan?

VA home loans aren't offered 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. That's why you don't need to pay a down payment -- so long as the sale price isn't higher than the home's appraised value.

And 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, even if your credit needs a little work.

How does a VA loan work?

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. You'll be able to access this service your whole life -- it's not limited to one home. However, the loan can only be used on your primary residence, not any vacation properties.

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 current or 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.

Pros

No down payments: 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. On May 11, for example, the average 30-year VA loan rate was 2.66% with an APR of 2.84%. Meanwhile, the average 30-year FHA purchase rate was 2.85% with an APR of 3.7%, and traditional 30-year mortgage rates were 3.06%. 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.

COVID-19 forbearance: Like other government-back mortgages, the CARES Act allows those struggling to keep up with their mortgages because of the pandemic to request forbearance through June 30. It'll last up to six months and borrowers can receive an additional six months if need be. 

Cons

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 funding fees if you stop making payments on the loan. Once the government has assumed responsibility for the loan, it starts charging the fees, which are typically between 1.4% and 3.6% of the loan, and can be paid upfront or over time.