What Is a VA Loan?
VA mortgages are designed to help active-duty military service members, veterans, and their surviving spouses buy a home. These loans are issued by private lenders and insured by the Department of Veterans Affairs. VA loans are available in several types, with low or no down payment and generous terms, making homeownership more attainable for people who have served.
How Do VA Loans Work?
VA loans are government-backed mortgages. This means if a borrower is unable to repay their VA loan, the federal government reimburses the mortgage lender for some of its loss. The reduced risk of loss encourages lenders to offer mortgages that meet the VA’s generous standards to eligible borrowers.
Who Can Get a VA Loan?
To get a VA loan, borrowers need to have served a minimum time in the military or be the surviving spouse of someone who served in one of the following branches of the U.S. armed forces:
- Air Force.
- Coast Guard.
- Marine Corps.
- Space Force.
To get a VA loan, you must have served on active duty for anywhere from 90 days to 24 months, depending on when you performed your service.
You also may be eligible for a VA loan through service with the:
- Environmental Science Services Administration.
- National Oceanic and Atmospheric Administration.
- National Guard.
- National Reserve.
- Public Health Service.
National Guard and Reserve members need to serve between 90 days and six years.
The VA website offers a summary of service requirements.
VA Loan Requirements
Here are some of the requirements for a VA loan:
- Property requirement: The property must be a home, not just land. Eligible property types include single-family homes, condominiums, and townhouses.
- Occupancy requirement: The borrower must intend to use the property as their primary residence. It cannot be an investment property or second home.
- Closing costs: Like conventional mortgages, VA loans come with closing costs. Expect these fees to total between 2% and 5% of the purchase price.
- Funding fee: Instead of mortgage insurance, you’ll pay a one-time VA funding fee that’s between 0.5% and 3.6% of the total amount.
- Loan limits: VA loans have no limits on the amount you can borrow.
VA Loan vs. Conventional Loan
Here are some important differences between VA loans and conventional loans, which are the most common mortgage type:
VA Loans vs. Conventional Loans
|VA Loan||Conventional Loan|
|— No down payment.|
— No mortgage insurance.
— VA funding fee.
— Must be used to buy your primary residence.
|— Minimum down payment of 3%.|
— Private mortgage insurance if you put down less than 20%.
— No VA funding fee.
— Can be used to buy any type of property.
Is a VA Loan Right for You?
Access to VA loans is one of the benefits of serving in the armed forces. If you don’t have much saved for a down payment or your credit isn’t too great, then a VA loan can make the difference in helping eligible borrowers become homeowners.
Pros of VA loans
- You don’t need a down payment. Saving for a down payment can take time and hold you back from buying a home. Unlike conventional loans, VA loans don’t require a down payment, so you don’t need to wait as long to buy a home.
- You don’t have to pay for PMI. Other government-backed loans require mortgage insurance, and conventional loans require PMI if your down payment is less than 20%. VA loans don’t make you pay for mortgage insurance, saving you from covering that expense each month.
- Lower credit requirements. The VA requires no specific minimum credit score for a home loan. Lenders may have their own credit score requirements, but they’re on the lenient side, with many requiring borrowers’ scores to be no lower than 580.
- No loan limits. Many types of mortgages set maximum loan limits, which may restrict your choice of homes or where you can buy. VA loans have no such limit — you can borrow any amount as long as the home is worth it, and you can afford to repay it.
- No prepayment penalty. Some lenders charge a fee if you pay back your mortgage too soon because then they miss out on collecting interest. VA loans have no prepayment penalty.
Cons of VA loans
- There’s a VA funding fee. VA loans require most borrowers to cover an upfront funding fee that helps pay for the program. You’ll have the option of either paying the fee upfront with your closing costs or including it in your loan and paying it off over time.
- VA loans can’t be used to buy investment properties. VA loans can be used only to purchase a primary residence.
- VA loans can’t be used to flip a home. Similarly, VA loans cannot be used to purchase a fixer-upper that you intend to sell once you’ve improved its value.
- You’ll likely need to pay lender fees. Many lenders charge their own fees, such as an origination fee that often comes out to 1% of the loan. Note that some lender fees may be negotiable.
- Sellers may be hesitant. Some sellers assume that an offer backed with a VA loan means the bidder is short on cash, and may prefer a bid from buyers with a conventional loan. This can make it more difficult to find a home in competitive markets.
VA Loan FAQ
Here are answers to some frequently asked questions about VA loans.
The financial requirements for a VA loan are generous as long as you’re a qualified military service member, veteran, or surviving spouse of one. You don’t need to make a down payment, but you can if you want to start off with more equity in the home.
Though the VA doesn’t enforce specific debt-to-income ratios or credit score minimums, many lenders will want to see a score of at least 580.
You likely won’t qualify for a VA loan if you haven’t served the required time on active duty. You also can be disqualified if you were dishonorably discharged, and no longer have access to veterans benefits.
VA loans and loans backed by the Federal Housing Administration are both government-insured loans designed to be easier to get than conventional loans.
FHA loans require at least a 3.5% down payment, while VA loans require no down payment. The FHA requires you to have a credit score of at least 500, while the VA has no minimum credit requirement. FHA loans require ongoing mortgage insurance, while VA loans charge a one-time funding fee.
If you’re eligible for both loan types, then a VA loan might be cheaper.