Last Updated on June 1, 2023 by Bob Filipczak
This is everything we know about the VA loan, which is a process, a system, a benefit and a way to get a mortgage if you are a veteran or an active duty service member in a branch of the armed forces. The one thing that the VA loan is not , is a loan. That’s one of its confusing elements, and there are others. The reason veterans and active duty members are drawn to the VA loan is because it provides a list of benefits that, when you line them up, is almost unbelievable. No other program from the federal government comes close to the VA loan guarantee in terms of benefits, costs savings and scope. It’s easy to think it’s just a way to get a cheaper mortgage, but it’s a lot more than that, and here’s what you need to know.
What is the VA Loan?
The VA loan is a loan guarantee. It is essentially an agreement by the Department of Veterans Affairs and the federal government to stand behind whatever loan you get because you are a former or current member of the military. It is not the loan itself — that comes from a private lender or mortgage broker – but rather a kind of insurance. It tells the mortgage lender that you are a good risk and that the government is insuring your loan in case you can’t repay it. It is, in fact, a type of mortgage insurance.
This reduction of risk, for the lender, makes you a more attractive mortgage candidate and it should help you land a home loan. This is especially important for first time homebuyers who are serving, or who have served, in the armed forces.
What are VA Loan Benefits?
The list of benefits associated with the military VA loan guarantee is long…very long. The Big Three benefits, in terms of cost savings, are:
- No down payments
- No private mortgage insurance
- Lower interest rates
There are many more benefits, but these three will save you thousands of dollars up front and then continue to save you tens of thousands of dollars over the life of your VA mortgage. Others include:
- Lifetime benefits, meaning you can use your VA loan benefit multiple times during your life
- The VA home loan benefit can be used for single-family homes (up to four units), condos, manufactured homes and new builds.
- The VA loan guarantee limits your closing costs
If you want to know all the benefits of the VA loan guarantee, it’s a good idea to investigate the whole list. You will see why we call the VA program the Gold Standard.
Native American Direct Loan
The VA program has other loans that we will discuss further down the page. The Native American Direct loan is designed to help Native American military personnel find or build a home. If you’re a veteran or active duty service member, and either you or your spouse is Native American, you could be eligible for the NADL. These loans let military veterans and active-duty service members buy, build or improve a property on federal trust land. If you qualify, you can also use this loan to refinance your current mortgage. This one is an actual loan from the federal government and not a guarantee.
The VA Loan Compared to Other Loans
When you compare the VA loan guarantee to other federal mortgage loan programs (or even conventional loans), it usually comes out on top. We have shown you the complete list of benefits (above), but it’s good to be familiar with all of your options when you are looking for a new home and trying to land a mortgage.
Conventional vs. VA Loan
This can be a little confusing because, as we have explained, with a VA loan guarantee, the money is actually coming from a private lender. In many ways that process resembles a conventional loan. The forms and paperwork and questions you need to answer on the private lender side are almost exactly the same as with a conventional loan. You are just adding the VA loan guarantee into the mix in order to save a lot of money, both short term and long term.
We already looked at the top three VA loan guarantee benefits:
- No down payments
- No private mortgage insurance
- Lower interest rates
When compared to conventional loans, those three are substantial, especially for first-time home buyers. The top three advantages of conventional loans over VA loans are:
- Faster Closings – Conventional loans typically close faster than VA loans, meaning you can get from start to finish more quickly.
- More than one property – With conventional loans, getting a mortgage for a second home, vacation home or rental property is easy. All you need to prove is that you can pay for it.
- Competition – Having a VA guaranteed loan adds time and complexity to the mortgage process, and that makes you less competitive in an aggressive buying environment. Conventional loans make you more competitive. In the eyes of some sellers, a buyer with a VA loan can be more hassle than it’s worth, especially if they have offers on the table that can be closed quickly.
USDA Loan vs VA Loan
One of the primary advantages of the USDA loan over the VA loan is: they are open to everyone. You don’t need to have military service to qualify. Other than that, the top three benefits you get from the USDA loan guarantee program are:
If that list looks a lot like the VA loan guarantee program, it is. The USDA program, however, sort of stops there. You will notice that it has reduced private mortgage insurance, but it doesn’t eliminate it completely like the VA loan program. The primary requirement for the USDA loan guarantee is that you don’t have a high income and you want to move to an eligible rural district. “Rural” is the operative word here, because the program is designed to promote interest in rural real estate.
The USDA also offers a Section 504 Home Repair loan to help borrowers fix up rural houses that need help. Just like the VA system, The USDA system is a loan guarantee program. You still will need to get approved for the loan by a private lender.
FHA vs VA Loan
FHA loans come from the U.S. Department of Housing and Urban Development and it’s designed to help low and moderate income families afford a home. There is no military service requirement.
Three things that stand out for the FHA versus the VA loan:
- The FHA loan guarantee has a small down payment (3.5%) and the VA loan guarantee has none.
- The FHA requires mortgage insurance and the VA does not.
- The FHA and the VA both typically have lower interest rates on the mortgage that the private lender gives you. The VA’s interest rate tends to be lower, but it’s variable.
The FHA program is also, like the VA system, a loan guarantee program. You still will need to get approved for the loan by a private lender.
Who Gets the VA Loan?
There’s a lot of talk about eligibility when it comes to the VA loan guarantee. Generally you are eligible for the VA loan program if you served in the military, including these armed forces branches:
- Air Force
- Coast Guard
- Space Force
- National Guard
- Reserve members
- Veterans of any of these military services
As a veteran or active duty home buyer, if you served at least 24 continuous months in the armed forces, you probably qualify. There is a long list of dates and length of service requirements, but it’s pretty easy to figure out. You can also dig deeper into eligibility requirements.
The VA loan is also open to the uniformed services such as NOAA and the Public Health Service. VA benefits including the VA loan guarantee extend to the surviving spouse of a military member who was killed in the line of duty, died from a service-related injury, or is a POW/MIA.
How to Get the VA Loan Guarantee
When you look at the list of elements involved in a VA loan guarantee, it can be intimidating. It’s a lot simpler than it looks. Once you determine if you are eligible, you need to put some paperwork in motion.
- First, find a private lender to work with.*
- Second, get a copy of your COE, your Certificate of Eligibility
- Third, work with your lender to get approved for your loan. Your VA mortgage lender should then be able to work with the Department of Veterans Affairs to finish the rest of the process.
Once you have the financing and the VA loan guarantee lined up, you can start working with a real estate agent to find your next home. Getting pre-approved for the loan will make your house hunt much easier, especially when it comes to making offers and negotiating.
*This is a good point to mention that Homes for Heroes can help with private lenders. When you sign up for our Hero Rewards, we connect you with mortgage lenders who specialize in helping military heroes, including veterans and active duty service members. We also connect you with real estate agents and specialists who can help you find a great home. We have a whole team of professionals who are committed to helping community heroes like you.
VA Certificate of Eligibility (COE)
The VA Certificate of Eligibility is the one of the first things you will encounter when you start investigating the VA loan process. The good news is, while you do need this important document to complete your application, it is not difficult. It’s just a one page form, it’s online, and your lender can help.
We recommended having a private lender ready to work with you on your VA Loan, because they can request a Certificate of Eligibility directly from the Department of Defense. There’s an online system called Web LGY that has this information online and it can be immediately downloaded. You can also do it yourself by using the VA’s eBenefits portal.
One point to remember is that the Certificate of Eligibility is not the same as an approval for the VA Loan guarantee – but it’s close. Once you’ve got it, your lender and the VA will work out the rest of the details of the mortgage loan.
On your COE there’s a place that lists your entitlement. That is how big a loan the The Department of Veterans Affairs will guarantee.
The VA will guarantee 25% of the loan amount, and the basic entitlement is $36,000. With a little math, you can see that the basic guarantee will cover a $144,000 VA mortgage loan. If that seems low, it is. Most single family homes in the U.S. cost quite a bit more than that.
The VA knew it needed to change the basic entitlement to keep up with the market. It made some adjustments to its policies and regulations and came up with a secondary entitlement that covered veterans home loans up to $647,000. If the entitlement looks a little funky on your COE, it’s because they are working with two entitlements – basic and secondary.
Myth – One of the myths you will hear a lot is about the loan limits on VA loans. There aren’t any. None. Period. There are limits to how much the VA will guarantee on your loan ( $647,000), but if you are looking to buy a house that’s more expensive, the VA will not stop you. If for example you find a home in San Francisco that’s $1.3 million, the VA will insure and guarantee the first 49.7% of your loan. For the rest, you will need to pay a down payment, mortgage insurance and the rest of the things involved in a conventional loan.
VA Funding Fee
Also listed on your Certificate of Eligibility is your funding fee. VA Funding Fees are something you pay during your closing costs, so it does not necessarily come out of pocket (more on that below). This fee does pay to support the VA Loan system, which insures and guarantees loans for armed forces service people, veterans and surviving spouses. That’s important because the VA Home Loan program has been responsible for helping more than 25 million veterans and active duty armed forces personnel since it began, and it helped 1.2 million heroes in 2020 alone.
The funding fee can range between 2.3% and 3.6% of the loan amount, so it is an expense worth noting. The different fees apply based on whether it’s your first use of the VA loan guarantee (2.3%) or it’s a second or third use of your benefit (3.6%). Most veterans and military service members will pay this fee but there are some exceptions:
- A veteran who receives compensation for a service-related disability.
- A service member who gets service-connected disability pay but is receiving retirement or active duty pay instead?
- A surviving spouse of a veteran who died in service or from a service-related disability.
- An active-duty service member who has been awarded the Purple Heart.
- Military personnel who have a memorandum saying you are eligible for compensation based on pre-discharge claim?
The VA approaches closing costs on your mortgage with a wary eye. They really don’t want veterans and military service members paying much at all in the way of closing costs. There are only a few exceptions. That’s great at one level because it saves you money. However, someone must pay the closing costs, and the VA requires the seller to pay many of them. When you are in negotiations with a seller over the various costs and obligations, it may not sit well with them that they are forced to pay many of the closing costs.
Consequently not paying closing costs is a double-edged sword–less money from you but a weaker negotiating position. Here are some of the things the VA will absolutely, positively not let you pay:
- Real estate commissions
- Attorney’s fees
- HUD inspection fees
VA Loan Down Payment
One of the deepest truths about the VA loan guarantee is that you don’t have to make a down payment. It’s one of its core strengths, and it gets the most attention from home buyers because it offers thousands of dollars of savings right up front. But it’s not always true.
There are exceptions. When you use the VA loan guarantee to buy a high-end home that exceeds your entitlement – what they call a Jumbo loan – you will need to make a down payment for the amount that exceeds your entitlement. Other exceptions include:
- If the cost of the home exceeds the appraised value.
- If you have a co-borrower on the loan
- If you get rejected by a private lender for the loan and you want to try again, a down payment might help you get it on the second try.
VA Loan Credit Score
You will hear a lot about the minimum credit scores for a VA loan guarantee being 580 or 620.
Myth – There is no minimum credit score for a VA loan guarantee. It just doesn’t exist. What folks are usually talking about is that, on the private lender side of the equation, there will be credit score minimums and credit checks. From the Veterans Affairs side, however, they have no such requirements.
VA Loan Statement of Service Letter
The COE (Certificate of Eligibility) is the single most important document in the VA loan process, but if you are an active duty military professional, you will need one other document. It’s called the Statement of Service Letter, and it’s something the private lender will ask for. If you were applying for a conventional loan, the Statement of Service Letter is sort of similar to asking for your proof of employment.
The Statement of Service Letter is a letter from your commanding officer (or your unit’s adjutant or your personnel office) that lists:
- Your date of birth
- Which branch you served
- Your rank
- Your dates of active duty
- List of any time lost
- Type of discharge
- Are you eligible to return to service
- Name and signature of commanding officer
VA Loan Appraisal Requirements
The VA loan process has a few requirements that are not negotiable, and this is one of them. You must have the property that you want to buy appraised. And it must be done by a VA-approved appraiser. The good news is that there is a nation-wide network of these appraisers and the VA will assign one to your case. The bad news is, you will have to pay for this ($525 and $1,500, depending on where you are purchasing your house).
Remember: the appraisal is not the same as an inspection. If you want to know what the appraiser will be looking for, there is a list.
VA Loan Home Inspection
While the appraisal process is a requirement, the home inspection is not a VA requirement. Chances are that your private lender or mortgage broker will require you to do an inspection, but it’s good to remember the inspection is primarily there to protect you, the home buyer. Unlike the appraisal, a home inspector will go deep into most of the elements of your house, such as:
- Wood-destroying insects
If they find things that make the house unsafe or not-up-to code, they will let you know what needs to be fixed. That may affect the negotiations with the seller.
This is another area where Home for Heroes can help. We connect you to a network of real estate professionals, and home inspectors are part of the team. We have inspectors across the country that understand the needs of military families and veterans. Moreover, most of the Homes for Heroes inspectors offer discounts to our armed forces heroes and we have them organized by state.
Getting a VA Loan With Bad credit
While the VA loan system does not have a minimum credit score requirement, the private lenders who actually give you the loan probably do. These mortgage brokers tend to have a minimum that ranges between 580 and 620. There are some things you can do to repair your credit. If you have a bankruptcy or a foreclosure in your past, the VA is pretty good about giving you another chance. The waiting period for a foreclosure is only two years and the waiting period for bankruptcy is between 12 months and two years.
VA Loan Benefits After You Buy a House
Ok, maybe you’ve got your VA loan guarantee and maybe you’ve got your mortgage and your new home. Are you done? Not if you don’t want to be. The VA loan is a lifetime benefit and it provides other loan guarantee services that can help you with every home you own.
One thing you should check into is the VA home loan refinance programs. These can help you with your monthly budget and your overall financial health. They have two different loan guarantees.
VA IRRRL: The Interest Rate Reduction Refinance Loan
The VA Interest Rate Reduction Refinance Loan, or VA IRRRL, is a streamlined refinance program that helps military professionals and veterans rework their current loans.
The VA IRRRL is a loan that replaces your current mortgage with another VA-insured mortgage, but this one has a lower interest rate. It keeps you as part of the VA Loan program, but having a lower interest rate has short-term and long-term benefits.
It’s important to remember that the IRRRL VA loan is only available to the current VA Loan holders. If you haven’t gone through their process and been approved for (and received) a VA Loan, this refinance option isn’t available to you. If you do have a VA Loan, this may be the next logical step for you.
When they say the VA IRRRL is streamlined, they mean it. Here are some features of their streamlined process:
- Less documentation – the process requires a lot less paperwork than a traditional refinance and can often be completed in 30 days.
- No home appraisal –You don’t have to have your current home appraised to get the loan–saving you more money on fees.
- Low VA funding fee –The VA does charge a one-time funding fee, but this fee is reduced on the VA IRRRL.
VA Cash Out Refinance
The VA’s Cash Out Refinance is essentially a way to turn your home’s equity in cash in your hand. Over time, you build up equity in your home as you pay off your mortgage. There are ways to borrow against that equity, or you can do a cash out through the VA system. If, for example, you have paid down about $50,000 of your mortgage over time, you can turn that equity into a payment to you (minus closing costs). Or if your home’s value has gone up as a result of the real estate market, that extra equity can also increase the amount you can cash-out.
In addition to cash, there is another benefit of this VA refinance. You can convert a conventional loan into a VA-guaranteed loan using this refinance, if you are eligible for VA benefits. That means if you didn’t use the VA loan system on your first mortgage, you can use this refinance to opt into the system–with all of the savings you will get.
The Cash-Out Refinance loan is useful if you need cash to fix up or renovate your current home. It can also be used for any number of needs including medical bills, education or just getting yourself back on your feet financially.
Using a VA Loan for Second Home
If you plan to use a VA Loan for a second home, there are a few factors you will need to consider. First, it is possible to get a second home with a VA loan guarantee. It’s not illegal, but you do need to acknowledge and abide by the VA’s policies. That means understanding rules about:
Occupancy is the first challenge and timing is everything in this. The U.S. Department of Veterans Affairs requires that when you apply for a VA loan guarantee, it must be for the residence that will be your primary home. In terms of timing, buying a second property with a VA loan really means that you are buying a primary residence, leaving your previous home as your “second home.” Let’s say that again: your old house is now your second house and your new house is the one you will live in, i.e. your primary house. This is completely legit, but you can see where timing is critical. If you plan on using your benefit for a second VA loan guarantee, you can’t buy a second home and not live in it.
If you are considering this, it’s a good idea to dig deeper into the intricacies of owning two homes using the VA loan benefit.
Myth – You cannot use the VA loan for investment properties. This is not true. It’s not necessarily easy or straightforward, but it can be done and still remain with VA loan regulations. Again, the timing of your occupancy is key. You need to be moving into your new home and living there. But you can then convert your previous home into investment income, i.e. collect rent. This makes more sense when you look at Change of Station situations, which are frequent in the armed forces.
An easier path for this kind of income is to get one VA loan guarantee on a multifamily unit (up to four units). Then you live in one unit and rent out the other three.
Myth – You cannot use the VA loan guarantee for a vacation home. This is also not true. You can do it, but you need to continue to abide by the occupancy rules. That means you live in your new home and designate your previous home as your vacation home. As always, when owning two homes and mortgages under the VA system, do the math on your entitlement.
Timing is always crucial with the VA in terms of owning multiple properties. For example, if you are close to retiring from the military, you might want to purchase a home that would be in a vacation destination. In that case, you have 12 months to move in, but it will need to become your primary residence once you retire.
Are VA Loans Assumable?
Another strength of the VA loan system is the mortgage you get will be assumable. That makes it unique. There are very few instances where assumable mortgages are available anymore. What is an assumable VA loan? It means you can sign your existing mortgage and home over to someone else, and they will be the new owner of both house and mortgage. They will be responsible for paying the monthly mortgage payments and all the other things that are involved with owning a house, and you can move on to your next home. The buyer who assumes the mortgage can skip a lot of the paperwork that goes with a traditional sale, but the real benefit is being able to assume a mortgage with a lower interest rate than is currently available.
This is another case where Change of Station could come into play. The most streamlined mortgage assumption is to work with another member of the armed forces who is also eligible for the VA loan program. So you move to a new base, and you don’t want to go through the hassle of selling your previous home. You can just sign it over to another service member and they can pay you for the equity you built up. In this way, you also preserve your entitlement for your next loan.
Save Average of $3,000 with Homes for Heroes
“Overall great experience. I was able to use the Homes for Heroes program along with my VA Loan and purchased the home of my dreams.” – Stephen, Navy, bought a new house in Texas.
There are a lot of moving parts when you are working with the VA loan system, and Homes for Heroes gets that. Our local real estate and mortgage specialists joined us specifically to help you navigate the process.
Two ways Homes for Heroes can help:
Our local loan officers are vital to the VA process. Not only can they assist you in getting pre-approved, and eventually close on your loan, but they have agreed to reduce their lending fees to save you money.
In addition, if you work with our local real estate agent, who specializes in helping heroes buy and sell their homes, will save you an average of $3,000 after you close on a home with them.
Sign up today to speak with a member of our team to learn more about how our local specialists can take care of your needs, and save you money in the process. It’s our way to say thank you for your service.