Article

VA Loans: What to Know

VA loans are for current and veteran service members. Perks include no required down payment, credit score minimum or mortgage insurance. VA borrowers do pay a "funding fee," however.

Hal M. Bundrick, CFPMarch 29, 2019

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VA loans play an important role in helping those who serve and have served in the military buy a home. Here’s what you need to know about VA loans: how they work, who can get them, and all the other moving parts of a VA mortgage.

What is a VA loan?

A VA loan is issued by a private lender and guaranteed by the Department of Veterans Affairs. It’s a valuable benefit — offering a mortgage with a lower-than-most interest rate that usually requires no down payment — for qualified U.S. veterans, active-duty military personnel and certain surviving spouses.

You’ll complete the loan process with the mortgage lender of your choice, just like everyone else, but with some key differences along the way.

Who is eligible for a VA loan?

You are likely to be eligible for a VA mortgage if:

  • You are active-duty military.

  • You were separated from military service in a situation “other than dishonorable discharge.”

  • You meet specific length-of-service requirements.

  • You are a reservist or a member of the National Guard.

  • You are a qualified surviving spouse of a deceased veteran.

In addition, there are these VA loan requirements:

  • The home must be your primary residence.

  • You must have a valid certificate of eligibility from the VA.

  • You must satisfy credit score requirements set by your lender.

Benefits of a VA loan

A VA loan begins with one important distinction: relaxed credit-qualifying standards.

Although the VA has no minimum credit score requirement, lenders often require scores of at least 620. A few lenders will approve loans with credit scores as low as 580. And a borrower must be able to afford a home. The VA takes a real-life view of affordability by estimating the ability to pay the home loan after accounting for other monthly expenses.

The major benefits:

  • Down payments aren’t required unless the purchase price is more than the appraised value of the property or it's higher than the local VA loan limit.

  • VA loan rates are typically lower than conventional loan rates.

  • No mortgage insurance is required.

  • Counseling is available to help borrowers retain a home through serious financial difficulties.

  • Limited closing costs.

  • You don't have to be a first-time home buyer.

  • VA-backed loans can be assumable — this means they can be taken over by the person who buys your house, even if he or she isn't a service member.

  • You can still get a VA loan even if you've declared bankruptcy in the past.

Types of VA loans

Home purchase: A VA loan can be used to buy an existing home or a condominium in a VA-approved development, or to build a home.

Cash-out refinance:VA cash-out refi replaces your mortgage with a new loan, while tapping some of your home’s value for things like paying off debt or making home improvements. It also can be used to replace a non-VA loan with a VA loan.

Interest rate reduction refinance loan: A VA IRRRL (which is pronounced "Earl") is also called a streamline refinance loan. You can replace an existing VA loan with a mortgage offering a lower interest rate, or move from an adjustable-rate loan to one with a fixed interest rate.

Native American Direct Loan program: This helps qualified Native American veterans buy, build, improve or refinance a home located on federal trust land.

Adapted housing grants: These help veterans with service-related disabilities purchase, build or modify homes for better livability.

VA loan fees

Although mortgage insurance isn’t required on VA loans, a “funding fee” serves the same purpose: to help lenders cover the cost of foreclosing on borrowers who default. The fee ranges from 1.25% to 3.3% of the loan balance, depending on your down payment, branch of the military and whether or not it’s your first VA loan.

Next steps to find a VA lender

Once you've determined that you are eligible for a VA loan, it’s time to find the best VA lender for your situation.

  1. Review the best VA lenders in a variety of categories.

  2. Compare VA mortgage rates and fees from the best VA lenders in your area.

  3. Get a mortgage preapproval so you know your price range. Use the NerdWallet mortgage preapproval tool, which you can customize by indicating that you're a veteran.

  4. Check out our guide to refinancing a VA loan if you're already a homeowner.