VA Loans 101
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Guides VA Loans 101
VA loans are for those who served in the military. The main advantages are no required down payment, lower credit-score requirements and no mortgage insurance. VA borrowers do have to pay a “funding fee,” however.
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 insured 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.
» MORE: Best lenders for VA loans
You’ll complete the loan process with a bank, broker or credit union, or online, just like everyone else, but with some key differences along the way.
Who is eligible for a VA loan?
You are likely to be entitled to apply for a VA mortgage if:
- You are active-duty military.
- You were separated from military service in a situation “other than dishonorable discharge.”
- As a veteran or active military, 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 requirements:
- The home must be your primary residence.
- You must have a valid certificate of eligibility from the VA.
- Although the VA has no minimum credit score requirement, most lenders do.
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 in some cases. 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.
- Mortgage rates are typically lower than rates on conventional loans.
- No mortgage insurance is required.
- Counseling is available to help borrowers retain a home through serious financial difficulties.
- You can reuse your VA loan benefit.
- VA loans limit the amount you can be charged for 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 someone you sell the house to, even if that person isn’t a service member.
- A bankruptcy discharged more than two years ago — and in some cases, within one to two years — will not preclude you from getting a VA loan.
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: A 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 charged on VA loans, a “funding fee” serves the same purpose: to help lenders defray the expenses 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 time getting a VA loan.
The VA funding fee can be rolled into your total loan package, but that will likely raise your interest rate and will absolutely raise your monthly payment.
Though a down payment is not generally required, putting 5% or more down will reduce your VA funding fee. And a down payment will lower your monthly payment, too.
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. Start with NerdWallet’s selection of the best VA lenders in a variety of categories: best overall, best online experience, best customer service, best for borrowers with weaker credit, and best traditional banks offering VA loans.
Another way to start is to compare mortgage rates and fees from the best VA lenders operating in your area.
And it’s always helpful to get a mortgage preapproval. Try the NerdWallet mortgage preapproval tool, which you can customize by indicating that you are a veteran.