How Do VA Home Loans Work?

The United States government created the VA loan program over 75 years ago to help veterans purchase affordable housing. With 2021 a record-breaking year for VA loans, both to purchase homes and to refinance, the program remains an important resource for eligible applicants.¹ But how exactly do VA loans work, and who qualifies?

Many borrowers think a VA loan is just a direct loan from the government. In reality, the VA generally guarantees only parts of the loan to a separate lender, often a bank, credit lender, or mortgage company. The lender offers its own loan terms while the VA serves as a backer, guaranteeing at least a partial payoff if the loan were to default. With the backing of the VA, lenders feel more comfortable offering borrowers cost-saving loan terms. 

After qualifying, eligible borrowers receive a Certificate of Eligibility (COE) from the VA. This COE is then included in a portfolio with other information usually given to a private mortgage lender when submitting a loan application, such as income, debts, and credit reports.

Even though eligible VA loan applicants may still be using a traditional lender for their mortgage, a VA loan has several advantage over other home loans.² Common benefits include: 

• No or low down payments: Many VA-backed loans do not require a down payment. However, some lenders may require one, especially for higher priced properties.
• No private mortgage insurance required: Many low or no down payment loans require private mortgage insurance (PMI), but a VA loan does not, which can lower the monthly cost of a VA mortgage.
• No minimum credit score to qualify: The VA does not require a minimum credit score to get a VA home loan. Your credit score will still be a part of a VA loan profile and can therefore influence loan terms, but the VA requires lenders to view your entire application – not just your score – before making a final decision and setting terms.
• VA assistance: The VA has offices all over the country staffed to help borrowers, whether they need assistance applying, advice if they’ve fallen behind on payments, or simply have questions throughout the length of the loan.³
• Potentially better interest rates: The interest rate attached to a mortgage may fluctuate depending on loan size, the borrower’s financial circumstances, and location. On average, VA-backed loans generally have lower interest rates than traditional loans.⁴

There are several groups that can qualify for a VA loan. Many eligible borrowers fall into one of five categories: 

• Veterans: Depending on when you served, length-of-service requirements vary, ranging from 90 total days of active service to 24 continuous months.⁵ If you don’t meet the minimum active-duty service requirement based on when you served, you may still be able to qualify for a COE if you were discharged for certain eligible reasons, such as disability, a certain medical condition, or hardship.
• Active-duty service members: As long as you’ve been serving for at least 90 continuous days, you may be eligible for a VA loan.
• National Guard members: You can qualify for a VA loan if you’ve had at least 90 days of non-training active-duty service, or were honorably discharged or retired after six creditable years in the National Guard.
• Selected Reserve members: Selected Reservists can qualify after at least 90 days of non-training active-duty service, or after six creditable years in the Selected Reserve and one of the following: honorary discharge, retirement, transfer to Standby Reserve after honorable service, or continual service in the Selected Reserve.
• Spouses of deceased veterans: If you are the surviving spouse of a veteran who was missing in action, a prisoner of war, or died during or in connection with their service, you may be eligible for a VA loan. Note that there are some additional criteria for surviving spouses who have remarried, so not all spouses qualify.⁶

There are also specialized versions of VA loans available to specific groups of qualifying people, such as Native American veterans. These types of VA loans may carry additional benefits, including low interest rates, limited closing costs, and no down payment in most cases.⁷ To find out if you qualify, you can apply for your COE through the VA eBenefits portal, through your mortgage lender, or via mail.

Even with reduced costs, VA loans have some fees and limitations. The specifics vary with the terms of the loan, but some common costs and limits include: 

• VA funding fee: The VA funding fee is a one-time fee that the eligible borrower pays on a VA loan. The fee is lower for first-time buyers, usually around 2.3% of the loan if your down payment is less than 5%.⁸ For subsequent loans, it rises to 3.6% for a down payment of less than 5%. The VA funding fee can be lowered by making a larger down payment. Some veterans may not have to pay this fee, including eligible disabled veterans, their surviving spouses, and Purple Heart recipients.
• Closing costs: Many mortgages include closing costs, and VA loans are no exception. Taxes, title insurance, recording fees, hazard insurance, and more can all add to the cost of closing on a new home. The VA sets limits on some, but not all, of these costs.
• Approved property conditions: Not every property can be bought with a VA loan. Separate from a traditional home inspection, VA loans require the property to meet several standards, like working utilities, size requirements, and accessibility.⁹ If the home isn’t move-in ready or set to be your primary residence, it might not qualify for a VA loan.
• Borrowing limits: Depending on your benefit entitlement and the county you live in, the loan may have a maximum value, especially if you currently have a VA loan that has yet to be paid off. If the maximum loan you can receive falls below what you need, you still may be able to qualify if you add a down payment.