VA loans: how they work, who is eligible

VA loans are intended for current service members as well as veterans and qualifying spouses. These mortgages have competitive interest rates and generally do not require a down payment.

If you’ve been in the military and needed a mortgage, a VA loan may be right for you, whether you’re buying a home or refinancing yourself. You should know that.

What is a VA loan?

A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs (VA) and issued by a private lender, such as a bank, credit union, or mortgage company. A VA loan can make buying a home easier because there is usually no down payment required.

Only qualified U.S. veterans, serving military personnel, and certain surviving spouses are eligible for VA loans. The GI Bill of Rights created the VA Home Loan Program in 1944 to help veterans settle into civilian life after World War II.

How Does a VA Loan Work?

The VA guarantee means that the government will reimburse part of a VA loan to the lender if the borrower fails to make the payments. This guarantee reduces the risk for lenders and allows them to offer advantageous terms and not require a down payment.

If you are eligible, you can complete the VA mortgage application process through a lender of your choice. Many, but not all, lenders offer VA loans, and some lenders specialize in serving VA borrowers.

Who Can Get a VA Home Loan?

You are likely eligible for a VA mortgage if:

You are active-duty military or veteran who meets the requirements for length of service.

You are the surviving spouse of a member who died while on active service or due to a service-related disability and who has not remarried or remarried after the age of 57 or on December 16, 2003. Spouses of prisoners war or missing soldiers are also eligible.

Meet the lender’s credit and income requirements. The VA does not set a minimum credit score for VA loans, but lenders can set their own minimum standards. The lender will also consider your income and debts to assess your ability to pay the mortgage.

The property you wish to purchase meets safety standards and building codes and is your primary residence.

To prove that you qualify for military service or surviving spouse, you must obtain a VA title before you complete the loan. You can ask a VA approved lender to get the document for you, or you can request the certificate through the VA.

VA loan services

Here are the main advantages of VA loans over conventional and FHA loans:

No Down Payment or Mortgage Insurance Required: Other types of loans require down payments and may include additional mortgage insurance fees. FHA loans require mortgage insurance regardless of the amount of the down payment, and traditional loans generally require mortgage insurance if the down payment is less than 20%.

Competitive Interest Rates: According to mortgage data provider Ellie Mae, the 30-year average mortgage rates for VA mortgages were lower each month in 2019 than for FHA and conventional mortgages.

Limited closing costs: Closing costs are the various fees and expenses that you pay to get a mortgage. The Department of Veterans Affairs limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging other closing costs.

Disadvantages of VA Home Loans

Each type of loan has drawbacks for some borrowers. Here are the possible disadvantages of a VA loan.

VA Loan Funding Fees: While no mortgage insurance is required for VA loans, there are additional costs known as finance charges. The federal government sets the fees and bears the execution costs if the borrower has no arrears. The fees range from 1.4% to 3.6% of the loan, depending on your down payment and whether this is your first VA loan. You can pay the fees upfront or double the loan.

Buy Principal Home Loans Only: You can’t buy an investment property or vacation homes with a VA loan.