What Is a VA Loan?

A VA loan is a mortgage loan available through a program established by the United States Department of Veterans Affairs (previously the Veterans Administration). The VA sets the qualifying standards, dictates the terms of the mortgages offered, and guarantees a portion of the loan, but doesn't actually offer the financing.

VA home loans are provided by private lenders, such as banks and mortgage companies, instead. With VA loans, veterans, service members, and families of service members can purchase homes with little to no down payment, no private mortgage insurance (PMI), and generally get a competitive rate.

Key Takeaways

  • A VA loan is a mortgage offered through a Department of Veterans Affairs program.
  • Available to active and veteran service personnel and their families, VA loans are backed by the federal government, but issued through private lenders.
  • VA loans have generous terms, such as no down payment, no mortgage insurance, no prepayment penalties and limited closing costs.

How a VA Loan Works

VA loans assist active service members, veterans, and surviving spouses to become homeowners. The individual presents a certificate of eligibility from the VA to the lender in the course of a loan application. Although some of the lender's own underwriting requirements must still be met, in most cases, VA loans are easier to qualify for than conventional loans.

The Veterans Administration offers a home loan guaranty benefit and other housing-related programs to help qualified veterans or their eligible family members buy, build, repair, retain or adapt a home for personal occupancy. VA loans offer up to 100% financing on the value of a home. VA loan recipients do not have to be first-time home buyers. Also, they may reuse the benefits and assign the loan to another qualifying person. 

The terms of VA loans are quite generous, compared to other mortgages and even other federal loan programs. Among the benefits:

  • No down payment is mandated unless required by the lender, or if the residence's purchase price is above the established property value.
  • There is no private mortgage insurance premium requirement.
  • Closing costs are limited and may be paid by the seller.
  • The lender may not charge a prepayment penalty if the borrower pays off the loan early.
  • Assistance is available from the VA to help borrowers avoid default.

VA loans, FHA loans, and other loans insured by departments of the United States government have securitization through the Government National Mortgage Association (GNMA), which is also known as Ginnie Mae. These securities carry the guarantee of the United States government.
against default

Many states offer additional benefits to veterans, such as property tax reductions.

Types of VA Loans

The VA offers several types of mortgage loans to help veterans and their families. 

  • VA home purchase loans help veterans to buy a home at a competitive interest rate. Often these purchase loans do not require a down payment or private mortgage insurance. 
  • Cash-out refinance loans allow mortgage holders who are veterans to borrow against home equity to pay off debt, fund school or make home improvements. This refinancing option offers a new mortgage for a larger amount than the existing note and converts home equity into cash.
  • Interest rate reduction refinance loans (IRRRLs), also known as streamline refinance loans, help borrowers obtain a lower interest rate by refinancing an existing VA loan. This is a VA-loan-to-VA-loan process that allows homeowners to refinance a fixed loan at a lower interest rate or convert an adjustable-rate mortgage (ARM) into a fixed-rate mortgage.
  • The Native American Direct Loan Program helps eligible Native American veterans finance the purchase, construction or improvement of homes on federal trust land. Reductions in interest rates also come with these loans. 
  • Adapted housing grants help veterans with a permanent and total service-connected disability to purchase or build an adapted home or modify an existing home for their disability.