What Is a VA Loan?
A VA loan is a mortgage loan available through a program established by the U.S. Department of Veterans Affairs (VA) (previously the Veterans Administration). With VA loans, veterans, service members, and their surviving spouses can purchase homes with little to no down payment and no private mortgage insurance and generally get a competitive interest rate.
- A VA loan is a mortgage offered through a U.S. Department of Veterans Affairs program.
- VA loans are available to active and veteran service personnel and their surviving spouses, and are backed by the federal government but issued through private lenders.
- VA loans have generous terms, such as no down payment, no mortgage insurance, and no prepayment penalties.
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How a VA Loan Works
VA loans help active service members, veterans, and their surviving spouses become homeowners. They provide up to 100% financing on the value of a home. Eligible borrowers can use a VA loan to purchase or build a home, improve and repair a home, or refinance a mortgage.
The VA sets the qualifying standards, dictates the terms of the mortgages offered, and backs the loan, but doesn’t actually offer the financing. Instead, VA home loans are provided by private lenders, such as banks and mortgage companies.
When borrowers apply for a loan, they need to provide the lender with a certificate of eligibility from the VA. To get the certificate, you’ll have to produce service-related documentation, which can vary based on whether you are active duty or a veteran. The certificate can be obtained from the VA website. Although some of the lender’s own underwriting requirements still must be met, in most cases, VA loans are easier to qualify for than conventional loans.
VA loans, Federal Housing Administration (FHA) loans, and other loans insured by departments of the United States government have securitization through the Government National Mortgage Association (GNMA), also known as Ginnie Mae. These securities carry the guarantee of the U.S. government against default.
Borrowers can apply for a VA loan more than once, but the funding fee increases when using a VA loan after your first time if the down payment is less than 5%. Fees range from 1.4% to 3.6% of the loan amount.
VA Loan Terms
The terms of VA loans are quite generous compared to other mortgages and even to 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 requirement.
- Closing costs are limited and may be paid by the seller.
- There is no prepayment penalty if the borrower pays off the loan early.
- Assistance is available from the VA to help borrowers avoid default.
Credit score minimum requirements differ slightly from lender to lender. The VA’s only credit requirement is for the borrower to be considered a satisfactory credit risk by a lender. The benefits of a VA loan are the same no matter which lender you choose.
Types of VA Loans
The VA offers several types of mortgage loans:
Home Purchase Loans
VA home purchase loans help veterans to buy a home at a competitive interest rate. These purchase loans often do not require a down payment or private mortgage insurance.
Cash-Out Refinance Loans
Cash-out refinance loans allow mortgage holders 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.
The VA also offers adapted housing grants. These 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.
Interest Rate Reduction Refinance Loan
Interest rate reduction refinance loans (IRRRLs), also known as VA 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 with an existing VA loan to refinance a fixed-rate loan at a lower interest rate or convert an adjustable-rate mortgage (ARM) into a fixed-rate mortgage.
Native American Direct Loan
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.