The VA home loan: Unbeatable benefits for veterans

For many who qualify, the VA loan program is the best possible mortgage.

Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans and certain other groups become homeowners at an affordable cost.

The VA loan asks for no down payment, requires no mortgage insurance, and has lenient rules about qualifying, among many other advantages.

Here’s everything you need to know about qualifying for and using a VA loan.

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PART 1: Top 10 VA loan benefits

1. No down payment on a VA loan

Most home loan programs require you to make at least a small down payment to buy a home. The VA home loan is an exception.

Rather than paying 5, 10, 20 percent or more of the home’s purchase price upfront in cash, with a VA loan you can finance up to 100 percent of the purchase price. The VA loan is a true no-money-down opportunity.

2. No mortgage insurance for VA loans

Typically, lenders require you to pay for mortgage insurance if you make a down payment that’s less than 20 percent. This insurance, which is known as private mortgage insurance (PMI) for a conventional loan and a mortgage insurance premium (MIP) for an FHA loan, protects the lender in the event that you default on your loan.

VA loans require neither a down payment nor mortgage insurance. That makes this a VA-backed mortgage very affordable upfront and over time.

3. VA loans have a government guarantee

There’s a reason why the VA loan comes with such favorable terms. The federal government guarantees that a portion of the loan will be repaid to the lender even if you’re unable to make monthly payments for whatever reason.

This guarantee encourages and enables lenders to offer VA loans with exceptionally attractive terms to borrowers that want them.

4. You can shop for the best VA loan rates

VA loans are neither originated nor funded by the VA. Furthermore, mortgage rates for VA loans aren’t set by the VA itself. Instead, VA loans are offered by U.S. banks, savings-and-loans institutions, credit unions and mortgage lenders — each of which sets its own VA loan rates and fees.

This means you can shop around and compare loan offers and still choose the VA loan that works best for your budget.

5. VA loans don’t allow a prepayment penalty

A VA loan won’t restrict your right to sell your home if you decide you no longer want to own it. There’s no prepayment penalty or early-exit fee no matter within what time frame you decide to sell your home.

Furthermore, there are no restrictions regarding a refinance of your VA loan.

You can refinance your existing VA loan into another VA loan via the agency’s Interest Rate Reduction Refinance Loan (IRRRL) program or switch into a non-VA loan at any time.

6. VA mortgages come in many varieties

A VA loan can have a fixed rate or an adjustable rate. In addition, you can use a VA loan to buy a house, condo, new-built home, manufactured home, duplex or other types of properties.

Or, it can be used to refinance your existing mortgage, make repairs or improvements to your home, or make your home more energy efficient. The choices are yours. A VA-approved lender can help you decide.

7. It’s easier to qualify for VA loans

Like all mortgage types, VA loans require specific documentation, an acceptable credit history and sufficient income to make your monthly payments. But, as compared to other loan programs, VA loan guidelines tend to be more flexible. This is made possible because of the VA loan guaranty.

The Department of Veterans Affairs genuinely wants to make it easier for you to buy a home or refinance.

8. VA loan closing costs are lower

The VA limits the closing costs lenders can charge to VA loan applicants. This is another way that a VA loan can be more affordable than other types of loans. Money saved can be used for furniture, moving costs, home improvements or anything else.

9. The VA offers funding fee flexibility

VA loans require a “funding fee”, an upfront cost based on your loan amount, your type of eligible service, your down payment size plus other factors. Funding fees don’t need to be paid as cash, though. The VA allows it to be financed with the loan, so nothing is due at closing.

And, not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.

10. VA loans are assumable

Most VA loans are “assumable,” which means you can transfer your VA loan to a future home buyer if that person is also VA-eligible.

Assumable loans can be a huge benefit when you sell your home — especially in a rising mortgage rate environment. If your home loan has today’s low rate and market rates rise in the future, the assumption features of your VA become even more valuable.

Part 2: VA loan rates

VA mortgage rates are among the lowest

The VA loan is viewed as one of the lowest-risk mortgage types available on the market. This safety allows banks to lend to veteran borrowers at extremely low rates.

Loan Type Current Mortgage Rate* VA 30-year FRM 2.25% (2.421% APR) Conventional 30-year FRM 2.875% (2.875% APR) VA 15-year FRM 2.25% (2.571% APR) Conventional 15-year FRM 2.625% (2.625% APR)

*Current rates provided daily by partners of the Mortgage Reports. See our loan assumptions here.

VA rates are more than 25 basis points (0.25%) lower than conventional rates on average, according to data collected by mortgage software company Ellie Mae.

Most loan programs require higher down payment and credit scores than does the VA home loan. In the open market, a VA loan should carry a higher rate due to more lenient lending guidelines and higher perceived risk.

Yet the result of the Veterans Affairs efforts to keep veterans in their homes means lower risk for banks and lower borrowing costs for eligible veterans.

VA mortgage calculator

VA Loan Calculator Home Price: Down Payment: Not required Interest Rate: Service Type: Active/Retired Guard/Reserves See Results Home Price: Down Payment: Not required Loan Term (years) : 30 15 Interest Rate: Advanced Options Service Type: Active/Retired Guard/Reserves VA Loan Use: First Use Subsequent Use State: AL AK AR AZ CA CO CT DC DE FL GA HI IA ID IL IN KS KY LA MA MD ME MI MN MO MS MT NC NE NH NJ NM NV NY ND OH OK OR PA RI SC SD TN TX UT VT VA WA WI WV WY Property Tax: Homeowners Insurance: HOA/Other: Funding Fee: $2,500 Funding Fee Percentage: Total Loan Amount: Payment Breakdown Principal and Interest

Property Tax

Homeowners Insurance

HOA/Other *You could save up to $3,000 in interest payments by comparing rates from multiple lenders Request Rates ×

PART 3: Eligibility

Am I eligible for a VA home loan?

Contrary to popular belief, VA loans are available not only to veterans, but also to other classes of military personnel. The list of eligible VA borrowers includes:

Active-duty servicepersons

Members of the National Guard

Reservists

Surviving spouses of veterans

Cadets at the U.S. Military, Air Force or Coast Guard Academy

Midshipmen at the U.S. Naval Academy

Officers at the National Oceanic & Atmospheric Administration.

A minimum term of service is typically required.

Minimum service required for a VA mortgage

VA home loans are available to active service members, veterans (unless dishonorably discharged), and in some cases, surviving family members. To be eligible, you need to meet one of these requirements for service:

You’ve served 181 days of active duty during peacetime

You’ve served 90 days of active duty during wartime

You’ve served six years in the Reserves or National Guard

Your spouse was killed in the line of duty and you have not remarried

Your eligibility never expires. Veterans who earned their benefit in long ago are still using their benefit to buy homes.

PART 4: The VA loan COE

What is a COE?

In order to show a VA mortgage lender that you are VA-eligible, you’ll need a Certificate of Eligibility (COE), which your lender can acquire for you online, usually in a matter of seconds.

How to get your COE (Certificate of Eligibility)

Getting a Certificate of Eligibility (COE) is very easy to do in most cases. Simply have your lender order the COE through the VA’s automated system. Any VA-approved lender can do this.

Alternatively, you can order your certificate yourself through the VA benefits portal.

If the online system is unable to issue your COE, you’ll need to provide your DD-214 form to your lender or the VA.

Does a COE mean you are guaranteed a VA loan?

No, having a Certificate of Eligibility (COE) doesn’t guarantee a VA loan approval.

Your COE shows the lender you’re eligible for a VA loan, but no one is “guaranteed” VA loan approval.

You must still qualify for the loan based on VA mortgage guidelines. The “guarantee” part of the VA loan refers to the VA’s promise to the lender of repayment if the borrower defaults.

PART 5: Qualifying for a VA mortgage

VA loan eligibility vs. qualification

Just because you’re “eligible” for a VA loan based on your military status or affiliation, doesn’t necessarily mean you’re qualified for a VA loan.

You still have to qualify for a VA mortgage based on your credit, debt, and income.

Minimum credit score for a VA loan

The VA has established no minimum credit score for a VA mortgage. However, many VA mortgage lenders require minimum FICO scores of 620 or higher — so apply with many lenders if your credit score might be an issue.

Even VA lenders that allow lower credit scores don’t accept subprime credit. VA underwriting guidelines state that applicants must have paid their obligations on time for at least the most recent 12 months to be considered satisfactory credit risks.

In addition, the VA usually requires a two-year waiting period following a Chapter 7 bankruptcy or foreclosure before it will insure a loan.

And borrowers in Chapter 13 must have made at least 12 on-time payments and secure the approval of the bankruptcy court.

VA loan debt-to-income ratios

The relationship of your debts and your income is called your debt-to-income ratio, or DTI.

VA underwriters divide your monthly debts (car payments, credit cards and other accounts, plus your proposed housing expense) by your gross (before-tax) income to come up with this figure.

For instance, if your gross income is $4,000 per month, your new mortgage, property taxes and homeowners insurance, plus other debt payments total is $1,500, your DTI is 37.5 percent.

A DTI over 41 percent means the lender has to apply additional formulas to see if you qualify under residual income guidelines.

VA residual income rules

VA underwriters perform additional calculations which can affect your mortgage approval.

Factoring in your estimated monthly utilities, your estimated taxes on income, and the area of the country in which you live, the VA arrives at a figure which represents your “true” costs of living.

It then subtracts that figure from your income to find your residual income (e.g.; your money “left over” each month).

Think of the residual income calculation as a real-world simulation of your living expenses. It is the VA’s best effort at ensuring you a stress-free homeownership experience.

Here is an example of how residual income works, assuming a family of four which is purchasing a 2,000 square foot home on a $5,000 monthly income.

Future house payment, plus other debt payments: $2,500

Monthly estimated income taxes: $1,000

Monthly estimated utilities at $0.14 per square foot: $280

This leaves a residual income calculation of $1,220.

Now, compare that residual income to VA residual income requirements for a family of four:

Northeast Region: $1,025

Midwest Region: $1,003

South Region: $1,003

West Region: $1,157

The borrower in our example exceeds VA’s residual income standards in all parts of the country. Therefore, despite the borrower’s debt-to-income ratio of 50 percent, the borrower could get approved for a VA loan, if it applied.

>> Related: Complete guide to residual income requirements

Qualifying for a VA loan with part-time income

You can qualify for this type of financing even if you have a part-time job or multiple jobs.

You must show a 2-year history of making consistent part-time income, and stability in the number of hours worked. The lender will make sure any income received appears stable.

See our complete guide on getting a VA loan with part-time income.

PART 6: Funding fees and loan limits

About the VA funding fee

The VA charges an up-front fee to defray the costs of the program and make it sustainable for the future.

Veterans pay a lump sum that varies depending on the loan purpose, the veteran’s military experience, and down payment amount.

The fee is normally wrapped into the loan; it does not add to the cash needed to close the loan.

VA home purchase funding fees

Type of Military Service Down Payment Fee for First-Time Use Fee for Subsequent Use Active Duty, Reserves, and National Guard None 2.3% 3.6% 5% or more 1.65% 1.65% 10% or more 1.4% 1.4%

VA cash-out refinance funding fees

Type of Military Service Fee for First-Time Use Fee for Subsequent Uses Active Duty, Reserves, and National Guard 2.3% 3.6%

VA streamline refinances (IRRRL) & assumptions:

Type of Military Service Fee for First-Time Use Fee for Subsequent Uses Active Duty, Reserves, and National Guard 0.5% 0.5%

Manufactured home loans not permanently affixed:

Type of Military Service Fee for First-Time Use Fee for Subsequent Uses Active Duty, Reserves, and National Guard 1.0% 1.0%

VA loan limits in 2020

Starting in January 2020, VA loan limits will be repealed, thanks to the Blue Water Navy Vietnam Veterans Act of 2019.

There will be no maximum amount for which a home buyer can receive a VA loan after that date, at least as far as VA is concerned.

However, lenders may set their own limits, so check with your lender if you are looking for a VA loan above local conforming loan limits.

PART 7: Eligible property types

Houses you can buy with a VA loan

VA mortgages are flexible about what types of property you can and can’t purchase. A VA loan can be used to buy a:

Detached house

Condo

New-built home

Manufactured home

Duplex, triplex or four-unit property

You can also use a VA mortgage to refinance an existing loan for any of those types of properties.

VA loans and second homes

Federal regulations do limit loans guaranteed by the Department of Veterans Affairs to “primary residences” only.

However, “primary residence” is defined as the home in which you live “most of the year.”

Therefore, if you own an out-of-state residence in which you live for more than 6 months of the year, this other home, whether it’s your vacation home or retirement property, becomes your official “primary residence”.

For this reason, VA loans are popular among aging military borrowers.

Buying a multi-unit home with a VA loan

VA loans allow you to buy a duplex, triplex, or four-plex with 100% financing. You must live in one of the units.

Buying a home with more than one unit can be challenging. Mortgage lenders consider these properties riskier to finance than tradition single-family residences, or SFRs, so you’ll need to be a stronger borrower.

VA underwriters must make sure that you will have enough emergency savings, or reserves, after closing on your house. That’s to ensure you’ll have money to pay your mortgage even if a tenant fails to pay rent or moves out.

The minimum needed after closing is six months of mortgage payments (covering principal, interest, taxes, and insurance – PITI).

Your lender will also want to know about previous landlord experience you’ve had, or any experience with property maintenance or renting.

If you don’t have any, you may be able to sidestep that issue by hiring a property management company, but that’s really up to the individual lender.

Your lender will look at the income (or potential income) of the rental units, using either existing rental agreements or an appraiser’s opinion of what the units should fetch. They’ll usually take 75 percent of that amount to offset your mortgage payment when calculating your monthly expenses.

VA loans and rental properties

You cannot use a VA loan to buy a rental property. You can, however, use a VA loan to refinance an existing rental home you once occupied as a primary home.

For home purchases, in order to obtain a VA loan, you must certify that you intend to occupy the home as your principal residence.

If the property is a duplex, triplex or four-unit apartment building, you must occupy one of the units yourself. Then you can rent out the other 1-3 units.

The exception to this rule is via the VA’s Interest Rate Reduction Refinance Loan (IRRRL). This loan, also known as the VA Streamline Refinance, can be used to refinance an existing VA loan for a home where you currently live or where you used to live, but no longer do.

Buying a condo with a VA loan

The VA maintains a list of approved condo projects within which you may purchase a unit with a VA loan.

At VA’s website, you can search for the thousands of approved condominium complexes across the U.S.

If you are VA-eligible and in the market for a condo, make sure the unit you’re interested in is approved. As a buyer, you are probably not able to get the complex approved. That’s up to the management company or homeowner’s association.

If a condo you like is not approved, you must use other financing like an FHA or conventional loan or find another property.

>>Related: Complete guide to financing a condo purchase.

Note that the condo must meet FHA or conventional guidelines if you want to use those types of financing.

PART 8: Veteran mortgage relief

VA loans can provide veteran mortgage relief

The U.S. Department of Veterans Affairs, or VA, provides home retention assistance. They intervene when a veteran is having trouble making their home payments.

The VA works with loan servicers to offer options to the veteran other than foreclosure.

Each year, VA publishes benefit insights in its Home Loan Guaranty report. In fiscal year 2015, VA made over half a million contact actions to reach borrowers and loan servicers. The intent was to work out a mutually agreeable repayment option for both parties.

More than 90,000 veteran homeowners avoided foreclosure in 2015 alone thanks to this effort. More than three hundred thousand current and former service members have kept their homes since 2012.

The initiative has saved the taxpayer an estimated $10 billion. More important, vast numbers of veterans got another chance at homeownership.

PART 9: When NOT to use a VA loan

If you have good credit and 20% down

A primary advantage to VA home loans is the lack of a mortgage insurance requirement.

However, the VA guarantee does not come free of charge. Borrowers pay an upfront funding fee, which they usually choose to add to their loan amount.

The fee ranges from 1.4 to 3.6 percent, depending on the down payment percentage and whether the home buyer has previously used his or her VA mortgage eligibility. The most common fee is 2.3 percent.

On a $200,000 purchase, it equals $4,600. However, buyers who choose a conventional (non-government-backed) mortgage, and put 20 percent down, avoid mortgage insurance and the upfront fee. For these military home buyers, the VA funding fee might be an unnecessary expense.

The exception: Mortgage applicants whose credit rating or income meets VA guidelines but not those of conventional mortgages may still opt for VA.

If you’re on the “CAIVRS” list

To qualify for a VA loan, you must prove that you have made good on previous government-backed debts and that you have paid taxes.

The Credit Alert Verification Reporting System, or “CAIVRS,” is a database of consumers who have defaulted on government obligations. These individuals are not eligible for a VA home loan.

If you have a non-veteran co-borrower

Veterans often apply to buy a home with a non-veteran who is not their spouse.

This is okay. However, it might not be their best choice.

As the veteran, your income must cover your half of the loan payment. The non-veteran’s income cannot be used to compensate for the veteran’s insufficient income.

>> Related: Buying a home with a non-veteran

Plus, when a non-veteran owns half the loan, the VA only guarantees half that amount. The lender will require a 12.5 percent down payment for the non-guaranteed portion.

The Conventional 97 mortgage, on the other hand, allows down payments as low as three percent. Another low-down payment mortgage option is the FHA home loan, for which 3.5 percent down is acceptable.

>> Related: What’s better, FHA or VA financing?

The USDA home loan is another option that requires zero down payment and offers VA-similar rates. The property must be within USDA-eligible areas, but there is no requirement for any applicant to have military experience.

If you plan to borrow with a non-veteran, one of these loan types might be your better choice.

If you apply with a credit-challenged spouse

In community property states, VA lenders must consider the credit rating and financial obligations of your spouse. This rule applies even if he or she will not be on the home’s title or even on the mortgage.

Such states are as follows.

Arizona

California

Idaho

Louisiana

Nevada

New Mexico

Texas

Washington

Wisconsin

A spouse with less-than-perfect credit or who owes alimony, child support, or other maintenance can make your VA approval more challenging.

Apply for a conventional loan if you qualify for the mortgage by yourself. The spouse’s financial history and status need not be considered if he or she is not on the loan application.

If you want to buy a vacation home or investment property

The purpose of VA financing is to help veterans and active service members buy and live in their own home. They are not meant to build real estate portfolios.

These loans are for primary residences only, so if you want a ski cabin or rental, you’ll have to get a conventional loan.

If you want to purchase a high-end home

Starting January 2020, there are no limits to the size of mortgage a lender can approve. However, lenders may establish their own limits for VA loans, so check with your lender before applying for a large VA loan.

PART 10: Surviving spouses and divorcees

What spouses are eligible for a VA loan?

What if the service member passes away before he or she uses the benefit? Eligibility passes to an un-remarried spouse, in many cases.

For the surviving spouse to be eligible, the deceased serviceperson must have:

Died in the line of duty

Passed away as a result of a service-connected disability

Been missing in action, or a prisoner of war, for at least 90 days

Been a totally disabled veteran for at least 10 years prior to death, and died from any cause

Also eligible are remarried spouses who married after the age of 57, on or after December 16, 2003.

In these cases, the surviving spouse can use VA loan eligibility to buy a home with zero down payment, just as the veteran would have.

VA loan benefits for surviving spouses

These spouses have an additional benefit, however. They are exempt from the VA funding fee. As a result, their loan balance and monthly payment will be lower.

Surviving spouses are also eligible for a VA streamline refinance when they meet the following guidelines.

The surviving spouse was married to the veteran at the time of death The surviving spouse was on the original VA loan

A VA streamline refinance is typically not available when the deceased veteran was the only one of the original VA loan, even if he or she got married after buying the home.

In this case, the surviving spouse would need to qualify for a non-VA refinance, or a VA cash-out loan.

A cash-out mortgage through VA requires the spouse to meet home purchase eligibility requirements.

If this is the case, the surviving spouse can tap into the home’s equity to raise cash for any purpose, or even pay off an FHA or conventional loan to eliminate mortgage insurance.

Qualifying if you receive (or pay) child support/alimony

Buying a home after a divorce is no easy task.

If, prior to your divorce, you lived in a two-income household, you now have less spending power and a reduced monthly income for purposes of your VA home loan application.

With less income, it can be harder to meet the VA Home Loan Guaranty’s debt-to-income (DTI) guidelines; and, the VA residual income requirement for your area.

Receiving alimony or child support can counter-act a loss of income.

Mortgage lenders will not require you to provide information about your divorce agreement’s alimony or child support terms, but if you’re willing to disclose, it can count toward qualifying for a home loan.

Different approved-VA lenders will treat alimony and child support income differently.

Typically, you will be asked to provide a copy of your divorce settlement or other court paperwork to support the alimony and child support payments.

Lenders will then want to see that the payments are stable, reliable, and likely to continue for another 36 months, at least.

You may also be asked to show proof that alimony and child support payments have been made in the past reliably, so that the lender may use the income as part of your VA loan application.

If you are the payor of alimony and child support payments, your debt-to-income ratio cane harmed. Not only might you be losing the second income of your dual-income households, but you’re making additional payments which count against your outflows.

VA mortgage lenders make careful calculations with respect to such payments.

You can still get approved for a VA loan while making such payments — it’s just more difficult to show sufficient monthly income.

PART 11: VA loan assumption

How to assume (take on) another person’s VA loan

When you assume a mortgage loan, you take over the current homeowner’s monthly payment.

VA loan assumption savings

Buying a home via an assumable mortgage loan is even more appealing when interest rates are on the rise.

As an example, say a seller-financed $200,000 for their home in 2013 at an interest rate of 3.25 percent on a 30-year fixed loan.

Using this scenario, their principal and interest payment would be $898 per month.

Let’s assume current 30-year fixed rates averaged 4.10 percent.

If you financed $200,000 at 4.10 percent for a 30-year term, your monthly principal and interest payment would be $966.

Additionally, because the seller has already paid four years into the loan, they’ve already paid nearly $25,000 in interest on the loan.

By assuming the loan, you would save $34,560 over the 30-year loan due to the difference in interest rates. You would also save roughly $25,000 thanks to the interest already paid by the sellers.

That comes out to a total savings of almost $60,000!

How to assume a VA loan

There are currently two ways to assume a VA loan.

1. The new buyer is a qualified veteran who “substitutes” his or her VA eligibility for the eligibility of the seller.

2. The new home buyer qualifies through VA standards for the mortgage payment. This is the safest method for the seller as it allows their loan to be assumed knowing that the new buyer is responsible for the loan, and the seller is no longer responsible for the loan.

The lender and/or the VA needs to approve a loan assumption.

Loans serviced by a lender with automatic authority may process assumptions without sending them to a VA Regional Loan Center.

For lenders without automatic authority, the loan must be sent to the appropriate VA Regional Loan Center for approval. This process will typically take several weeks.

When VA loans are assumed, it’s the servicer’s responsibility to make sure the homeowner assuming the property meets both VA and lender requirements.

VA loan assumption requirements

For a VA mortgage assumption to take place, the following conditions must be met:

The existing loan must be current. If not, any past due amounts must be paid at or before closing.

The buyer must qualify based on VA credit and income standards.

The buyer must assume all mortgage obligations, including repayment to the VA if the loan goes into default.

The original owner or new owner must pay a funding fee of 0.5 percent of the existing principal loan balance.

A processing fee must be paid in advance, including a reasonable estimate for the cost of the credit report.

Finding assumable VA loans

There are several ways for home buyers to find an assumable VA loan.

Believe it or not, print media is still alive and well. Some home sellers advertise their assumable home for sale in the newspaper, or in a local real estate publication.

There are a number of online resources for finding assumable mortgage loans.

Websites like TakeList.com and Zumption.com give homeowners a way to showcase their properties to home buyers looking to assume a loan.

With the help of the Multiple Listing Service (MLS), real estate agents remain a great resource for home buyers. This applies to home buyers specifically searching for assumable VA loans as well.

How do I apply for a VA loan?

You can easily and quickly have a lender pull your certificate of eligibility (COE) to make sure you’re able to get a VA loan.

Most mortgage lenders offer VA home loans. So you’re free to shop and compare rates with just about any company that catches your eye.

What’s more, VA-specific mortgage lenders are actually some of the highest-rated (and lowest-priced) on the market. Here are a few we’d recommend checking out.