VA loans are available to purchase a primary residence for consumers who have served or are serving in the United States military. The Department of Veterans Affairs (VA) does not lend, but instead, they back loans made by private lenders to qualifying veterans. The guarantee provided by the VA allows VA-approved lenders to provide competitive rates and terms to veterans in exchange for greater protection.
The VA Loan Guaranty Program was created in 1944 to help returning military members purchase a home. To date, more than 18 million veterans have purchased a home through the program.
Along with purchasing or building a home, VA loans are very flexible. They may be used to refinance to take out cash, refinance an existing VA loan, repair or improve a residence, make energy-efficient improvements and more.
Borrowers eligible for a VA loan include:
- Active-duty personnel
- National Guard members/Reservists who have served at least six years
- Spouses of those killed in the line of duty, or those rated totally disabled or eligible for compensation before death from any cause
Veterans and active-duty military members must obtain a Certificate of Eligibility from the VA, which certifies the prospective borrower has a VA entitlement and may participate in the VA loan program. VA-approved lenders can help veterans obtain this form, or Veterans may download a request online.
Benefits of a VA Loan
Many borrowers turn to a VA loan to buy a home with no money down. VA loans also have far less stringent underwriting standards than conventional loans. It is estimated that nearly 80% of VA borrowers could not have qualified for a conventional mortgage.
- Interest rates are often below conventional rates
- No down payment required
- No private mortgage insurance (PMI), which is required for a conventional loan if the borrower puts less than 20% down
- Less stringent requirements
- VA loans are available to eligible veterans with a history of foreclosure or bankruptcy
- No prepayment penalties
- The home seller may pay for up to 6% of closing costs
- Higher allowable debt-to-income ratio than other loans
- Streamlined refinancing program available
- Ability to finance the VA funding fee
- Mortgage is assumable
- VA assistance provided to borrowers in default due to a temporary difficulty
Surviving spouses who obtain a VA home loan are exempt from the VA funding fee.
Cost of a VA Loan
While most qualified veterans may obtain a VA loan with no money down toward closing costs or a down payment, veterans must pay a VA funding fee. This fee is charged on every loan, and covers costs associated with the program. VA funding fees are as follows:
Regular Military Members
- 2.15% with no down payment
- 1.50% with a 5% or greater down payment
- 1.25% with a 10% or greater down payment
Reserves and National Guard Members
- 2.4% with no down payment
- 1.75% with a 5% or greater down payment
- 1.50% with a 10% or greater down payment
This fee can be rolled into the loan.
While a VA home loan may not be the best option for every veteran, it is the best option for most, particularly veterans with lower income or less-than-stellar credit. VA mortgages often provide better interest rates than conventional loans which, combined with no down payment requirements and less strict underwriting, is unmatched by other loan products.