A VA loan is a home loan issued by a private lender and backed by the federal government’s Department of Veteran Affairs (VA). A lender may issue a VA loan to an active service member, veteran, or surviving spouse that meets all the VA’s qualifying requirements and wishes to buy, build, repair, retain, or refurbish a primary residence.
The VA guarantees a quarter of the loan up to the limit set by the Federal Housing Finance Agency (FHFA). In 2020 the FHFA set the conforming limit at $510,400 in most of the country (except in a small number of high-priced areas such as New York and San Francisco, where the limit is higher). Therefore, in most of the country, the limit for a VA loan is $510,400, of which the VA guarantees $127,600.
Thanks to this support from the federal government, lenders are able to offer VA loans with no down payment and no private mortgage insurance. VA loan rates are generally similar to conventional loan rates; like a regular loan, VA rates depend heavily on the borrower’s credit score and other factors. Borrowers who meet the VA’s qualifying requirements often find it easier to get approved for a VA home loan than for a conventional mortgage. What’s more, the best VA loan rates generally match those for conventional loans.
VA loans have helped more than 22 million veterans purchase property since the GI Bill came into effect in 1944. According to the latest VA data, VA-approved lenders issued 624,544 VA loans in 2019 at an average of $281,225 per loan.
These people are eligible for a VA home loan:
- Veterans who have served at least 90 consecutive days of active service in wartime or 181 days of active service in peacetime
- Members of the National Guard and Reserve who have served at least 6 years
- Spouses of veterans who died in the line of duty or as a consequence of a service-related injury
Before applying for a VA home loan, you will need to obtain a Certificate of Eligibility (COE) from the VA. A COE can be obtained from the VA benefits website, by mail, or by filling out VA Form 26-1880. Some lenders may offer free assistance with obtaining a COE.
Applying for a VA loan is similar to applying for any other home loan, with a few small but important differences. For example, the valuation and assessment of property conditions must be conducted by a VA-approved appraiser. Also, you must pay a funding fee worth 2.15% of the loan amount (or 2.4% for members of the National Guard and Reserves). Surviving spouses and veterans receiving VA disability compensation are exempt from the fee. The fee can be reduced to 1.5% with a 5% down payment or 1.25% with a 10% down payment.
There are four types of VA loans: VA purchase loan, VA cash-out refinance loan, VA Interest Rate Reduction Refinance Loan (IRRRL), and Native American Direct Loan (NADL).
Here’s what you need to know about each of the different types of VA loan:
- VA purchase loan. No down payment, so long as the sales price isn’t higher than the appraised value. Some lenders offer VA jumbo loans above the FHFA’s conforming limits (although jumbo loans do require a down payment
- Interest Rate Reduction Refinance Loan. If you have an existing VA-backed home loan and live in or used to live in the home covered by the loan, then you can refinance with a VA IRRRL, also known as VA streamline program. Using this program to refinance is a good idea because VA IRRRL rates tend to be lower than a conventional refinance.
- VA-backed cash-out refinance loan. A VA-backed cash-out refi can be used to refinance a VA or non-VA loan into a VA-backed loan. It can be used to take cash out of your home equity or pay off debt, pay for school, make home improvements, or take care of other needs.
- Native American Direct Loan. If you’re a Native American Veteran or non-Native American Veteran married to a Native American, then you may be eligible for this type of loan. Unlike the other types of VA loan, the NADL is offered directly through the VA and not by direct lenders.
If current VA mortgage rates are any indication, then VA loan interest rates are similar to conventional loan rates. For example, we looked up VA mortgage rates today at America’s biggest lender Quicken Loans, and found identical rates for VA loans and conventional loans. The APR for the VA loan was higher due to the funding costs imposed by the VA. However, these additional costs are easily offset by the fact that you can get a VA loan with zero down payment without having to fork out for monthly private mortgage insurance.
As for refinancing, VA refinance rates and VA IRRRL rates are generally similar to a conventional refinance. From a search of top VA lenders, we found that the best IRRRL rates matched conventional rates. Of course, VA IRRRL loans offered added benefits such as streamlined application and no PMI where the home equity is under 20%.
APR is one of the most important factors in choosing a loan, but it isn’t the only factor. It’s a good thing then that VA loans offer these additional benefits:
- Equal opportunity for all eligible veterans
- Loan is re-usable
- No down payment, as discussed earlier
- No need to purchase private mortgage insurance
- VA funding fee can be wrapped into the cost of the loan. Anyone receiving VA disability compensation is exempt from funding fee
- VA staff can assist if the home buyer becomes delinquent on their loan
- A first-time home buyer can use a VA, and so too can someone on their second, third or tenth home – just as long as you use the home as your primary residence