Introduction to VA Loans
VA loans are mortgage loans issued by private lenders authorized by the federal government’s Department of Veteran Affairs (VA). VA-authorized mortgage lenders may issue VA loans to active service members, veterans, or surviving spouse who meet all the VA’s qualifying requirements and wish 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 2021 the FHFA set the conforming limit at $548,250 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 $548,250, of which the VA guarantees $137,063.
The federal government’s financial support is what enables lenders to offer VA loans with zero down payment and no private mortgage insurance. VA loan rates are generally similar to conventional loan rates; like a conventional loan, VA loan rates depend heavily on the borrower’s credit score and other factors.
VA loans have helped more than 25 million veterans purchase or refinance since the GI Bill came into effect in 1944. A record amount of VA loans were issued in 2020, with 1.247 million loans at an average loan amount of $301,044 for a total loan amount of $375.45 billion. A record number of lenders participated in VA loans in 2020, with 1,429 lenders issuing at least one VA loan, 137 lenders issuing more than one thousand VA loans, and 21 lenders issuing more than ten thousand VA loans.
Types of VA Loans
The five types of VA loan are: VA purchase loan, VA jumbo loan, VA cash-out refinance loan, VA Interest Rate Reduction Refinance Loan (IRRRL), and Native American Direct Loan (NADL).
VA purchase loan
A VA purchase loan requires no down payment, provided the sales price isn’t higher than the appraised value. That aside, VA purchase loans are similar to other purchase loans in terms of the interest rates and repayment terms.
VA jumbo loan
Some lenders offer VA jumbo loans above the FHFA’s conforming limits, although these require down payment. As mentioned earlier, the 2021 conforming limits range from $548,250 in most counties to $822,375 in America’s most expensive zip codes, so any loan above these amounts takes you into VA jumbo territory.
VA 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. The “cash-out” part is applied when the new mortgage is greater in value than what you owe on the old loan, allowing you to cash out the difference. A VA cash-out refi can be used for any purpose such as paying off debt, paying tuition fees, making home improvements, or anything else.
VA Interest Rate Reduction Refinance Loan (IRRRL)
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 a VA streamline program. Overall, VA IRRRL rates tend to be lower than conventional refinance options.
Native American Direct Loan
Native American veterans (and non-Native American veterans married to Native Americans) may be eligible for this type of loan. Unlike the other types of VA loans, the Native American Direct Loan is offered directly through the VA and not by private lenders.
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How to Apply for a VA Loan
The following people may be 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; and
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 must first obtain a Certificate of Eligibility (COE) from the VA. A COE can be obtained from the
VA e-Benefits website
, by mail, or by filling out VA Form 26-1880. Some lenders offer free assistance with obtaining a COE.
Applying for a VA loan is similar to applying for any other home loan, except that the valuation and assessment of property conditions must be conducted by a VA-approved appraiser.
Finally, VA loans carry a funding fee of 1.4%-3.6% of the loan amount, with the exact amount determined by the type of VA loan and size of the down payment (if you choose to put money down). Surviving spouses, veterans receiving VA disability compensation, and certain other types of borrowers are exempt from the VA funding fee.
How do VA Home Loan Rates Compare to Other Loans?
The interest rates on VA loans tend to be similar to the interest rates on conventional loans, although total APRs (annual percentage rates) for VA loans are higher than equivalent conventional loans due to the funding costs imposed by the Department of Veterans Affairs. However, the additional costs of VA loans are easily offset by the fact that you can get a VA loan with zero down payment and without having to pay monthly private mortgage insurance (PMI)
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.
What to Look for When Comparing VA Loans
The monthly payments on a mortgage comprise principal, as in the amount remaining on your loan, and interest, as in the money the lender collects for providing the loan. Your APR, or annual percentage rate, consists of the interest rate plus certain other lender fees. The lower the interest rate / APR, the lower your monthly payments to the lender.
Like other mortgages, the typical VA loan has a 15-30-year repayment term although shorter options are sometimes available. There is no right or wrong when it comes to repayment terms; what’s best for you depends largely on how much you can afford to pay each month. The shorter the term, the higher your monthly payments but the less you’ll pay in interest over the life of the loan. The longer the term, the lower your monthly payments but the more you’ll pay your lender in the long run.
Closing costs are the fees and charges owed to the lender when the loan begins and usually range from 2-6% of the loan value. Closing costs may include origination fees, property appraisal, title fees, taxes, and various other costs – some of which go directly to the lender and some which the lender collects on behalf of third parties. The VA funding fee is a separate fee and isn’t impacted by the lender you choose.
Expertise in VA loans
There are thousands of VA-authorized lenders but only a few-dozen issuing high enough volumes of VA loans to be able to call themselves experts. If a lender displays VA loans prominently on their website, has lots of positive online reviews from veterans, and offers help with obtaining a Certificate of Eligibility, these are all good indications of their expertise.
The best VA-authorized lenders show their commitment to service members and veterans through exceptional customer service. Some lenders even offer a 24-hour line with a toll-free international number, specifically to give service members deployed overseas a convenient way of applying for or enquiring about VA loans.