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What Exactly is a VA Loan? A Guide to the VA Mortgage Program

Key Learnings
  • Only active-duty service members and Veterans who meet the service requirements are eligible for a VA home loan
  • VA loans can only be used for your primary residence
  • The difference between VA loans and conventional loans
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When it comes to buying a home, there are unique factors at play for Veterans and active-duty military members. If you’re an active-duty military member, you may have to work around deployments, PCSing or station restrictions, which can make the home loan process a bit more complicated.

While many mortgage options are available to Veterans, the Department of Veterans Affairs (VA) offers the VA loan, which is a unique mortgage product exclusively offered to active-duty and Veteran military members.

What Exactly is a VA Loan?

A VA loan is a mortgage offered through the U.S. Department of Veterans Affairs. VA loans are available to active and Veteran service members and their surviving spouses. VA mortgages are backed by the federal government but issued through private lenders.

What differentiates VA loans from others is that they're designed to offer long-term financing options specifically to Veterans in exchange for their service.

One of the most appealing benefits of the VA loan is that they don't require down payments. If you qualify for a VA mortgage, you will not have to put any money down, which isn’t usually the case with other home loan types. Even government-backed loans, like FHA loans, require some money for a down payment.

The VA doesn't set a minimum credit score requirement, but individual lenders do. Being aware of lenders' credit score requirements can save you time down the road.

There is also no maximum debt-to-income ratio, or DTI, for VA loans. If you have a lower income and higher debt, you can still qualify for this mortgage. That said, most lenders advise VA loan borrowers to have a DTI of 40% or less — but it won’t necessarily be a deal-breaker if your DTI is higher.

Other VA mortgage benefits include low-interest rates, no-prepayment penalties, and the ability for new buyers to assume the VA loan when the house is sold, whether they are military-affiliated or not.

Who Can Get a VA Loan?

VA loans are limited to active military members, Veterans, and eligible surviving spouses, only. Furthermore, as a Veteran, you must have been honorably discharged.

To be eligible for a VA loan, you must meet the following service requirements:

  • 90 consecutive days of active service during wartime

  • 181 days of active service during peacetime

  • Six years of service in the Reserves or National Guard

  • Spouse of a service member that has died in the line of duty or as a result of a service-related injury

Furthermore, if you were discharged due to service-connected disability, you will likely be eligible for a VA loan, no matter how long you served.

How Do VA Loans Work?

VA loans must be used to buy or refinance your primary residence. In other words, it needs to be a home you'll live in full-time, and you cannot use VA loans to purchase a rental or investment property.

As with other types of government-backed loans, VA loans are not issued to borrowers by the Department of Veterans Affairs. Rather, a portion of that loan is subsidized by the VA. The lender can offer more favorable terms, and is also protected in the event that you might have to default.

The VA has to approve lenders in the program. Almost all major financial institutions have the VA okay to offer these mortgages to Veterans.

Types of VA Loans

The VA loans available to you include the following:

VA Purchase Loans: VA purchase loans are precisely what they sound like: loans that allow you to buy a home to live in. They can be used to purchase an existing single-family home (up to four units), a condo in a VA-approved building or a manufactured home.

VA Interest Rate Reduction Refinance Loans (IRRRL): A VA IRRL, sometimes called a VA streamline refinance, lets you refinance your current loan term into a lower interest rate. The benefit of a VA streamline refinance is you can reduce your interest rate, and potentially, your monthly payments, without going through the full refinance process. This can reduce the required paperwork while speeding up the process.

VA Cash-Out Refinance Loans: A VA cash-out refinance loan lets you tap into your existing home equity to borrow a sum of cash. You can use this money to make renovations, pay off high-interest debt, buy a vehicle, send a child to college, etc.

VA Rehab and Renovation Loans: Interested in purchasing a fixer-upper and making renovations? The VA rehab and renovation loan helps you finance both the purchase price of the home and any necessary repairs. Thanks to this loan, you have better access to the cash you need to make necessary improvements. VA rehab loans are also great for making long-awaited upgrades to your current existing home.

VA Construction Loans: If you want to build a new home, a VA construction loan can help. VA construction loans are short-term loans that help cover the costs of constructing a home when using a VA-registered builder.

VA Loans vs Conventional Loans

You may be wondering whether a conventional mortgage is a better option for you and your financial situation. Let’s break down the differences between VA and conventional loans to determine which option may be the right one for you.

Compare VA and Conventional Loans

VA Loan Conventional Loan
Down Payment No minimum 3% to 20%
Private mortgage insurance Not required Required if the down payment is less than 20%
Property options Primary residence only All types of purchases
Minimum credit score None At least 620
Interest rates Typically low Vary based on the market

Conclusion

While VA loans won't be the right choice for every buyer, these loans are designed specifically for Veterans to offer long-term financing options in exchange for their service. If you qualify for this unique type of mortgage loan, it can be a great way to purchase or refinance a home at a low-interest rate, with no down payment, flexible lending and credit parameters, and take advantage of the many other perks that VA loans offer to buyers.

Written by:
Crystal Shifflett
Loan Coordinator

Crystal’s experience spans many aspects of the homebuying process, including closing and title work, but perhaps her own personal experience of purchasing several homes across state lines helps her connect with and advocate for homebuyers.

More articles by Crystal Shifflett
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