What is a VA Loan? Types, terms, and how to apply

A VA home loan offers service members and veterans an affordable way to buy a home. Since the program’s creation, the Department of Veterans Affairs has guaranteed over 28 million loans. VA loans can be used to buy a new home, refinance a home, or improve an existing home. Here’s how VA loans work, pros and cons to consider, and what the requirements are.

What is a VA loan? 

A VA loan is a mortgage loan available to military service members, veterans, and their families. VA home loans offer government-backed mortgage options that may have lower credit and down payment requirements than conventional loans and can make it easier to afford a home. 

“VA loans offer a huge advantage for first-time homebuyers because they help to remove obstacles like a down payment and the need for great credit,” said Chris Birk, vice president of mortgage insight at Veterans United Home Loans. 

But VA loans aren’t just for first-time buyers. “In fact, this is a benefit that veterans can use over and over again throughout their lives,” Birk said.

When comparing VA loans to conventional loans, you might be able to lower your interest rate and closing costs by going with the former option, if you qualify.

How does a VA loan work?

To use VA loan benefits, you must be an eligible service member or veteran. With VA direct loans, you’ll apply to the VA directly for a mortgage. With a VA-backed loan, you’ll work with a private lender to apply for a mortgage. You can choose from various VA loan types to buy, build, improve, or refinance your home. The VA guarantees the loan, which means the lender has government assurance that a portion of the loan will be repaid if the buyer defaults.

The private mortgage lender must abide by the VA’s home loan standards, such as having a Certificate of Eligibility (COE), but may also impose its own standards, such as requiring an appraisal on the home.

As the homebuyer, you’ll usually pay lower closing costs and can avoid private mortgage insurance (PMI), although there’s generally a funding fee for VA loans. Funding fees usually cost between 1% and 3% of the loan amount.

What are the requirements to qualify?

VA loan eligibility is based on your length of service, type of service, and duty status. The type of property and its condition will also affect whether you qualify for a particular VA home loan.

VA loan requirements for borrowers include:

• Must have a COE from the VA
• Must meet minimum active-duty service requirements
• Must meet your lender’s minimum credit and income requirements
• Must live in the home you’re purchasing

The home loan limits for VA loans are the same as FHA loan limits — $498,257 in low-cost areas and $1,149,825 in high-cost areas. However, if you have full entitlement, there is no limit to your loan amount. Full entitlement means you’ve never had a VA loan, or if you have, that it has been repaid and the home sold.

Who is eligible for a VA loan? 

VA home loans are for current active-duty service members, veterans, and certain spouses. To be eligible for a VA loan, you must be one of the following:

• An active-duty member of the U.S. armed forces ( the Army, Marine Corps, Navy, Air Force, Space Force, Coast Guard, National Guard, or Reserve) with 90 days of active duty (whether it must be continuous depends on the branch)
• A veteran with minimum active-duty service; the exact amount depends on when you served, but is typically 90 days or 181 days
• A surviving spouse of a veteran or the spouse of a veteran who is missing in action or a prisoner of war
• A U.S. citizen who served in the armed forces of an allied nation during World War II

You may also be eligible if you served in some roles in specific organizations, such as the Public Health Office or National Oceanic & Atmospheric Administration. It’s also possible to qualify if you were discharged for a reason such as hardship, reduction in force, or certain medical conditions. 

See specific years of service for wartime and peacetime and minimum service requirements on the VA website. You can also contact the VA by phone (877-827-3702) if you have specific questions about your eligibility. 

What are the benefits and drawbacks of a VA loan? 

There are many VA loan benefits, especially for service members and veterans who are interested in alternatives to conventional mortgages. For example, you may be able to get a mortgage with no down payment and no PMI when you use a VA loan. You may also benefit from more lenient credit requirements, as the VA doesn’t have a minimum credit score requirement.

“VA loans also typically offer lower interest rates compared to conventional loans, reducing monthly payments and overall loan costs,” Birk said. The VA also limits what lenders can charge in closing costs, he said, which can also make buying a home more affordable.

“VA loans are also assumable, which can present significant advantages for homeowners in a rising-rate environment,” he said. With an assumable loan, you can take over the VA loan of the previous homeowner, which could be at a lower interest rate than what is available today.

But there are some drawbacks to VA home loans. For instance, they require a one-time funding fee of between 1% and 3% of the loan amount. If you took out a $400,000 mortgage, the funding fee could cost between $,4000 and $12,000. This fee, which supports the VA loan program, can be rolled into your loan, but doing so will increase the loan balance. 

You also can’t use a VA loan for investment property or vacation homes, as they’re intended to be used for primary residences only. Since the VA has specific property requirements regarding safety and habitability, older homes might need repairs before they meet those standards. That can draw out the process of buying the home.

What are the types of VA loans? 

There are VA loan types for many different purposes, including buying, improving, and refinancing a home. 

Purchase loan

A VA purchase loan is a VA-backed home loan you can use to buy a home. There’s no down payment requirement as long as the home is appraised for less than the sales price. 

You can use a VA purchase loan to borrow up to the Fannie Mae or Freddie Mac conforming loan limit, which varies by county but is typically $766,550 for single-family homes with one unit. With a down payment, you can get a loan for more than your county’s conforming loan limit.

You can use a VA purchase loan for the following purposes:

• Buy a new primary residence of up to four units
• Buy an approved condo
• Buy and fix up or improve a home
• Build a new home
• Make energy-efficiency improvements to your home

Interest Rate Reduction Refinance Loan (IRRRL)

You can refinance an existing VA home loan with an Interest Rate Reduction Refinance Loan (IRRRL), often called a streamline refinance. This type of VA loan lets you replace your existing loan with a new one with better terms and/or lower payments. However, keep in mind that refinancing typically requires closing costs, and you may need to pay a new VA funding fee, too.

Cash-out refinance loan

Instead of replacing your mortgage with an IRRRL, you can choose a cash-out refinance loan. This type of VA loan lets you refinance your existing mortgage (VA or non-VA) for more than the loan amount to receive the difference in cash, paid as a lump sum at closing. You can use this cash to pay unexpected expenses, cover education costs, consolidate debt, or improve your home. As with the IRRRL, you’ll typically need to pay closing costs and possibly a new funding fee.

Native American Direct Loan (NADL) 

This type of VA loan helps Native American veterans or veterans married to a Native American to buy, build, or improve a home on tribal land. It offers the same benefits as a VA purchase loan, including no down payment requirement, no PMI requirement, and limited closing costs. NADLs also offer a low, fixed interest rate for 30 years, with current NADL rates starting at 2.5%.

How to apply for a VA loan

To apply for a VA home loan, follow these steps: 

1. Gather your paperwork, such as discharge papers or a signed statement of service.
2. Obtain your COE from the VA online or by mail.
3. Choose a participating mortgage lender.
4. Fill out a mortgage application by providing your personal information and details about your income and assets. You can opt for a pre-approval or prequalification first if you wish.
5. Close on the home loan and begin repayment.

VA loan FAQ 

What credit score do you need for a VA loan?

VA home loans have no minimum credit score requirement, which can make it easier for you to qualify for a mortgage. However, lenders may have their own criteria for deciding whether to offer you a loan, including a satisfactory credit history.

Do VA loans require a down payment?

VA home loans do not require a down payment. However, if you put no money down, your loan amount will be limited. By putting money down, you can borrow beyond the conforming loan limits for your county.

Can you refinance a VA loan?

Knowing how refinancing works with VA loans can help you get and keep an affordable mortgage payment. Using an IRRRL will let you replace your existing VA home loan with a new VA loan with a new rate and terms. Or, you could choose a VA cash-out refinance to access funds for goals like schooling, renovations, or a big purchase. 

How long does it take to get approved for a VA loan?

According to Chris Birk of Veterans United, “VA loans tend to close in about the same amount of time as conventional mortgages, which is historically about 30 to 45 days from contract to closing.”

Are VA loans only for first-time homebuyers?

While VA home loans can be a great option for first-time homebuyers, you don’t have to be a first-time buyer to use the program. You can use your VA loan benefit again and again if you pay off the loan and sell the home. Your eligibility can be restored after you send the proper form to the VA.