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VA Loans: How They Work and Qualifications for 2022
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A VA loan allows eligible active-duty service members, veterans and eligible surviving spouses to finance a home with no down payment, no mortgage insurance and lenient credit requirements. Understanding how a VA loan works will help you determine if it’s the right mortgage for your purchase or refinance plans.
What is a VA loan?
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs (VA) exclusively for military borrowers to buy and refinance homes. Each day of service counts towards VA entitlement, the dollar amount the VA pays if the borrower can’t repay the loan and the lender has to foreclose.
How does a VA loan work?
On the surface, a VA loan works like any other home loan program. You fill out a loan application, provide proof you can repay the loan based on your earnings and credit history and verify you have enough money saved up to cover closing costs.
However, there are some big differences between VA loans and conventional or FHA loans, especially when it comes to how costs and fees are charged and paid.
You have to verify your military service history. The VA home loan benefit is only for military borrowers that have served enough time to meet eligibility requirements.
You don’t pay any mortgage insurance. Most low- or no-down-payment loan programs require mortgage insurance, which covers lenders in case you default on your payments and they have to foreclose. The VA doesn’t require mortgage insurance on any of its loan types.
You’ll pay a VA funding fee. One of the downsides to a VA loan is having to pay the VA funding fee cost of 0.5% to 3.6%. The funding fee is charged to offset the cost of the VA loan program to taxpayers and is typically rolled on top of the loan amount, even if you make no down payment.
Your lender can’t charge you more than 1% in closing costs. VA lenders are limited to charging 1% of your loan to cover their fee. That saves you money at closing and makes VA closing costs more affordable than other government-backed loan programs.
You’re not restricted by federal loan limits. There are currently no VA loan limits, although some lenders may set their own maximums similar to the conforming loan limits for conventional loans. Currently, the conforming loan limit is $647,200 for a single-family home in most parts of the country.
VA loan eligibility
Not everyone can qualify for a VA loan. Besides meeting the VA loan requirements for income, assets and credit, you’ll need to meet the guidelines for military service.
Minimum service requirements
Your DD Form 214 will reflect the number of years you served in the military.
According to the VA, you meet the minimum service requirement if you served at least this amount of time:
- 90 continuous days of active duty
- 90 consecutive days during wartime
- 181 days during peacetime
- More than six years in the National Guard or Reserve
Certificate of eligibility (COE)
A certificate of eligibility (COE) is a document that shows the mortgage lender you qualify for a VA loan. To obtain a COE, you’ll need to show proof that you served — you can verify your eligibility by obtaining an online COE or mailing a completed form VA Form 26-1880 to the VA processing center in your region.
VA loan requirements
One you prove that you’re eligible, there are additional requirements you’ll need to meet to get a VA loan.
Eligible borrowers. To be eligible for no down payment, you must borrow on your own, with a spouse or with another eligible veteran. If you don’t, you may need to make a down payment.
Maximum debt-to-income ratio requirement. Your debt-to-income (DTI) ratio measures your total monthly debt (including your new mortgage payment) divided by your gross (before-tax) income. The VA recommends a maximum 41% DTI ratio, but exceptions are possible if you have enough residual income.
Residual income test. Residual income calculates how much free cash you have each month based on your after-tax income. The minimum required depends on your home and family size, as well as the location of your home.
Federal debt default tracking. VA-approved lenders use the Credit Alert Interactive Reporting System (CAIVRS) to check for defaulted federal debt, such as past VA loans or student loans.
Employment history. Lenders prefer a steady, two-year job history, but may make exceptions for recently discharged veterans.
Credit score minimum. Although the VA guidelines don’t require a minimum credit score, many lenders set their minimum at 620.
Occupancy. The VA requires you to live in the home you intend to finance with a VA loan, which lender terms is known as a “primary residence.” You can’t use a VA loan to buy a second home or investment property.
Appraisal requirements. Only VA-approved appraisers can complete a VA appraisal, and they typically cost from $500 to $1,200 — much more than the $300 to $400 usually spent on a conventional appraisal.
Types of VA loans
Military borrowers can use a VA loan to buy, refinance, renovate or even build a home. Here’s a look at the most common types of VA loans:
VA no-down-payment purchases
The VA loan is the only government-backed mortgage program that requires no money down and has no income or loan limits. In some cases, you can even buy more than one home with no down payment using your VA bonus entitlement.
VA no-equity regular refinance
This type of refinance allows you to borrow up to 100% of your home’s value and roll your closing costs in. An added bonus: You can pay off an FHA or conventional loan with this option.
VA cash-out refinances
Eligible VA borrowers can tap equity up to 90% of their home’s value with a VA cash-out refinance — that’s 10% more than conventional or FHA cash-out refinances allow.
VA interest rate reduction refinance loans (IRRRLs)
Homeowners with a current VA loan may lower their interest rate and roll the VA closing costs into their loan with a VA IRRRL. An added bonus: No appraisal or income verification is required.
VA renovation loans
Military borrowers can purchase or refinance a fixer-upper home and roll remodeling and repair costs into the loan with a VA renovation loan. Even better: You can finance up to 100% of the home’s value, which is more than home improvement loan programs allow.
VA supplemental loans
Smaller home maintenance project costs can be financed with a supplemental VA loan. The extra amount can be added to your current loan or taken out as a separate loan.
VA energy-efficient loans
You may be able to finance up to $6,000 worth of costs for “going green” and potentially save on your utility bills with a VA energy-efficient mortgage (EEM). You can combine the VA IRRRL with an EEM without documenting income, as long as your new payment doesn’t increase by more than 20%.
VA construction loans
You can build a house with no down payment using the one-time close or two-time close VA construction loan program. The one-time close option covers the cost of building the home and automatically converts to the permanent loan when the home is complete. The two-time close actually involves two loan closings: One for the dedicated construction loan to build the home, followed by a second for the new loan that pays off the construction loan.
Things you should know
If you’re refinancing a VA loan you took out less than a year ago, you’ll need to prove you’ve made at least seven payments to refinance to a new VA loan. This rule was put in place in 2019 to prevent the practice of “churning,” in which lenders refinance your loan multiple times with little benefit to you.
VA-approved properties
The VA requires proof that any home financed with a VA loan is “safe, sound and sanitary,” including one-to four-unit homes, manufactured homes attached to land, modular homes and VA-approved condominium units and planned unit developments (PUDs).
VA minimum property requirements usually include proof that:
- Each unit has enough space for living, cooking, sleeping and sanitary facilities
- There is private road access if the home is located in rural areas
- The drainage directs water away from the home
- Safe drinking water is available from a local health authority
Things you should know
The VA escape clause, also known as an “amendatory clause,” is a disclosure that allows homebuyers to cancel a transaction and receive a refund of any earnest money if the appraised value of the home is less than the contract sales price. The clause must be signed by the borrowers before signing the purchase contract.
VA loans vs. conventional loans
Borrowers with good credit and at least a 20% down payment often choose conventional loans to buy or refinance homes. However, there are conventional loan programs that require down payments as low as 3%, if you can’t or simply don’t want to use your VA loan eligibility. Here’s how these two loan types stack up side by side:
| Loan feature | VA loan | Conventional loan |
|---|---|---|
| Down payment | 0% | 3% |
| PMI | Not required | Required with less than a 20% down payment |
| Credit score minimum | No guideline minimum | 620 |
| Funding fee | 0.5% to 3.6% of loan amount | Not applicable |
| Occupancy | Primary residence only | Primary, second or investment home permitted |
VA loan benefits and drawbacks
| Pros | Cons |
|---|---|
| No down payment required | Must be eligible based on military service |
| No loan limits | Tougher appraisal requirements |
| No income restrictions | Longer wait in between refinancing than conventional loans |
| No mortgage insurance required | VA funding fees up to 3.6% of the loan amount |
| Lender costs capped at 1% of loan amount | Higher appraisal costs than conventional or FHA loans |
| Options for no income verification/no appraisal refinance | Can’t finance a second home or investment property |
How to get a VA loan
Once you’ve confirmed you’re eligible for a VA loan, you’ll normally follow five steps on the way to your closing day:
Step 1:Shop for a VA-approved lender
Not all lenders offer VA loans, and not all loan officers are familiar with how to process them. Don’t forget: The VA handbook caps lender fees at 1% of your loan amount so skip any lender that quotes costs any higher than that.
Step 2:Gather your financial documents
You’ll need to provide a little extra paperwork if you’re buying a home with a VA loan. The table below gives you a list of the documents to expect:
| VA Loan Document Checklist |
|---|
| Certificate of Eligibility |
| DD214 (Discharge or Record of Separation paperwork) |
| Leave and earning statement (if you’re on active duty) |
| Child care statement |
| Nearest living relative statement |
| Two years of W2s |
| 60 days of bank statements |
Letters of explanation for:
|
Step 3:Find your home and get your appraisal ordered
Your lender will need to order your appraisal from a VA-approved inspector. One good thing about VA appraisals: The appraisers on the VA rotation must finish your appraisal within a set time, depending on your location. Check the appraisal for any repair requirements and be prepared to negotiate with the seller if anything needs to be fixed.
Step 4:Provide approval conditions and review your closing disclosure
The VA underwriter will review any final conditions and the lender will issue your closing disclosure at least three business days before your closing date. Double-check all the figures and, in particular, make sure you aren’t being charged for a funding fee if you’re eligible for an exemption.
Step 5:Sign your closing documents and bring your cash to closing
You’ll typically need to provide a cashier’s check or wire funds to the escrow or title company handling your closing. Once the lender reviews your closing package, loan funds are wired, the property title is recorded into your name and you’re officially a homeowner.
VA loan FAQs
How many times can I use my VA loan benefit?
You can use your VA loan benefit as often as you wish, as long as you have sufficient entitlement to buy a home and are purchasing a primary residence.
Do VA loans require PMI?
No. Instead, the VA offers a “guarantee” that covers the cost of VA-approved lender losses equaling up to 25% of your loan amount if you default. The VA also charges a funding fee of 0.5% to 3.6% to offset the program cost to taxpayers.
How much are VA loan closing costs?
You’ll usually pay 2% to 6% in VA loan closing costs depending on your loan size. However, VA-approved lenders can’t charge more than 1% of your loan amount for loan-related fees including origination, doc prep, underwriting and other miscellaneous fees.
What is the required down payment for a VA loan?
Eligible veterans typically don’t need any down payment. However, you may need one if you have an outstanding VA loan on another home and don’t have enough entitlement to cover the guarantee on the new loan.
Can I refinance my VA loan to lower my rate?
Yes. The VA IRRRL program makes it easy to refinance to a lower rate with no income verification or appraisal required.