How Does A VA Loan Work? The Essential Details You Need To Know

One of the most significant benefits is the VA loan, which makes homeownership easier for current service members, veterans, and eligible spouses.

We'll explore how a VA loan works, explain how to get one, and dispel common misconceptions about the mortgage. Confidently take advantage of this program to buy your dream home.

What is a VA Loan?

"A VA loan is a government-backed mortgage that allows eligible veterans and service members to purchase a home with a range of big benefits, namely the ability to buy without a down payment and no private mortgage insurance," says Chris Birk, vice president of mortgage insight at Veterans United Home Loans.

"The Department of Veterans Affairs guarantees a portion of the loan, which gives lenders confidence to offer favorable terms and flexible credit guidelines," adds Birk.

Types of VA Loans

While most people think of VA loans for home purchases, the program offers several financing options:

1. Purchase loans: Help you buy your primary residence with no down payment required.
2. Refinancing options: Lower your rate with an Interest Rate Reduction Refinance Loan (IRRRL) or access equity through a cash-out refinance.
3. Assumable loans: Take over payments on an existing VA loan when buying from another veteran.
4. Native American Direct Loans: Purchase federal trust land (available only if you or your spouse is Native American).

You can also add an Energy-Efficient Mortgage (EEM) of up to $6,000 to fund energy improvements within six months of closing.

Eligible Property Types for VA Loans

VA loans can finance various property types, including single-family homes, multi-family properties (up to four units), townhouses, VA-approved condos, and manufactured homes with land. You can even use VA financing for fixer-uppers or new construction projects.

How Does a VA Loan Work?

VA loans function similarly to conventional mortgages in most ways. You can choose a 15 or 30-year term with either a fixed or adjustable interest rate, and use the same application and underwriting process as other loan types.

VA Loan Closing Costs and Fees

Like any mortgage, you'll pay closing costs to finalize your purchase. These typically include:

• VA-specific fees: VA appraisal and funding fee (if applicable)
• Standard costs: Credit report, title evidence, property survey, and recording fees
• Lender fees: Loan origination (up to 1% of loan amount) and discount points (optional)

Most closing costs must be paid up front and can't be rolled into your loan amount. However, the VA funding fee can be financed into your mortgage balance.

VA Funding Fee

The funding fee helps sustain the VA loan program and varies based on several factors, including your military service, loan type, down payment amount, and whether this is your first VA loan.

For example, first-time users pay a 2.30% funding fee on purchase loans with no down payment, while veterans with service-connected disabilities are exempt from this fee entirely.

Benefits of VA Loans

VA mortgages offer exceptional advantages that make homeownership more accessible for veterans and service members:

• Zero down payment: Purchase a home without saving for years (available with full entitlement).
• No loan limits: Borrow what you can afford based on income, not arbitrary caps.
• No mortgage insurance: Save hundreds monthly compared to conventional and FHA loans.
• Competitive rates: Often lower than conventional mortgages due to government backing.
• Reduced closing costs: Veterans are protected from certain excessive fees.
• Flexible credit: More forgiving requirements for veterans with past financial challenges.
• No prepayment penalties: Pay off your loan early without additional costs.

Built-in Financial Protection

Beyond these tangible benefits, VA loans provide unique security. "The greatest benefit of the VA home loan is the security provided by the VA," explains Jordan Vlastuin, certified financial planner (CFP®) and founder of Make the Memory Financial Planning.

"The home loans are guaranteed by the VA. If a veteran runs into financial difficulty affording or selling their home, the VA will step in to help the veteran directly," adds Vlastuin.

This government backing also protects lenders, allowing them to offer more favorable terms than they could with conventional loans.

VA Loan Eligibility Requirements

To qualify for a VA loan, you must meet both the Department of Veterans Affairs program requirements and your chosen lender's standards. Understanding these dual requirements helps you prepare for a successful application.

VA Program Requirements for Loan Eligibility

The VA doesn't require a specific credit score or cash reserves, but you must demonstrate sufficient monthly income after paying your mortgage and other bills. This ensures you can handle unexpected expenses without falling behind on payments.

Additionally, the property must be safe and sanitary, and you must use it as your primary residence. You must also meet these service-related criteria:

Active Duty Service Members:

• 90+ days of continuous service

Veterans (August 2, 1990 to present):

• 24 months of service
• 90+ days active duty
• 90+ days with discharge due to hardship, reduction in force, or government convenience
• Less than 90 days with discharge for service-connected disability

Surviving Spouses:

• Eligible for Dependency and Indemnity Compensation benefits
• Spouse died in service or from service-connected disability (unremarried)
• Spouse was 100% disabled-rated (unremarried)
• Remarried after age 57 on or after December 16, 2003
• Spouse is MIA or POW for 90+ days

Reservists and National Guard:

• 90+ days of active duty
• Six years of creditable service

Note: Different criteria may apply for veterans who served before 1990.

Lender Requirements for VA Loans

While the VA sets baseline standards, individual lenders establish their own qualification criteria for credit scores, debt-to-income ratios, and cash reserves. Most lenders typically require:

• Credit score above 620
• Debt-to-income ratio under 41%
• Stable employment history

Pro tip: A qualified loan officer can assess your financial situation and determine your likelihood of approval.

How To Get a VA Loan: Step-by-Step Process

Securing a VA loan involves several key steps that prepare you for successful homeownership:

1. Educate yourself about VA loans: Study the homebuying process and read the VA Buyer's Guide to understand what to expect at each phase and prepare accordingly.
2. Strengthen your financial position: If needed, pay off debt, increase your income, or boost your savings balance to improve your loan qualification chances.
3. Find VA-approved lenders: Research lenders experienced with VA loans. "Work with a lender that understands this loan program and an agent who has worked with VA buyers," explains Nate Fain, director of sales at One Real Mortgage.
4. Apply for your Certificate of Eligibility: Your lender may assist with this process, or you can apply online or by mail using VA Form 26-1880.
5. Gather required documentation: Collect proof of income (bank statements, pay stubs, W-2s, tax returns) and debt information. Include a service-connected disability award letter if not documented on your COE.
6. Get pre-approved for your VA loan: A pre-approval letter shows how much you can likely borrow and makes you more attractive to sellers.
7. House hunt and make an offer: Ensure your real estate contract includes the VA 'Escape Clause,' allowing you to withdraw without losing your deposit if the appraisal comes in below the purchase price.
8. Submit your VA loan application: Compare at least three loan estimates to ensure competitive terms, and respond promptly to lender requests for additional information.
9. Complete property appraisal and inspection: Your lender orders the required VA appraisal. Consider hiring a licensed inspector to identify potential property issues.
10. Close on your VA loan: Sign final paperwork and pay closing costs to complete your home purchase.

Important Caution: "The VA home loan is a fantastic program, but I've seen many veterans overextend themselves on their home purchase and put themselves in financial hardship. Veterans need to make sure that the home is affordable and fits into their financial plan before purchasing," warns Vlastuin.

Common VA Loan Misconceptions Debunked

Several myths about VA loans persist in the market. Here's the truth behind common misconceptions:

"You Can Only Use VA Loan Benefits Once"

Reality: "VA loans can be used multiple times as long as there's sufficient eligibility available. Eligibility is restored once a home is sold. The veteran may also have remaining eligibility that can be used to buy a new primary home if the loan balance on their first home is low enough," explains Rebecca Richardson, nationally-ranked mortgage expert known as The Mortgage Mentor™.

"VA Loans Take Longer to Close"

Reality: "VA loans typically close in about the same time frame as conventional loans, if not faster in some cases. When you work with a lender and real estate agent who understands the program, there's no reason a VA loan should delay the home-buying process," says Birk.

"VA Appraisals Are Unfair or Too Strict"

Reality: "The VA does have minimum property requirements, but they're focused on making sure veterans are purchasing homes that are safe, sound, and sanitary. The VA appraiser is there to make sure the home meets basic standards," Birk explains.

"VA Loans Can Finance Investment Properties"

Reality: "The VA home loan is intended only for a primary residence. The VA does allow purchasing multi-family properties as long as the veteran lives in one of the units," clarifies Vlastuin.

"VA Buyers Aren't Competitive"

Reality: "I've done plenty of VA loans where the buyers have excellent credit and enough money for a large down payment, but they choose not to put money down because they don't have to," remarks Fain.

"The VA Services Your Loan"

Reality: "While the VA issues direct loans from the organization, the vast majority are VA-backed home loans, meaning the VA provides its guarantee to a private lender," Vlastuin notes.

Bottom Line: Is a VA Loan Right For You?

VA loans offer exceptional benefits for veterans and service members, but they're not always the optimal choice for every situation. "The VA loan is a powerful option, but it's not always the best fit for every veteran," says Birk.

"If you have excellent credit and enough cash to make a sizable down payment, you might want to compare VA and conventional options side by side," adds Birk.

Choose a VA loan if you want zero down payment, have limited cash reserves, or prefer flexible credit requirements. Consider conventional financing if you have excellent credit (740+ score), can make a substantial down payment, or want to minimize long-term costs in competitive markets.

Frequently Asked Questions

1. What is the VA funding fee, and can I avoid it?

The VA funding fee ranges from 1.25% to 3.3% of your loan amount and helps sustain the program. Veterans with service-connected disabilities are completely exempt, and the fee can be rolled into your loan balance rather than paid upfront.

2. Can I buy a fixer-upper or new construction with a VA loan?

Yes, you can finance fixer-uppers that meet basic safety standards and use VA construction loans for new builds. The property must serve as your primary residence in both cases.

3. Do I need perfect credit to qualify for a VA loan?

No, the VA doesn't require a minimum credit score, though most lenders prefer 620+. VA loans offer more flexible credit requirements than conventional mortgages, making homeownership accessible to veterans with limited credit history.