VA Loans: Buy or Refinance With a VA Home Loan

The U.S. The Department of Veterans Affairs offers many benefits to military members and their families. One of the most popular is the VA loan program. 

VA loans are designed to help service members, veterans and eligible surviving spouses become homeowners. The VA doesn't make loans directly, but it partners with lenders to guarantee home loans. 

Several features make VA home loans an attractive option for buying or building a home. Understanding VA loan requirements can help you decide if this kind of mortgage meets your needs. 

What Are VA Home Loans?

VA loans are government-backed mortgages. Private lenders make VA home loans to eligible borrowers. The Department of Veterans Affairs then guarantees those loans.

Government backing helps minimize any financial losses a lender might incur if a borrower defaults on their loan. Since there's less risk to lenders, VA loans can offer some advantages that other types of home loans don't. 

For example, VA loans have:

• No down payment requirement
• Low interest rates
• Limited closing costs

There are different types of loan programs offered through the VA. Generally, you can use VA home loans to:

• Purchase a home
• Complete a cash-out refinance for a home you already own
• Refinance to a lower interest rate

The VA also offers a direct loan program for eligible Native American veterans to purchase or build homes on Federal Trust Land or reduce interest rates on VA loans. 

How Do VA Loans Work?

VA loans provide funding to eligible service members, veterans and their families to purchase a home or refinance an existing loan. 

Again, the VA does not make loans to borrowers directly. Instead, the VA partners with private lenders to back home loans. That's similar to how FHA loans backed by the Federal Housing Administration work.

Borrowers apply for a mortgage with a lender that offers VA home loans. You don't need to be a first-time buyer; you can use your VA home loan benefit multiple times during your lifetime. 

If you're approved for a VA loan, you make payments to the lender like you would with any other home loan. Should something happen that prevents you from being able to make your mortgage payments, the lender could foreclose on the home. At that point, the VA's backing would come into play to help the lender recoup some of the financial loss. 

VA Loan Requirements

Because VA loans are government-backed mortgages, there are some specific requirements borrowers need to meet to qualify. Generally, eligibility for benefits is based on your length of service or service commitment, duty status and character of service. 

Before checking any other VA loan requirements, you first need to obtain a Certificate of Eligibility (COE).

Certificate of Eligibility for VA loans

The COE is a document that verifies your eligibility for a VA loan based on your military status and length of service. You can request a COE online and provide proof of service. 

Service requirements vary based on whether you're a:

• Veteran
• Active-duty servicemember
• National Guard member
• Reserve member

Your status also determines what paperwork you need to show to prove your service history. 

Veterans, for example, need to submit Form DD 214 verifying that they've been discharged from service. Active duty service members can submit a statement of service signed by their commanding or unit officer. Active duty National Guard and Reserve members can also submit this form.

Individuals discharged from the National Guard or Reserve will need to submit NGB Form 22 or proof of honorable discharge, respectively. 

If you don't meet the minimum service requirements for VA loans, you may still be able to get approved. To get a COE, you must have been discharged for one of these reasons:

• Hardship
• The convenience of the government (if you served at least 20 months of a 2-year enlistment)
• Early out (if you served 21 months of a 2-year enlistment)
• Reduction in force
• Certain medical conditions
• Service-connected disability

Once you've obtained a COE, you're one step closer to applying for a VA loan. But there are still other VA loan requirements you'll need to meet. 

Property requirements

VA home loans can only be used to buy homes you plan to live in as a primary residence. So you can't use a VA loan to buy a second home or investment property.

The home itself must meet VA loan standards and be an eligible property. Generally, that includes single-family and multi-family dwellings with up to four units. If you're buying a multifamily home, like a duplex or triplex, you have to live in one of the units. 

Also, keep in mind that some VA lenders may not finance certain types of properties. For example, if you're interested in using a VA loan to buy a townhouse, condo or manufactured home, you'd have to find a lender willing to finance them. 

Credit and income requirements

The VA doesn't set specific requirements for income or credit scores. VA lenders can, however, apply a minimum credit score for borrowers. The credit score you need to qualify will depend on the lender. 

Keep in mind that the higher your score, the lower your interest rate is likely to be. Getting a VA loan with a lower credit score, on the other hand, could result in a higher rate. 

VA lenders can also look at your income and, more specifically, your debt-to-income ratio or DTI. Your DTI is the percentage of your income that goes to debt repayment each month. 

The VA doesn't have a maximum DTI limit, but generally, VA home loans' acceptable debt to income ratio is 41% or less.

VA loan down payment requirements

VA loans have no down payment requirements under VA rules. That's one of the things that makes them an attractive loan option. 

VA lenders can, however, set some guidelines for getting a no down payment loan. For example, they may only offer this option to borrowers with higher credit scores. 

Closing costs and other fees

You may put nothing down on a VA loan, but there are other costs you might pay. For example, VA loans do have closing costs like other mortgages. These are fees you pay at closing to finalize the loan.

There's also the VA funding fee to be aware of. This fee, which ranges from 2.3% to 3.6% of your loan amount, is designed to help cover the cost of administering the VA loan program. 

You'll pay this fee upfront, though if you're not able to do so, you might be able to roll it into your mortgage. Remember that any fees you roll into your loan can increase your mortgage payment. 

The good news is that you don't pay private mortgage insurance (PMI) for a VA loan. This insurance is usually required for borrowers who put less than 20% down on a conventional loan. FHA loans also require something similar in the form of an upfront and annual mortgage insurance premium.

VA loan limits

VA loans don't limit how much you can borrow, but there are limits on how much the VA will guarantee. 

For 2022, VA loan limits follow the conforming loan limit of $647,200 for most areas. In high-cost areas, the loan limit increases to $970,800.

How to Get a VA Loan

If you're interested in using VA loans to buy a home or you want to refinance an existing VA loan, there are some specific steps you'll need to take. Briefly, here's what the process looks like:

• Choose a VA-approved lender
• Obtain your COE if you haven't done so already
• Complete the loan application

Some other things happen along the way, of course. For example, you'll need to find an eligible property to buy and make an offer. And your proposal will need to be accepted by the seller. 

Getting pre-qualified for a VA loan with an approved lender could give you an edge when making offers. If a seller is fielding multiple offers, they might be more inclined to accept one from a buyer who's already conditionally approved for a loan.

You'll also need to have the home appraised and inspected. The appraisal is used to determine the home's value while the inspection looks for any flaws or defects with the property. Keep in mind that you could hit a snag here if the appraisal comes in under the purchase price or the inspection reveals issues that need to be addressed before closing. 

If the appraisal comes in too low, you could try to negotiate a different sale price with the seller. You may also make up the difference with cash out-of-pocket. Your real estate agent can walk you through the options to decide what's best. Once any wrinkles are worked out, you can move on to the closing and get the keys to your new home.

If you're ready to explore your VA loan options, shop around and compare lenders to find the best rates.