Understanding VA Loans

VA loans are issued by private lenders but guaranteed by the U.S. Department of Veterans Affairs (VA). They are available to active-duty service members, eligible veterans, and certain surviving spouses and can be used for various purposes, such as purchasing homes, refinancing, or covering renovation costs.

Overview

Private lenders issue VA loans, and the U.S. Department of Veterans Affairs (VA) guarantees or partially covers them.

Types of VA loans

There are various types of VA loans:

VA Purchase Mortgage: Allows qualified service members to purchase homes without a downpayment.
VA Construction Loan: Funds home construction, including purchasing land, labor, and building materials.
VA Rehab and Renovation Loan: Finances home renovations.
VA Streamline Refinance or Interest Rate Reduction Refinance (IRRRL): Replaces a current VA loan with a new one at a lower interest rate or converts an adjustable-rate loan into a fixed-rate loan.
VA Rate-and-Term Refinance: Refinances to a new loan with different terms and interest rates.
VA Cash-Out Refinance: Allows borrowers to refinance into a larger loan, converting home equity into cash.
VA Energy Efficient Mortgage (EEM): Finances energy efficiency improvements for the home.
Native American Direct Loan (NADL): Helps Native Americans build, purchase, or finance homes on federal trust land.

Key Features and Requirements

VA loans have unique features, eligibility requirements, and loan limits.

VA Loan Features

VA loans offer these key benefits:

Reusable loan benefits.
Only applicable for residential properties.
Private lenders issue the loans, but the VA guarantees them.
Available even with a history of bankruptcy or foreclosure.
No mortgage insurance or prepayment penalties.
A mandatory funding fee.
No borrowing limits for borrowers with full entitlement.

VA Loan Eligibility

To qualify for a VA loan, you must meet these criteria:

You are on active military duty or an honorably discharged veteran who served at least 90 days during wartime or 181 days during peacetime.
You served at least six years in the National Guard or Selective Reserve or 90 days on active duty under Title 32 orders (with at least 30 consecutive days).
You are the surviving spouse of a service member who died in action or from a service-related disability, and you haven’t remarried. Spouses can remarry after age 57 or after Dec. 16, 2023. Spouses of missing service members or prisoners of war are also eligible.
You meet the lender’s income and credit requirements.
You purchase a property that meets safety and building standards and is your primary residence. You must occupy the home within 60 days, though this can extend up to 12 months with permission.

VA Loan Limits

There’s no set VA loan size limit if you have full entitlement, but lenders may impose limits based on income and debt. Your loan entitlement is also subject to mortgage limits.

For 2024, the standard VA loan limit in a typical U.S. county is $766,550 for a single-family home, but it can go up to $1,149,825 in high-cost areas. If the home price exceeds the county limit, you can still get a VA loan with a downpayment.

Refinancing a VA Loan

You can refinance a VA loan using these options:

VA Streamline Refinance (IRRRL): To secure a lower rate or switch from an adjustable rate to a fixed rate.
VA Cash-Out Refinance Loan: For borrowers with conventional loans to convert to a VA loan, taking a larger loan, paying off the original mortgage, and receiving the difference as cash.

How to Apply for a VA Loan

Here are the steps to apply for a VA mortgage:

Obtain a Certificate of Eligibility (COE).
Compare lenders based on qualification requirements and mortgage rates.
Organize financial documents like bank statements, tax returns, and brokerage statements.
Request preapproval and search for a home that meets the VA’s safety and structural standards.
Complete the mortgage application after accepting an offer.
Provide additional financial or credit information during underwriting if required.

Pros and Cons of VA Loans

Pros:

Purchase a home with no downpayment.
No need for mortgage insurance.
Lender fees are capped at 1% of the loan amount, lowering closing costs.

Cons:

Only for purchasing a primary residence.
Includes a funding fee, which depends on whether you’re buying or refinancing. Funding fees vary based on the borrower’s military status, loan type, down payment (if any), and whether it’s a first-time use or subsequent use of the VA loan benefit.

Takeaway

Service members can use VA loans, guaranteed by the Department of Veterans Affairs, to buy or refinance their primary residences. These loans provide benefits like no downpayment, no mortgage insurance, and competitive interest rates.