A VA Loan is a mortgage loan backed by the U.S. Department of Veterans Affairs, designed to provide financial assistance to eligible military service members, veterans, and their surviving spouses.

These loans allow borrowers to purchase or refinance a primary residence with little to no down payment. Active-duty service members, veterans, and their spouses can access VA benefits, which offer numerous advantages, such as no down payment requirement, no private mortgage insurance, and more flexible credit and income requirements

Types of VA Loans

There are four main types of VA loans:

Purchase Loans

Ideal for purchasing a primary residence, VA loans offer financing for single-family homes, multi-unit homes (if one unit is occupied by the borrower), and condominiums.

Interest Rate Reduction Refinance Loan (IRRRL)

Also known as the VA Streamline Refinance, this loan allows borrowers to refinance their existing VA loan to a lower interest rate or to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

Cash-Out Refinance Loans

These loans allow borrowers to refinance their existing mortgage (VA or non-VA) and receive cash from the home’s equity for various purposes such as home improvements, debt consolidation, or other financial needs.

Native American Direct Loans (NADL)

The NADL is a unique program designed specifically for eligible Native American veterans and their spouses which qualified borrowers to finance the purchase, construction, or improvement of homes on Federal Trust Land, or to refinance an existing NADL to reduce the interest rate.

VA Loan Benefits

VA loans come with several benefits, including:

• No down payment requirement
• Competitive interest rates
• No private mortgage insurance (PMI)
• Flexible credit requirements
• Lower closing costs
• Ability to finance the VA funding fee

Requirements for a VA Loan

The VA can only guarantee a loan if it can be established that the veteran has satisfactory credit risk and possesses a current or verified future income that is appropriately proportional to the anticipated repayment terms of the loan.

Credit Score

While the VA does not set a specific minimum credit score, most lenders require a score of 620 or higher. However, some lenders may consider borrowers with lower credit scores on a case-by-case basis.

Income

Borrowers must have stable and sufficient income to cover the mortgage payment, property taxes, homeowner’s insurance, and other housing-related expenses. Lenders will evaluate the borrower’s debt-to-income (DTI) ratio in addition to Residual Income to ensure they can afford the loan. If a borrower’s debt-to-income ratio (the percentage of their income used to pay debts) is higher than 41 percent, the loan application will require a closer examination. However, there are exceptions:

• If the ratio is higher than 41 percent solely due to tax-free income, the loan may still be approved with proper documentation in the loan file.
• If the underwriter’s supervisor provides justification for approving the loan, it may be approved.
• If the borrower’s residual income (the remaining income after all expenses are paid) exceeds the guideline by at least 20 percent, the loan can be approved without additional justification.

For loans closed with a debt-to-income ratio greater than 41 percent, the underwriter’s supervisor must provide a written statement justifying the approval unless the residual income exceeds the guideline by at least 20 percent. The statement should include the reasons for approving the loan and any compensating factors that support the decision.

Loan Purpose

VA loans can only be used to purchase, refinance, or improve a primary residence. Investment properties and vacation homes are not eligible for VA financing. However, a VA loan can be used to purchase a multifamily home so as long as the borrower occupies one the units as their primary residence.

Property Condition

The property must meet the VA’s Minimum Property Requirements (MPRs) to ensure the home is safe, sound, and sanitary. A VA-approved appraiser will assess the property to ensure it meets these standards. Real estate agents can effectively narrow down your home search by concentrating on properties that are likely to comply with the VA’s appraisal guidelines and lender requirements. The VA appraisal aims to assist veterans and service members in acquiring homes that are secure, sanitary, structurally sound, and fairly valued. These homes must meet a set of general criteria called “Minimum Property Requirements” (MPRs).

Some examples of these property requirements include:

• Heating systems must be sufficient
• Roofing must be in adequate condition
• Crawl spaces and basements must remain dry
• Lead-based paint must be addressed and resolved
• Properties must be free from termites, dry rot, and fungal growth
• Mechanical systems must be secure and have a reasonable remaining lifespan

Condominiums

To be eligible for a VA loan, the condominium project must be on the VA-approved list. You can search for approved condominiums on the VA’s website. Work with a real estate agent who is familiar with VA loans and can help you find suitable condominiums.

Can I Get Another VA Loan?

Yes, eligible borrowers can have more than one VA loan at a time or obtain a new one after paying off a previous one. This is known as VA loan entitlement restoration, which may be subject to specific conditions and limitations.

Can I Have More Than One VA Loan at a Time?

Second-tier VA entitlement, also known as bonus entitlement, is an additional layer of VA loan eligibility that allows qualified borrowers to have more than one VA loan at a time or obtain a new VA loan after experiencing a foreclosure or short sale on a previous VA-backed mortgage. This entitlement is separate from the basic entitlement of $36,000 that every eligible veteran receives.

The second-tier entitlement comes into play when a borrower’s basic entitlement is not sufficient to cover the full loan guarantee. The amount available for second-tier entitlement varies based on the VA county loan limit and the borrower’s remaining entitlement from previous VA loans. In many cases, this can enable eligible borrowers to purchase a new home without a down payment, even if they have an existing VA loan or have previously defaulted on a VA-backed mortgage.

To use your second-tier entitlement, it’s essential to work with a knowledgeable lender who understands the VA loan process and can help you navigate the complexities of utilizing both your basic and second-tier entitlements.

How Much Can I Borrow with a VA Loan?

For eligible Veterans, service members, and survivors with full entitlement, there are no longer limits on loans over $144,000. This means that you won’t have to pay a down payment, and the VA guarantees to your lender that if you default on a loan over $144,000, they will pay the lender up to 25% of the loan amount.

You have full entitlement if you meet any of these requirements:

• You’ve never used your home loan benefit, or
• You’ve paid a previous VA loan in full and sold the property (in this case, you’d have your full entitlement restored), or
• You’ve used your home loan benefit, but had a foreclosure or compromise claim (also called a short sale) and repaid the VA in full

Note: Terms such as additional entitlement, bonus entitlement, or tier 2 entitlement are used when the VA communicates with lenders about VA-backed loans over $144,000. You won’t need to use these terms when applying for a loan.

With full entitlement, eligible borrowers can enjoy the benefits of VA loans without worrying about loan limits, providing more flexibility in purchasing a home.

VA Funding Fee

The VA funding fee is a one-time, upfront fee paid by VA borrowers to help offset the cost of the loan program. The fee varies depending on the type of loan, the borrower’s military status, and whether it’s the borrower’s first-time use of a VA loan or a subsequent use. The funding fee can be financed into the loan amount or paid in cash at closing.

VA Funding Fee Exemptions

Some borrowers may be exempt from paying the VA funding fee, including:

• Veterans receiving VA disability compensation
• Veterans who would be eligible for disability compensation if they weren’t receiving retirement pay
• Surviving spouses of veterans who died in service or from a service-connected disability

How Do I Obtain My Certificate of Eligibility (COE)?

The Certificate of Eligibility (COE) is a document that verifies your eligibility for a VA loan. You can obtain your COE in the following ways:

1. Online: Apply for your COE through the VA’s eBenefits portal at www.ebenefits.va.gov.
2. Mail: Complete VA Form 26-1880 (Request for a Certificate of Eligibility) and mail it to the Eligibility Center.
3. Lender Assistance: Many VA-approved lenders can obtain your COE for you using the VA’s WebLGY system, which is often faster than applying online or by mail.

Having your COE is an essential step in the loan process, as it helps determine your eligibility, loan entitlement, and potential funding fee exemptions.

VA Loan Closing Costs

Despite the numerous advantages of VA loans, borrowers must account for certain closing costs, typically ranging from 1% to 3% of the purchase price. It is crucial to budget for these expenses during the home buying process. Some of the closing costs may include:

• Appraisal fees
• Credit report fees
• Origination fees
• Recording fees
• Title insurance and settlement fees
• Discount points (if applicable)

However, the VA has rules in place to protect borrowers from paying excessive fees. For instance, the VA prohibits lenders from charging more than a 1% origination fee. Lenders cannot charge borrowers certain fees, like attorney and document preparation fees.

VA Loan Assumption

VA loans are assumable, allowing new buyers to take over your loan terms when you sell your home. This can be an attractive selling point, particularly if your loan has a lower interest rate than current market rates. However, the buyer must meet the lender’s credit and income requirements and obtain a release of liability from the VA to assume the loan.

While loan assumptions can offer an appealing advantage for VA homeowners in a rising-rate environment, they have distinct differences from traditional home purchases. Not all VA lenders allow assumptions, and they may potentially jeopardize your loan entitlement.

If a civilian buyer assumes the loan, the remaining portion of the seller’s VA entitlement in use stays with the original loan. The veteran cannot retrieve their remaining eligibility until they pay off the loan. This makes a short sale or foreclosure by the civilian owner a consideration, as the veteran owner may lose that portion of their benefit.

Refinancing with a VA Loan

You can refinance an existing loan to lower the interest rate or access your home’s equity. VA borrowers have two main refinance options: the Interest Rate Reduction Refinance Loan (IRRRL) and the Cash-Out Refinance Loan.

The IRRRL is a streamlined refinance option that requires minimal documentation and underwriting. This loan aims to reduce interest rates, shorten loan terms, or transition from an adjustable to a fixed-rate mortgage. Keep in mind that an IRRRL does not allow for cash-out.

Cash-Out Refinance Loans enable borrowers to refinance their mortgage (VA or non-VA) and access cash from their home equity. You can use this for various purposes, like home improvements or debt consolidation. The Cash-Out Refinance Loan requires a full underwriting process, including income, credit, and property appraisal.

The Bottom Line

VA loans provide eligible individuals with competitive rates, no down payment, and flexible underwriting, making them a valuable benefit. Grasping VA loan details aids in making informed decisions for home financing or refinancing. Collaborate with a VA-approved lender and acquire your Certificate of Eligibility to fully utilize this mortgage program