What Is a VA Home Loan?

Definition and Example of a VA Loan

The Department of Veterans Affairs (VA) doesn’t loan money; mortgages are provided by private lenders. However, VA guarantees a portion of the loan that it will cover if you default, also called the entitlement. This may prompt lenders to offer more favorable terms for veterans.  

The VA loan was created in 1944 to reward veterans returning from World War II for their service, by making it easier for them to get into a home with an affordable mortgage. It remains one of the most popular mortgage programs today. For example, in 2021, over 1.4 million VA loans were granted for home purchases. There's a reason for the program’s popularity, and it has to do with some smokin' VA home loan benefits.

How Does a VA Loan Work?

VA loans are a great way to save money on a mortgage because of unique cost-saving tricks. Here are the main VA loan benefits.

No Down Payment

For most people, the biggest benefit of the VA loan is that you don't need to put any money down. It's one of the few remaining programs that still allows this. Since saving up for a down payment is often a barrier to homeownership for many people, this can be a huge help. 

Still, if you can afford it, it's a good idea to put as much money down as you can. There are even a few situations where a down payment may be required with a VA loan. This usually happens if the home appraises for less than your offer (a situation called an "appraisal gap," which is common in bidding wars where multiple buyers compete for the same property). It can also happen if you don't have full entitlement, which can happen if you've defaulted on a previous VA loan or have an unpaid VA loan on another property.

No PMI

Normally, if you put less than 20% down with a conventional loan, you'll have to pay for private mortgage insurance (PMI). This protects the lender if you default, and it can tack a hefty amount onto your monthly mortgage payment. 

Flexible Credit Requirement

The VA doesn't have a minimum credit requirement to get a VA loan. However, individual lenders have credit requirements that you'll need to meet to qualify for a VA loan. 

VA loan requirements are usually easier to meet than those for a traditional mortgage. Most lenders require a credit score of 620 to qualify. That's a lot lower than the 753 average credit score for traditional mortgage holders in 2020. It's also easier to buy another home sooner with a VA loan if you've run into credit problems in the past, such as a foreclosure (even if it happened on a VA loan). You'll only need to wait two years before you can use your VA loan benefits again.

Assumable

One unique benefit of a VA loan is that you can transfer the mortgage to the buyer when you sell your house. After they buy the home and the mortgage is transferred, you’ll be released from the loan, and the buyer will continue to make the payments.

Having this ability to transfer the mortgage can be a great selling point if you locked in a low rate at the beginning of your loan and rates have gone up since then. In addition, it saves the buyer the hassle of having to get an entirely new loan and may save them a significant amount of money on closing costs. Before you can transfer your mortgage, though, the buyer will need to undergo a review of their finances and credit just like you did when you took out the original loan. 

Limits on Closing Costs

If you get a VA loan, the seller will be required to pay certain closing costs, including the commission for the buyer's and seller's agent and a termite report. It's optional for the seller to pay other fees, such as the VA funding fee for your loan or the appraisal fee.

However, this does have a downside in a hot market. Because the seller is required to pay certain closing costs if you're using a VA loan, your offer may end up at a disadvantage to others that don't have this requirement. 

Lifetime Benefit

You can use your VA loan benefit over and over again for the rest of your life. So even if you've defaulted on a VA loan in the past, or your Certificate of Eligibility (COE) says "$0 basic entitlement," you may still be able to get a VA loan. In addition, there are no limits to the amount of loan you can get.

You may also be able to have two VA loans at one time or get a jumbo VA loan if you're buying a home above the FHFA conforming loan limits in your area—$647,200 for most areas and up to $970,800 in high-cost areas.

The only limitations of the benefit are that the VA only guarantees 25% of a loan above $144,000 or 25% of the county FHFA loan limit minus the amount of a previously used entitlement that has not been restored, whichever is less.

Lower Rates

VA loans have a higher up-front cost with the VA funding fee, which is calculated as a percentage of the total amount of your loan. The funding fee helps reduce the cost of VA loans to taxpayers.

VA loan rates are usually lower on average. For example, in September 2021, VA loan rates averaged .32% lower. That might not seem like a big difference, but it could save you tens of thousands of dollars throughout the life of the mortgage. 

There are even special VA loan refinance programs (Interest Rate Reduction Refinance Loan, or IRRRL) that allow you to stay with the VA loan program and refinance to get a better rate.

Frequently Asked Questions (FAQs)