It’s a big decision to join the military. Members of the armed forces face a slew of risks to their physical safety and psychological well-being. They make many trade-offs in their personal lives as well, from frequent moves around the United States to overseas deployments that challenge even the strongest families.
To help offset personal sacrifices, military personnel enjoy many direct and indirect financial benefits.If you’re a current or former member of the armed forces and you’re weighing whether to buy a home, there’s one benefit you need to know more about: the VA loan. See how you can save thousands of dollars as a homeowner with the VA home loan program.
What Is a VA Loan?
Like conventional mortgages, most VA loans are issued by private lenders. But they’re backed by the full faith and credit of the U.S. government, specifically the U.S. Department of Veterans Affairs, up to limits set by federal regulation.
The limit adjusts every year. In 2022, it’s $647,200 in most of the country. Certain higher-cost areas have higher loan limits, up to $970,800 in 2022.
The federal guarantee reduces the risk for lenders and allows them to offer more favorable terms. That often means lower interest rates and no need to carry expensive private mortgage insurance (PMI) on certain loans.
It also allows lenders to offer VA purchase loans with no down payment required, which puts homeownership within reach for service members who have limited personal savings. Conventional loans require down payments: 20% or more of the property’s value if you want to avoid PMI. Other government-backed loans, including FHA loans, also require money down.
VA Loan Eligibility Requirements
VA loan eligibility requirements vary by the applicant’s branch, service length and dates, and discharge status. Dishonorably discharged service members are not eligible for VA loans under any circumstances.
Eligibility Requirements for Service Members
The following service member groups are eligible for VA loans:
- Armed forces personnel who gave at least 24 consecutive months of service in active or nonactive-duty roles after Sept. 8, 1980.
- Those called to active duty at any point during their careers are eligible after serving at least 90 to 181 days on active duty, depending on when the service occurred.
- Those currently on active duty are eligible after serving at least 90 consecutive days on active duty.
- National Guard and reservist personnel who gave at least 90 consecutive days on active duty after Aug. 2, 1990.
- National Guard and reservist personnel who did not give at least 90 consecutive days on active duty are eligible once they log at least six years in their respective service branch and retire, remain on selected reserve status, or transfer to other reserve status.
For more information, check the VA’s eligibility guidelines.
Eligibility for Those With Close Military Ties
Some other groups of people are also eligible for VA loans, mainly surviving spouses of service members and officers or trainees in certain government service organizations, like the National Oceanic & Atmospheric Administration.
Surviving Spouses of Eligible Service Members
Several types of surviving service member spouses are eligible for VA loans:
- Unremarried spouses of service members who died in service
- Unremarried spouses of service members who died from a service-connected disability
- Surviving spouses who remarried after Dec. 16, 2003, and after reaching age 57
- Surviving spouses of totally disabled veterans
Naturalized U.S. Citizens Who Served in Allied Militaries
This covers people who served in certain foreign militaries allied with the United States during World War II and subsequently became naturalized U.S. citizens. Few if any naturalized World War II vets remain in the market for mortgages, unfortunately. (Time catches up to us all.)
Members of Certain Military-Aligned Service Organizations
This covers people who served as:
- Cadets at the U.S. Military Academy, Air Force Academy, or Coast Guard Academy
- Midshipmen at the U.S. Naval Academy
- National Oceanic & Atmospheric Administration officers
- Public Health Service officers
How to Obtain a Certificate of Eligibility for a VA Home Loan
Once you’ve determined that you’re eligible for a VA loan, you may need to obtain a certificate of eligibility (CoE) to show to your lender. Your lender won’t give you a VA loan or refinance an existing loan without a valid one.
The evidence you need to get your CoE depends on your armed forces branch and active-duty status. The general requirements are:
- Armed Forces Veterans: Department of Defense Form 214 (DD214), including a full explanation of the nature of separation and character of service.
- Active-Duty Service Members: A signed statement of service outlining the service member’s entry date, personal information (including date of birth and Social Security number), and lost service time (if any).
- Current or Former Reservists and National Guard Members With Active-Duty Experience: Department of Defense Form 214 describing the nature of separation and character of service.
- Current Reservists and National Guard Members Without Active-Duty Experience: A signed statement of service outlining the total duration of service and any lost time.
- Discharged Reservists Without Active-Duty Experience: Evidence of honorable service (can vary on a case-by-case basis) and a copy of the most recent retirement points statement.
- Discharged National Guard Members Without Active-Duty Experience: Service records and separation reports for each stretch of National Guard service or a retirement points accounting statement with accompanying evidence of honorable service.
- Surviving Spouse Receiving Dependency and Indemnity Compensation Benefits: The veteran’s DD214 (if available) and VA Form 26-1817.
Surviving Spouse Not Receiving Dependency and Indemnity Compensation Benefits: The veteran’s DD214 (if available), VA Form 21-534, death certificate or Department of Defense casualty report (DD1300), and a marriage license. Send these documents to the spouse’s local VA Compensation and Pension office for processing.
The easiest way to apply for a CoE is online at the VA’s eBenefits portal. You may also be able to apply with your lender during the underwriting process, though not all lenders have this capability.
If you prefer to apply offline, you can fill out and mail VA Form 26-1880 (Request for Certificate of Eligibility) with the appropriate CoE evidence for your service class. If you’re a surviving spouse, you must fill out a paper copy of VA Form 26-1817 and either give it to your lender for forwarding to the VA or mail it directly to the VA.
Once you have your CoE in hand, you can use the VA’s website to find a qualified lender. Learn more about applying for a CoE on the VA’s Certificate of Eligibility page.
Types of VA Loans & Grants
VA loans come in several different flavors. The VA also offers financial grants to make veteran-occupied housing more accessible for people with disabilities.
A VA purchase loan helps you buy the home you plan to live in most of the time with no money down. Use one to do any of the following:
- Buy an existing detached home
- Buy a condominium unit in a VA-approved project
- Build a new construction home
- Simultaneously purchase and renovate a home (similar to an FHA 203k rehabilitation loan)
- Buy a manufactured home or lot for a manufactured home you already own
Cash-Out Refinance Loan
A cash-out refinance loan does two things. First, it replaces the existing mortgage on a home you already own. Your existing mortgage doesn’t have to be a VA loan. Second, it gives you a lump-sum cash payment you can use with no restrictions.
Cash-out refinance loans are similar to home equity loans, which also let you borrow against the value of your house. But they differ in some important ways:
|VA Cash-Out Refinance||Home Equity Loan|
|Replaces Existing Mortgage||Yes||No|
|Loan-to-Value Ratio||Up to 100%||Up to 80%|
VA cash-out refinance loans’ loan-to-value ratios (the loan amount as a percentage of home value) are unusually lenient and give you lots of freedom as a borrower. As an example, if you still owe $100,000 on a $150,000 mortgage and your house is worth $200,000, your cash-out refinance loan can be as large as $200,000. Of that total, $100,000 is available to cash out and do with as you see fit.
Interest Rate Reduction Refinance Loan
Also known as a VA streamline refinance loan, an interest rate reduction refinance loan allows you to refinance an existing VA loan and secure a lower interest rate without going through the VA loan application process a second time.
Unlike cash-out refinance loans, you can’t use these streamlined loans to tap your home equity for cash with the exception of a $6,000 allowance for energy-efficient home improvement projects. You don’t need to get a credit check or go through extensive financial risk assessments, but you do need to prove you live in the home you’re borrowing against.
Native American Direct Loan Program
This is a newer, less common type of VA loan designed specifically for Native American service members and veterans who are members of a participating tribe, meet creditworthiness standards, and plan to live in the home.
Unlike VA purchase and refinance loans, these are direct loans. The VA acts as the lender, not a bank.
These direct loans are always fixed-rate, 30-year loans. They must be used to buy, build, or renovate homes on Federal Trust Land (reservation land) or refinance and reduce the interest rate on existing Native American direct loans.
Adapted Housing Grants
The VA offers two non-loan grants for veterans with permanent and total service-connected disabilities: Specially Adapted Housing Grants and Special Housing Adaptation Grants.
Eligible disabilities must qualify for 100% disability compensation under the VA Schedule for Rating Disabilities. They must not be expected to improve with time. They include:
- Loss of use of both legs or arms
- Loss of use of one leg and one arm
- Severe burns
- Blindness in both eyes
- Severe respiratory injuries
If you qualify, you can use either or both types of grants to finance or offset the cost of building disability-adapted housing from the ground up. You can also use the grants to buy housing that has already been adapted, buy and renovate housing that hasn’t been adapted yet, or adapting a home you already live in.
VA Funding Fee
VA mortgage loans carry a special fee that doesn’t apply to other mortgage loans: the VA funding fee.
This fee varies depending on your down payment amount and loan type but generally ranges from 0.5% to 3.6% of the purchase price. You can pay it at closing or wrap it into your loan value, though wrapping results in a slightly higher monthly payment.
The fee structure for first-time purchase and cash-out refinance borrowers is:
|1st Down Payment Amount||Funding Fee|
|5% to 9.99%||1.65%|
|10% or higher||1.4%|
The funding fee is higher your second time around (and third, and fourth, and on and on) if your down payment remains under 5%:
|Subsequent Down Payment Amount||Funding Fee|
|5% to 9.99%||1.65%|
|10% or higher||1.4%|
For cash-out refinancing loans, the funding fee is always 2.3% your first time around and 3.6% for subsequent loans. It doesn’t change based on your down payment amount.
What about the rest of the VA loan lineup? Funding fees for streamlined refinances, Native American direct loans, and other less common loan types are:
|Loan Type||Funding Fee|
|Native American Direct Purchase||1.25%|
|Native American Direct Refinance||0.5%|
|Interest Rate Reduction Refinance||0.5%|
Finally, the VA waives funding fees on loans to eligible veterans with service-connected disabilities, regardless of loan type, down payment amount, or previous VA borrower status.
For a complete overview of VA funding fees, check the VA’s Funding Fee Charts.
VA Loan Pros & Cons
A VA loan is very often a great deal, but the program has some drawbacks too. Evaluate the pros and cons for yourself.
|VA Loan Pros||VA Loan Cons|
|No down payment required||Cap on loan principal ($647,200 in most areas)|
|No mortgage insurance required||Appraisal required for cash-out refinance|
|Relatively lenient underwriting||Difficult to qualify for a streamlined refinance when rates are high|
|Caps on closing costs||Restrictions on use of streamlined refinance proceeds|
|No prepayment penalties|
|Thorough inspection for newly built homes|
|Can be transferred to the next owner|
VA Loan Pros
VA loans have several useful (and potentially lucrative) benefits unavailable to nonmilitary borrowers:
- No Down Payment Required. For cash-strapped borrowers, this is the single biggest advantage of a VA-backed loan. Most other mortgage loan types require at least 3%, and many lenders prefer 10% or more. Some lenders still ask for down payments on VA loans. But the industry is competitive, and you can shop around to avoid one.
- No Mortgage Insurance Required. VA-backed loans don’t require private mortgage insurance, while many conventional loans do (at least to start). Depending on the loan principal and down payment value, that can save you anywhere from a few dollars to several hundred dollars per month.
- Relatively Lenient Underwriting. Lenders hold qualified VA loan applicants to lower credit standards than applicants for conventional mortgage loans. Even if you have fair or average credit, you may still qualify for a VA-backed loan.
- Limits on Required Closing Costs. Borrowers eligible for VA loans don’t have to pay certain closing costs, including underwriting fees, escrow charges, attorneys’ fees, and document processing fees. The lender can partially offset its losses on these items by charging the borrower an origination fee up to 1% of the loan principal.
- VA Inspection for New Construction Homes. When you use a VA loan to finance a new construction home, the VA sends licensed inspectors to evaluate construction progress and confirm the home fits the VA’s specifications. At a minimum, the builder must provide a one-year warranty on the new home. Some builders offer warranties as long as 10 years, providing crucial peace of mind for new homeowners.
- No Prepayment Penalties. VA loans carry no prepayment penalties. If you wish to avoid interest charges by accelerating your loan’s payoff or making additional payments toward its principal, you’re free to do so with no penalties. Some lenders charge substantial prepayment penalties that amount to thousands of dollars per loan.
- Assumable Loans. VA loans are assumable, meaning they can transfer from the seller to the buyer with minimal (or no) change to rates and terms. That’s extremely useful in a rising-interest-rate-environment. However, the buyer still has to cover the difference between the remaining loan balance and the appraised value of the home, either by putting cash down or taking out a second mortgage.
VA Loan Cons
Despite the advantages, VA loans carry some significant limitations and restrictions. These are the most important for borrowers to know upfront.
- Limits to Loan Principal. While there’s no upper limit to the actual property value, the VA only guarantees loan principals up to $647,200 (though this figure increases with inflation most years). The upper limit is higher in certain regions with high housing costs, mostly in Alaska, Hawaii, and major coastal metropolitan areas. If you want to buy a home that costs more than the limit in your area, you need to come up with the difference in cash.
- Cash-Out Refinance Appraisal Requirement. You need to get your home appraised when you apply for a VA cash-out refinance loan. That injects some uncertainty into the underwriting process, especially in bad housing markets.
- Streamlined Refinance Interest Rate Restrictions. Unless you’re refinancing an adjustable-rate mortgage into a fixed-rate loan, your interest rate reduction refinance loan’s interest rate must be lower than your original loan’s rate. In practice, it’s difficult or impossible to qualify for this type of refinance when interest rates are high.
- Restrictions on Proceeds of Streamlined Refinance. You must use the proceeds from your interest rate reduction refinance loan to pay down the existing VA loan or invest in qualified energy efficiency upgrades.
Serving in the armed forces is a heavy task. So is choosing to spend your life with a career service member. The least the federal government can do to reward the sacrifices service members and their loved ones make is to make it easier for them to buy homes of their own. It’s no wonder private lenders have issued nearly 20 million VA-backed loans since the program’s inception.
In an ever more tumultuous and uncertain world, those charged with keeping the peace deserve secure spaces of their own.