What is a VA loan and how does it work?

Dad holds his daughter, smiling, upon his return home from military assignmentImage: Dad holds his daughter, smiling, upon his return home from military assignment

In a Nutshell

If you’re an eligible service member, veteran or qualifying military spouse, you can apply for a VA loan to buy a home with no down payment — and you don’t have to pay monthly mortgage insurance. It’s also possible to qualify for a VA loan if your credit isn’t perfect. But you’ll pay a funding fee in most cases, which can add to your costs.
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If you’re in the military, an eligible veteran or a qualifying spouse of a service member, you may want to look into getting a VA loan when you buy a home.

You may be able to get a VA loan to buy a primary residence, even if you’ve had a VA loan in the past. The government guarantees these loans, so it’s typically easier to qualify since there’s less risk for lenders.

In fact, it’s possible to get a VA loan with no down payment — and you may qualify if your credit isn’t strong or you’ve had a history of foreclosures.

We’ll review how VA loans work, their requirements, how to apply and the different types of VA loans.

What is a VA loan?

A VA loan is a mortgage that’s insured by the Department of Veterans Affairs and is designed to help active-duty service members, eligible veterans and qualifying spouses buy property. They can be used to …

  • Buy a home
  • Buy a condo in a VA-approved building
  • Build a home
  • Purchase and improve a home
  • Make energy-efficiency improvements to your existing home
  • Buy a lot and/or a manufactured home
  • Refinance an existing loan

If you’re eligible, VA loans are fairly easy to qualify for, since there’s no down payment required, no minimum credit scores, and no maximum limit on how much you can borrow relative to income.

VA loan types

VA loan typeFeatures
VA purchase mortgageAllows qualified military service members to buy a home with no down payment in many cases, plus rates are competitive.
VA cash-out refinance Replaces a VA mortgage with a new VA loan so borrowers can convert home equity into cash that can be used for any purpose.
VA interest rate reduction refinance Replaces a VA loan with a new one that has a new rate (or a fixed rate instead of a variable rate).
VA rehab and renovation loanHelps finance certain home improvement projects as part of a home purchase.
Native American Direct LoanAllows qualified Native American veterans to buy, build, improve or refinance a home on federal trust land.

Unlike most mortgage options that don’t require a large down payment, such as FHA loans, VA loans don’t require you to buy mortgage insurance. There’s a funding fee for most borrowers though, which adds to the cost of your mortgage.

While VA loans are often a great choice, the funding fee means these loans aren’t right for everyone. And since they’re issued by private lenders, you’ll need to shop around.

VA loan requirements to review before applying

Qualifying requirementsRecord of military service (requirements depending on whether you served in war or peacetime)

Eligible member of the Selected Reserve or National Guard

Surviving spouse may also be eligible

Proof of income sufficient to repay the loan

Satisfactory credit (no minimum credit scores)
Mortgage insurance requirementsNone required — even with no down payment

Who can qualify?

You may be eligible for a VA loan if …

  • You meet service requirements. Find out how long you’d have to serve via the VA website.
  • You’re an unremarried spouse of a service member who died from a service-connected disability, or who died in service. Or if you are an eligible spouse who is receiving Dependency and Indemnity Compensation Benefits. Or you are the spouse of a service member who is missing in action or is a prisoner of war.
  • Your credit is satisfactory. Past foreclosures or bankruptcies won’t necessarily prevent you from qualifying.
  • You have proof of employment and income. You must verify two years of employment. If your monthly debt, including housing costs, will exceed 41% of your monthly gross income, you may need better credit or a down payment.

Lenders apply different standards to decide who can borrow, so if one lender turns you down, don’t give up hope on finding another one.

How do VA loans work?

The VA doesn’t make loans, so borrowers must find a private lender that is part of the VA loan program.

Different lenders have different qualifying criteria. But the VA encourages lenders to make VA loans available to all qualified veterans that apply. The government guarantees a portion of the loan to pave the way to easier approval.

In most of the U.S., the federal government guarantees loans of up to $726,200 for 2023.

But that government guarantee doesn’t protect you, the borrower, if you don’t pay your mortgage. You can still lose your home to foreclosure if you don’t repay your loan. If you do run into trouble as a VA mortgage holder, there’s a dedicated VA staff to help.

What’s the maximum you can borrow?

There’s no limit set by the VA on how much you’re allowed to borrow for a home. But the VA does cap the amount of insurance provided to the lender, and most lenders limit the loan amount as a result. You can find out the limit in any U.S. county through the VA website.

The maximum loan limit varies from one lender to another, so this is another reason to shop around.

If you’ve already received a VA loan, the amount you’re allowed to borrow with no down payment may be smaller.

What are the rules for down payment, mortgage insurance and other fees?

VA loans do not require you to put down any money to obtain a loan, and don’t require you to pay mortgage insurance. However, you’ll owe a funding fee, with the amount based on …

  • Whether you’re in the military, are in the national guard, are a qualifying spouse, or are a veteran of the military or national guard
  • The amount of your own down payment, if any
  • The type of loan
  • Whether you’re a first-time borrower or you’ve had a past VA loan

Funding fees vary depending on whether you’re buying or refinancing and other factors. This funding fees table on the VA website will help you figure out what you’ll owe.

Surviving spouses of deceased veterans who died because of their service don’t have to pay a funding fee, nor do certain eligible veterans entitled to compensation for service-connected disabilities. When owed, the funding fee can be paid upfront or financed.

Lenders may also charge additional fees, including any of the following:

  • Discount points to reduce your interest rate
  • Loan origination fees
  • Recording fees
  • Application and processing fees
  • Document prep fees
  • Notary fees
  • Tax service fees

Fees and costs vary by lender.

How does a VA loan differ from a conventional mortgage?

VA loans differ from conventional mortgages in many important ways.

VA loans have different down-payment requirements

If you’re eligible for a VA loan, there’s a good chance you won’t need a down payment. But the VA does require one if the home purchase price is more than the property’s appraised value.

Lenders also may require a down payment in some situations. If you’re considering a VA loan, you should check down payment requirements with a loan specialist at your regional VA office and with your lender.

You can qualify for a VA loan with lower credit scores

There is no minimum credit score requirement for VA loans. Lenders offering conventional loans, on the other hand, typically have credit score requirements.

VA loans have different insurance requirements

You don’t have to pay for private mortgage insurance to protect your lender if you get a VA loan, no matter how low your down payment. When you obtain a conventional loan, you’re typically required to pay for private mortgage insurance if you put less than 20% down.

There’s a one-time VA funding fee

You have to pay the fee unless you fall into an exception. This fee, which isn’t charged on conventional mortgages, can be the biggest downside to a VA loan. While the fee can be added to the loan amount, this means paying it back over many years.

The VA limits the closing costs you’ll pay

Sellers can also pay closing costs, although a seller’s contribution can’t exceed 4% of the loan. Many conventional lenders limit a seller’s contribution to the closing costs to 3% to 6%.

There’s no maximum debt-to-income limit

A debt-to-income ratio limit caps the total costs of your debt, including housing costs. With conventional lenders, it’s typically capped at 43%. The VA doesn’t impose a limit, but you may have to provide more proof of your ability to pay if your debt with the loan will exceed 41% of your gross income on a monthly basis.

The VA warns that adding the funding fee and closing costs to your loan, rather than paying for them upfront, could leave you owing more than your house is worth or could reduce benefits of refinancing because your payments won’t be lowered by as much.

What is the interest rate on a VA loan?

Interest rates on VA loans can be fixed or adjustable.

  • With an adjustable-rate mortgage, your interest rate is tied to a financial index or market interest rate, such as the Libor, and it can change periodically. If interest rates rise, your rate can go up and your monthly payments increase.
  • With a fixed-rate mortgage, your interest rate — and mortgage payment — should stay the same for the life of the loan.

Interest rates on VA loans are typically lower than rates on conventional mortgages. But rates and fees vary among lenders, so be sure to shop around.

How to apply for a VA loan

Applying for a VA loan is different from applying for a conventional mortgage, and this affects the home-buying process.

The VA recommends working with a real estate agent who’s familiar with VA loans and getting prequalified with a lender before making an offer.

There are a number of steps to applying for a VA loan, including …

  • Obtaining a certificate of eligibility, which verifies to the lender that you meet minimum eligibility requirements.
  • Comparing offers from different VA lenders to find the best interest rate and most affordable fees for you.
  • Submitting a loan application and providing financial information, including pay stubs and bank statements.
  • Obtaining a VA appraisal, which is ordered by the lender.

Your credit information, income and the value of the home will be reviewed, and then the lender will either approve or deny your loan. Make sure your purchase agreement has a clause called a “VA option clause,” which allows you to avoid financial penalties if the home doesn’t appraise high enough.

When your loan is approved, the lender will choose a representative to conduct a closing, during which the money can be released and the property transferred to you.

What’s next: Is a VA loan right for you?

A VA loan may be a good choice if you’re a qualifying military service member. Just keep in mind that you’ll likely have to pay a funding fee that could add to the total cost of your loan.

Here are some questions to ask yourself before applying.

  • How is your credit?
  • How much down payment can you afford?
  • Are you trying to avoid PMI?
  • Do you think you’ll refinance in the future? 

Calculate your VA loan

Find out what your estimated monthly payment and other loan terms could be with our VA loan calculator.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.