What’s a VA Loan? The Veteran’s Complete Guide to This Special Type of Mortgage

If you’re on active duty, a military veteran, or the surviving spouse of someone who has served in the military, buying a home could be more affordable than you realize, thanks to VA loans.

“The whole program is designed to get the veteran that house that she or he wants,” said Robert Greenblatt, a top real estate agent in Cherry Hill, New Jersey, with 12 years of experience who is certified as a Military Relocation Professional. Greenblatt has a few relatives who served in the military and estimates that about one-quarter of his business is assisting clients with VA loans.

Nearly 90% of VA-backed home loans have no down payment, a huge benefit when trying to build, buy, refinance, or even renovate a home, according to the U.S. Department of Veterans Affairs.

However, the misconceptions about this type of loan process can scare off borrowers (and even some real estate agents). Those who know these loans inside and out say apprehension can dissuade buyers from a lot of potential savings. “It really is designed to help the veteran become a homeowner or become a homeowner again,” Greenblatt said.

“They can get more than one VA loan in a lifetime, and in some cases, they could have more than one VA loan at a time simultaneously. It’s pretty impressive.”

Let’s explore what makes VA loans unique and how to apply for one if you think this special type of mortgage is right for you.

VA loan basics: How common are these types of mortgages?

When people speak of “VA loans,” they’re technically referring to “VA-backed” or “VA-guaranteed loans.” Private lenders, such as banks and mortgage companies, still provide these loans, but the VA guarantees a portion of the loan, enabling the lender to provide more favorable terms.

Loans from the Federal Housing Administration (FHA) and Veterans Affairs (VA) loans accounted for 18.7% of the $920 billion in mortgage loans issued at the end of the first half of 2019, according to Inside Mortgage Finance and the Urban Institute of Washington, D.C., a nonprofit research organization founded in 1968.

(The VA does serve as a mortgage lender for the Native American Direct Loan program, which helps Native American veterans and Native Americans who are not veterans purchase homes on tribal land. But this is a small portion of the loan program, closing 23 loans in FY 2018.)

In FY 2018, the VA guaranteed 610,513 loans totaling $161.3 billion, records show. First-time homebuyers accounted for 159,714 of VA purchase loans during this time period.

How long have VA loans been around?

The VA Home Loan Guaranty program was initially part of the Serviceman’s Readjustment Act of 1944, also known as the GI Bill of Rights. It was part of a national effort to avoid the economic recession historically associated with postwar periods and transition from the wartime economy of World War II to a peacetime economy, according to the Veterans Benefits Administration.

The program’s objective is to help not only veterans but surviving spouses, active-duty personnel, and members of the Reserves and National Guard purchase, retain, and adapt homes in recognition of their service. Recipients also can use VA loans to refinance existing home loans and improve a home by installing energy conservation measures such as solar heating.

What are the limits of a VA loan?

As of Jan. 1, 2020, the VA will not set a cap on the value of any VA loan, thanks to the Blue Water Navy Vietnam Veterans Act of 2019, enacted in June.

While the VA does not limit the actual loan amount you can borrow, they do limit the amount they will guarantee to the lender, i.e., how much they are willing to repay to the lender in the event you default on the loan.

As such, any limits in the VA lending program don’t really limit how much a mortgage company is willing to lend, but instead how much they will lend without requiring a down payment.

Additionally, individual lenders may have their own limits, depending on your income, credit score, a home’s market value, and other factors typically involved in calculating mortgage eligibility.

VA loan entitlements, explained

If you qualify for a VA loan, you are granted an “entitlement” by the VA, which is the minimum amount the VA is willing to guarantee on the veteran’s behalf.

The “basic entitlement” is $36,000 and generally a lender will be willing to lend up to 4 times the amount of the entitlement without a down payment.

However, VA-eligible borrowers in most of the US are granted an additional “full” or maximum entitlement amount equal to 25% of the conforming loan limit for the county where the property is located.

That means that in most of the US, a VA-eligible borrower with sufficient credit and income would be able to borrow up to $484,350 without any down payment. And in counties where the conforming loan limit is higher, as in Los Angeles County, New York City metropolitan area, Alaska, and Hawaii, that loan amount could be as much as $726,525 without a down payment.

Because there is no loan limit, so long as the borrower has sufficient income and credit history, the borrower can borrow more than the conforming loan limit, but will have to be prepared to make up the difference between their maximum entitlement amount and 25% of the loan amount as a cash down payment.

For example, let’s assume you want to buy a $500,000 home in El Paso County, CO where the conforming loan limit is $484,350. The maximum entitlement the VA will guarantee on your behalf is 25% of the loan limit, or $121,087.

25% of $500,000 (the cost of the house in El Paso) = $125,000.

You would be expected to make up the difference in cash, or a down payment of $3,913.

Who can apply for a VA loan?

To qualify for a VA loan as a service member, veteran, reservist or National Guard personnel, you first must have served for a minimum required time period (generally 90 days, 181 continuous days, or two years). You also must have been discharged or released under any condition other than dishonorable discharge.

The VA lists the specific length of service as follows:

• Veterans of World War II and the Korean Conflict: 90 days
• Post-World War II (July 26, 1947 to June 26, 1950): 181 continuous days
• Post-Korean Conflict (February 1, 1955 to August 4, 1964): 181 continuous days
• Vietnam Era service: 90 days
• Post-Vietnam Era (May 8, 1975 to September 7, 1980): 181 continuous days
• Enlisted personnel from September 8, 1980, to August 1, 1990: 2 years
• Officers from October 17, 1981, to August 1, 1990: 2 years
• Gulf War Era personnel (August 2, 1990 to present): 2 years or period called to active duty (not less than 90 days)
• Active duty personnel: eligible after having served continuously for at least 181 days (90 days if this was Gulf War era duty)
• Reservists and National Guard personnel: 6 years

An unmarried surviving spouse of an eligible veteran who died as a result of service or service-connected conditions also is eligible for a VA loan, as is the spouse of an active-duty member who is missing in action or a prisoner of war.

Before applying for a VA loan, you must submit evidence of your military service to obtain a Certificate of Eligibility. Veterans typically need a DD Form 214, with the narrative reason for separation. Active duty personnel, reservists, members of the National Guard, discharged personnel, and surviving spouses need different paperwork. Visit the VA benefits website for details.

You then can apply for a Certificate of Eligibility by mail, online, or through your lender.

What are the VA Loan borrower eligibility requirements?

The VA doesn’t set minimum income requirements for VA loan borrowers, so you could be eligible for a VA loan no matter the size of your paycheck.

According to Military.com, the largest online military and veteran membership organization with 10 million members, the VA will consider a variety of income sources you bring to the equation, provided the source meets certain benchmarks. For example, in the VA sphere, a job must be a minimum of 30 hours per week to qualify as “full-time” work. VA lenders will also factor in self-employed or part-time work if you can show a two-year history and certain likelihood of continuance.

However, as is the case with any other loan program, VA lenders want to make sure you can actually afford the house you buy, so they’ll take a look at what’s called your debt-to-income (DTI) ratio and use that to gauge how much loan you qualify for. DTI represents a measure of all your monthly debt payments (think: housing, credit card, car, and student loan payments) as a slice of your gross monthly income.

There’s no universal DTI cap for VA loans. However, certain lenders who offer VA loans may have their own internal DTI guidelines that you’ll need to meet. Meanwhile, the VA will take a closer look at any borrower with a DTI exceeding 41%, according to Veterans United Home Loans of Columbia, Missouri, a VA-approved lender founded in 2002 that in 2018 provided more VA home loans by total volume than any other lender.

Again, though, military borrowers will find different ratios among different lenders, with some allowing a debt-to-income ratio of 50% or higher.

When you go to apply for a VA loan, expect to show proof of income such as:

• Earned income, overtime, bonus, tips, and commissions
• Residual income from investments
• Rental property income
• Child support, alimony, or both

A lender likely will also want totals of your debts such as:

• Any current mortgage payments
• Credit card minimum payments
• Auto payments
• Co-signed credits
• Student loan payments
• Child support, alimony, or both

VA loan benefits: What’s the upside?

The guarantee that VA provides to lenders allows for borrowers to have more favorable terms compared to other loans. These terms may include:

• No required down payment, as long as the sales price doesn’t exceed the appraised value and the loan amount is less than the conforming loan limit. “There are some other programs on the market that have 0% down, but they’re few and far between,” Greenblatt said.

Compare that to these others:

• • FHA loans: Minimum 3.5% down payment
  • Conventional loans: Anything less than 20% down typically requires private mortgage insurance (note that the national median down payment in 2018 was 13%, however)
  • Jumbo loans: Varies by lender, but could be as high as 15%, 20%, or even 30% down
• No private mortgage insurance, which lenders often require as protection to offset their risk when homebuyers put down less than 20% of the purchase price.“Even on a $100,000 house, you could be paying an extra $50 to $60 a month in private mortgage insurance because it’s riskier for the mortgage company until you get to 20% down or 20% equity in your house,” Greenblatt said. “A VA loan doesn’t have that, which keeps the payments lower.”
• Closing cost limitations
  Veterans do pay a funding fee ranging from 1.25% to 3.30% of the loan amount for a purchase loan, a fee that the VA waives for veterans receiving disability compensation and surviving spouses. However, Greenblatt said he often negotiates with the sellers to pay closing costs to help offset this.“We always figure that our veterans are going to have closing costs somewhere in the 4.5% to 5.5% range based on the purchase price,” he said. “That will vary in different parts of the country because property taxes are one of the driving forces of closing costs, and in New Jersey, they’re a little on the high side.”
• No prepayment penalty
  You won’t be charged a fee for paying the loan off early.
• A relatively shorter waiting period to purchase a home after financial hardship, such as a bankruptcy.
  In most cases, a person needs to wait two years from the discharge date (not the filing date) of a Chapter 7 bankruptcy before qualifying for a new loan, such as an FHA loan. However, even after a bankruptcy or foreclosure, the VA will consider a person’s credit reestablished after he or she can show two years of clean credit (not from a particular filing or discharge date), according to VAntage Point, the VA’s official blog. In addition, VA guidelines do not require a minimum credit score.
• The option to reuse the benefit to purchase another home.
  If you’ve had a foreclosure involving a previous VA loan, you can still be eligible for another after you pay back the amount owed on the foreclosed loan.

Are there any disadvantages to VA loans?

Because of no required down payment, VA loans can have some drawbacks.

• No to low equity.
  If you needed to sell the house soon after buying it, “that can be challenging because there’s not much equity there,” Greenblatt said.He had one client in this predicament who had enough eligibility where she could qualify for another VA loan. So she rented out the first property, purchased the second, and eventually sold the first one. However, VA borrowers should know that they can’t initially purchase a home as an investment property. “It has to be a primary residence for at least a year.”
• Lender overlays.
  Because the VA guarantees only 25% of the conforming loan limit, a lender may have additional underwriting requirements that aren’t dictated by the VA, such as minimum credit scores, loan amount (minimums and maximums), and restrictions on property types such as co-ops and manufactured homes, according to LendingTree.com, an online loan marketplace since 1996 that offers educational programs as well as comparison shopping.
• Tougher appraisal requirements.
  The VA asks appraisers to ensure that a home meets minimum safety, sanitation, and structural integrity standards, such as handrails on stairs, safe water quality, a structurally sound roof, and no pest or mold problems. “They do look for some other things versus a conventional appraisal. Does the heat come on? Does hot water come out of the kitchen faucet? Is there peeling paint on the windowsills, or the exterior of the house? Is the flooring OK? Not is it pretty or nice, but is it torn up and are there any trip hazards?” Greenblatt said.

I’d like to apply for a VA loan. What should I do?

Talk with a qualified local real estate agent, who can give you names of lenders in your area who are familiar with this particular loan product. You’ll need to gather the appropriate documentation for your Certificate of Eligibility, but a VA-approved lender can help with that as well.

To find a qualified agent, ask around. How many VA loan buyers have they worked with? HomeLight notes on our agent profiles which agents have the Military Relocation Professional certification through the National Association of Realtors. This certification not only requires agents to have a detailed understanding of VA loans but also counsels them about dealing with the particular concerns of military personnel.

“We deal with clients who have served four times in Iraq. They may have PTSD. They may be partially disabled. We have clients who are 100% disabled through the VA, and in NJ, they don’t have to pay property taxes if we do the right paperwork, which is huge,” Greenblatt said.

This training also makes these agents sensitive to requests that others might not understand.

“A few months ago, I walked into a closing. I was helping the seller, but the buyer was a veteran and just said, ‘I can’t sit there. I can’t have my back to the wall.’ I knew what that was about. I’ve heard that before,” Greenblatt said, noting that because of post-traumatic stress, his clients will like to sit on a certain side of the table. “If that’s the way it needs to be, that’s the way it needs to be.”

Determining eligibility and applying for a VA loan is a complicated process, but take comfort in knowing that experienced professionals are available who can help you. Don’t hesitate to ask questions about any part of this process, which could put you on the path to owning the home you’ve imagined as a thanks for your service to the nation.

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