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

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.

The program’s objective is to help not only veterans but also 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?

Since 2020, the VA has stopped setting a cap on the value of any 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

VA loan entitlements are the amount the VA guarantees to a lender on behalf of a veteran or active-duty service member. This guarantee reduces the lender’s risk, allowing qualified borrowers to secure a mortgage with favorable terms, often without a down payment. VA entitlements come in two parts: basic and bonus (or second-tier) entitlements.

• Basic entitlement: This is typically $36,000, or 25% of the loan amount up to $144,000. If the loan exceeds this amount, the bonus entitlement comes into play.
• Bonus entitlement: Also known as second-tier entitlement, this covers loans that exceed the $144,000 mark. The VA will guarantee up to 25% of the conforming loan limit in your county minus any used entitlement.

Let’s look at an example of VA entitlements for a $500,000 home in El Paso County, Colorado, where the conforming loan limit is $517,500. Here’s how the VA loan entitlements would apply for a $500,000 home purchase:

1. Calculate the total entitlement: Since the county limit is $517,500, the total entitlement is 25% of this amount, which equals $129,375.
2. Determine the required guarantee: For a $500,000 loan, the required guarantee is 25% of $500,000, equal to $125,000.
3. Apply the entitlement: The VA will cover this $125,000 since it is within the total entitlement available for this county.

Because the $500,000 loan amount is less than the county limit and within the entitlement range, the borrower can secure the VA loan with no down payment required. This example shows how VA entitlements make it possible to purchase a home without needing to put money down, as long as the loan amount falls within the conforming limits and available entitlements.

In counties where the conforming loan limit is higher, such as Los Angeles County and the New York City metropolitan area, that loan amount could be as much as $1,149,825 without a down payment.

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 is also 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. 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.

The VA examines a variety of income sources with 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 a 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 offering VA loans may have their own internal DTI guidelines that you’ll need to meet.

Meanwhile, the VA will scrutinize more meticulously any borrower with a DTI exceeding 41%, as it’s beyond the acceptable limit. This doesn’t necessarily mean your loan application will be denied — you’ll still qualify if your DTI ratio is more than the permissible limit because of tax-free income or the residual income exceeds the acceptable limit by around 20%.

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

VA loan benefits: What’s the upside?

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

• No required down payment: You won’t have to pay 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 typical down payment in 2023 was 8% for first-time buyers and 19% for repeat buyers, however)
    • Jumbo loans: Varies by lender, but could be as high as 10% to 30%

• No private mortgage insurance: Lenders often require this 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 0.5% to 3.3% of the loan amount, 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 bankruptcy: For conventional loans, a person needs to wait four years from the discharge date of a Chapter 7 bankruptcy before qualifying for a new loan. In the case of VA loans, you only need to wait two years to be eligible.
• 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 they don’t require a 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, stricter DTI ratios, and and close examination of employment history.
• 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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