What is a VA loan? Simple guide to the VA mortgage

What is a VA loan?

The VA loan is a zero-down mortgage program that helps service members, veterans, and their eligible spouses buy a home. This is an excellent military benefit because borrowers can buy with little money out of pocket and avoid additional fees like private mortgage insurance. The program can also help existing homeowners refinance into a lower interest rate or cash out home equity.

In this article (Skip to...)

• How VA loans work
• Who qualifies?
• VA loan requirements
• Other important details
• How to get a VA loan
• Get started

How does a VA loan work?

VA loans are backed by the Department of Veterans Affairs. The government, however, doesn’t issue funds — it only guarantees the loans. This insurance provides extra security for VA mortgage lenders, allowing them to offer special loan benefits for veterans including low interest rates, no down payment, and no private mortgage insurance (PMI).

To get a VA loan, you must contact a private lender that’s approved to offer this program. Fortunately, almost all major lenders are VA-authorized. That includes banks, credit unions, mortgage companies, and online lenders.

Your mortgage lender will verify your eligibility for the VA loan program, look at your personal finances, and tell you how much you’re able to borrow. Your lender will also determine your interest rate. Mortgage rates for the VA loan program are generally lower than other home loan options.

Who qualifies for a VA loan?

VA home loans are available to active-duty service members, reservists, members of the National Guard, and eligible surviving spouses of service members.

Those who apply must meet one of the below requirements:

• Served 90 consecutive days of active service during wartime
• Served 181 days of active service during peacetime
• Served more than six years with the National Guard or Reserves (or 90 days under Title 32 with at least 30 of those days being consecutive)
• You’re the surviving spouse of a service member who died in the line of duty or from a service-related disability

You can check your eligibility for the VA loan program on the VA’s eBenefits portal or reach out to a mortgage lender and have them check on your behalf. Lenders can check your VA eligibility quickly and easily.

VA loan requirements

Having an eligible service history doesn’t automatically qualify you for a VA mortgage. You also have to meet your lender’s financial requirements. The VA sets minimum financial guidelines for borrowers but lenders are allowed to set their own, stricter requirements if they wish, so guidelines may vary by company.

Below are the standard, VA-mandated requirements to qualify for a VA home loan.

VA loan credit score requirements

The Department of Veterans Affairs doesn’t set a minimum credit score for loan approval. Instead, each lender sets its own minimum.

The minimum FICO score for a VA loan is often 620. But this can be slightly higher or lower depending on the lender. Some lenders might require a minimum score of 640 or higher, whereas others allow a score as low as 580 or 600. Credit score requirements may be higher for larger loan amounts.

Keep in mind that lenders check your credit history, too, not just your score. Many lenders allow only one 30-day late payment in the past 12 months. In addition, there’s a waiting period for approval after a bankruptcy or foreclosure.

You can expect a waiting period of one year following a Chapter 13 bankruptcy and two years following a Chapter 7 bankruptcy. If you’ve had a recent foreclosure, the waiting period for a VA loan is two years.

VA loan income requirements

There’s no income limit for a VA loan. However, you must verify that your income is stable and sufficient to make payments on your new home loan.

Along with your application you’ll provide the lender with supporting income documentation. This includes:

• Your most recent paycheck stubs
• W-2s from the past two years
• Tax returns from the past two years
• Most recent bank account and investment statements
• Proof of spousal support or child support (payments must continue for at least 36 months after closing)
• Year-to-date Profit and Loss statement (if you’re also self-employed and using this income for qualifying purposes)

Lenders generally want to see a steady two-year history of income and employment, and they want to know your income is reasonably expected to continue after closing on the loan. That said, there are some circumstances where you can get a home loan without a two-year job history.

VA loan debt-to-income requirements

Your lender will also review your debt-to-income ratio (DTI). This is the percentage of your gross monthly income that you spend each month on debt payments. Typically, a VA loan allows a maximum DTI of 41 percent. That means your monthly debts — including the mortgage — don’t take up more than 41% of your monthly pre-tax income.

You can calculate your DTI ratio by dividing your total monthly debt payments by your gross monthly income. Debt payments include regular, recurring items like credit card minimum payments, auto loan and student loan payments, and your future mortgage payment. They do not include living expenses like utilities or phone bills.

For example, if your debt payments equal $1,500 and you have a monthly gross of $5,000, your debt-to-income ratio is 30 percent.

Other VA loan program details

There are a few other features that set the VA loan program apart from other home loan options. Here’s what you should know.

Certificate of Eligibility

You must obtain a Certificate of Eligibility (COE) prior to getting approved for a VA loan. This certificate is proof of your eligibility as a veteran or service member, and it provides lenders with information about your VA entitlement. You can get your COE through the VA’s eBenefits online portal or ask a VA-approved lender to retrieve the document from the VA’s website.

VA loan entitlement

Your VA loan entitlement determines how much you’re eligible to borrow. Home buyers who have never used the VA loan program before should have “full entitlement,” as should borrowers who used a VA loan in the past but paid it off in full.

Technically, there’s no loan limit for borrowers with full VA entitlement. But many lenders set their own cap equal to the conforming loan limit, which is currently $ in most parts of the U.S. With many lenders, if your loan exceeds that amount, it’s considered a “VA jumbo loan" and you may be required to make a down payment.

The VA funding fee

VA loans don’t require a down payment or private mortgage insurance. But borrowers do pay a one-time funding fee.

The VA funding fee supports the VA loan program. It ranges from 0.5% to 3.6% of the loan amount, but most first-time home buyers with zero down pay 2.3 percent. You can pay this fee upfront at closing or roll it into the mortgage loan balance. Most borrowers choose to include the funding fee in their loan amount.

VA minimum property requirements

Be mindful, too, that VA loans have minimum property requirements (MPRs). MPRs are basic guidelines for the types of homes the VA will insure and the condition a property must be in to qualify for a VA loan. Generally, homes must be accessible, safe, and have up-to-date utilities to be eligible for VA financing.

You can use this loan program only for a primary residence or when buying a multi-unit home and living in one of the units yourself. You cannot use a VA loan for the purpose of buying a vacation home or rental property, although you’re allowed to rent out a former primary residence.

How to get a VA loan

Here are the steps to apply for a VA loan:

1. Contact a VA-approved mortgage lender

These include banks, credit unions, and mortgage companies approved by the Department of Veterans Affairs. Check lender websites to see if they offer VA loans before applying. Contact a minimum of three lenders to compare interest rates and find your best VA loan offer.

2. Get your Certificate of Eligibility

Visit the VA’s eBenefits portal to acquire your COE or ask your lender to access the database on your behalf. This document confirms your eligibility for the VA program and provides information about your VA entitlement. The COE will help your lender determine how much money you’re eligible to borrow and whether or not you need to make a down payment.

3. Get pre-approved

Complete a VA mortgage application and provide your lender with supporting documentation such as paycheck stubs, bank statements, tax returns, and proof of other income. Your lender uses this information to determine your loan amount and interest rate, and then issues a pre-approval letter. You’ll need this preapproval letter in hand to make a serious offer on a home you want to buy.

4. Shop for a home

After getting pre-approved, contact a real estate agent to begin the home search. Once a seller agrees to your purchase price, your lender reviews the purchase agreement and prepares a Loan Estimate. This document provides information about your mortgage terms, including the estimated interest rate, monthly payment, closing costs, and fees. Your lender will then complete the underwriting process (which includes ordering a home appraisal) and schedule a closing date.

Get started on your VA loan

The VA loan is an incredibly valuable benefit for eligible veterans and service members. With no down payment, low interest rates, and no ongoing mortgage insurance, this is one of the most affordable home loan programs available.

If you have past or current military service and you’re planning to buy a home or refinance, look into the VA loan. Most mortgage lenders are authorized to do VA mortgages and can easily tell you whether you’re eligible for the program.