What to Know About VA Loans

Made available through a collaboration between the federal government and private lenders, VA loans are financial tools developed to encourage homeownership among U.S. military service members. Here’s a look at how these loans work, what they can be used to pay for and who is eligible for them.

What are VA loans?

VA loans are available to both current and former service members. These housing loans are issued by regular lenders, but — crucially — they are guaranteed by the Department of Veterans Affairs. As set by the federal government, terms for VA loans are typically more generous than regular loans. Writing for NerdWallet, Hal Bundrick notes that VA loans typically don’t require down payments, high credit scores or private mortgage insurance. They’re usually available at lower interest rates, too, although a one-time funding fee is assessed. If borrowers are unable to pay, the VA also offers assistance to help them make a repayment plan, modify the loan and avoid foreclosure.

How do VA loans work?

VA loans operate through guarantees known as “entitlements.” Bankrate.com mortgage reporter Natalie Campisi writes that, as of 2019, the VA’s basic entitlement guarantees the lesser of $36,000 or 25 percent of a mortgage. Lenders typically approve loans that are about four times this amount — putting a $144,000 home within reach for borrowers. However, in many parts of the country, median home prices are far higher, so the VA also offers a bonus entitlement. This allows borrowers to take out a mortgage on a house that costs as much as $484,350 — or $726,525 in especially high-cost areas. These amounts are not caps, so lenders can still choose to offer larger loans.

What kinds of VA loans are available?

VA loans are most commonly used to buy or build a home, but they’re also available for other purposes. Bundrick notes that a VA loan can be used to get cash-out refinancing or secure a more advantageous refinanced interest rate. They can also be used to make improvements to a home. However, in keeping with their mission to expand homeownership among veterans, VA loans must go toward a borrower’s primary residence. They cannot be used to purchase a second home or an investment property.

Who is eligible?

Before getting a VA loan, a borrower needs a Certificate of Eligibility, or COE. An application for a COE can be obtained through a lender or through the VA’s website. According to Campisi, to receive a COE, applicants need to have served at least 181 days in peacetime, 90 days during war or six years in the National Guard and Reserve. VA loans are also available for qualified surviving spouses of service members. Getting a COE does not guarantee that a veteran will get a home loan, but it is a necessary first step.

If you’re a service member considering a home purchase, VA loans are designed to help you achieve that milestone. To learn more about how to apply and whether you qualify, contact the VA or speak with a representative of your local financial institution.

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