VA loans

A VA loan is a special type of low-cost mortgage available to certain U.S. service members, former service members and surviving spouses through the U.S. Department of Veterans Affairs (VA).

If you qualify, a VA loan can help you get into a new home, usually at better interest rates than you’d find with another type of loan. Read on to learn how VA loans work and how to qualify.

VA loan highlights

Banks, credit unions and mortgage lenders issue VA loans with the understanding that the VA will cover a big portion of the lender’s loss if the borrower fails to repay the loan.

When you take out a VA loan, the government provides you an entitlement (or guarantee) of up to 25% of the value of a home you’re buying as your family’s primary residence, up to a maximum value based on the cost of local housing.

To determine that maximum value, the VA uses purchase-price limits—known as conforming loan limits—that apply to mortgages backed by other government home loan agencies. You can look up those limits, which are subject to annual revision, at the Federal Housing Finance Agency’s website.

The VA doesn’t limit how much you can borrow, but there is a cap on the VA’s guarantee. That’s the amount of money they’llcover if you default on your loan. According to the VA, the loan limit for a no-down-payment VA loan is $548,250 in most of the country.

Certain high-cost areas have higher limits. If you need a loan higher than that amount, you may be able to look into a VA jumbo loan, which doesn’t require a down payment and may offer a lower rate than regular jumbo loans.

Note that if you can afford a home that costs more than the top conforming loan limit for your county, you can still use your VA entitlement toward the purchase—but you’ll have to finance (or put down cash) to cover the additional cost yourself. This option will still result in significant savings versus financing the whole property yourself.

Conversely, you don’t have to use your full entitlement if you find a property you like at a price lower than the conforming limit, and you may be able to apply any unused portion of your entitlement to a future home purchase.

VA Loan vs. Conventional Loan

Veterans Affairs backing, along with lending requirements stipulated by the VA, make VA loans significantly more affordable than comparable conventional mortgage loans.

If you’re not sure whether you’d get a better deal with a VA loan than you would with a conventional loan, check out these differences between the two:

  • You can get a VA loan with a zero down payment. Conventional mortgages typically require cash down payments of at least 10%.
  • You won’t have to pay private mortgage insurance (PMI) with a VA loan. On conventional mortgages with down payments of less than 20%, lenders require purchasers to buy PMI to cover their losses in case of default on the loan.
  • VA loans typically come with lower interest rates. Lenders usually charge higher rates on conventional mortgages than on VA loans.
  • You’re more likely to qualify for a VA loan with lower credit scores. Lenders typically have less restrictive credit requirements for VA loans than they do for conventional mortgages.
  • You can use your VA entitlement more than once. If you pay off your first VA home loan, you can apply for another, as long as you’re using it for your primary home.

What Fees Come With VA Loans?

As with conventional home loan lenders, financial institutions that issue VA loans may charge origination fees to cover the costs of processing the loan. The amount of these fees varies by lender, and is typically higher for applicants with lower credit scores.

In addition, most VA loan recipients must pay a percentage of the purchase value, known as the funding fee, to help offset the cost of VA benefits to U.S. taxpayers. Details are spelled out at the VA website, but the fee varies depending on several factors, including:

  • The nature of your service (reservists pay higher fees than full-time military)
  • Whether or not you make a down payment on the purchase. As with origination fees on many conventional mortgages, you can “buy down the points” on your funding fee by making a down payment on the loan.
  • Whether you’re using your VA entitlement for the first time, or applying it to a new loan after paying off your initial one. (Fees are higher the second time around.)

Is a VA loan right for you?

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