VA Loans: What First-Time Home Buyers Should Know

The VA Loan is an optional no down payment mortgage for active members of the military, discharged veterans, and surviving spouses. 

The program’s official name is the VA Guaranteed Home Loan and is commonly called by one of its shorthand names – the VA loan, the VA Mortgage, or the military mortgage.

Eligible home buyers get excellent interest rates backed by the U.S. government.

What is a VA Loan?

VA loans originate in the 1944 G.I. Bill, the landmark legislation that helped returning WWII service members buy homes, build roots, and strengthen U.S. communities. 

More than 400,000 veterans use VA loans to buy a home each year.

Benefits of VA-backed mortgages include:

• No down payment
• No mortgage insurance
• Below-market interest rates

Also, VA loans can be of unlimited size. There is no concept of mortgage loan limits with VA-backed mortgages.

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Benefits of VA Loans

The Department of Veterans Affairs provides benefits and services to U.S. veterans, including a mortgage loan guaranty benefit to service members who buy and build homes.

Home buyers can use VA loans to buy single-family homes, condominiums, and multi-unit properties. Home buyers can choose from fixed-rate and adjustable-rate mortgages.

No down payment required 

VA loans allow 100% financing. Home buyers can make an optional down payment with a VA-backed mortgage, but down payments aren’t required to be approved. The typical VA loan down payment is around 2 percent.

No need for Private Mortgage Insurance (PMI)

The VA Home Loan program makes homeownership accessible and affordable for military veterans. Ongoing mortgage insurance payments are never required unlike with other government mortgage programs such as FHA and conventional mortgages.

Competitively low interest rates

Mortgage lenders give VA mortgage rates below national averages because VA home loan benefits guarantee a portion of every loan against loss. VA mortgage rates can be as much as 0.25 percentage points below a comparable conforming 30-year fixed. 

No minimum credit score requirement

VA mortgage guidelines don’t enforce a minimum credit score requirement because VA loans don’t require credit scores. Mortgage lenders are instructed to evaluate applications from buyers with all credit types. Note that many lenders enforce a minimum credit score of 580.

Limited closing costs

The VA Home Loan program limits buyer closing costs to mortgage discount points and third-party costs such as government fees. 

If the lender charges a service fee, it cannot charge for overhead items such as postage, notary, and loan settlement fees. Lenders cannot charge VA home buyers for attorney fees, real estate commissions, and third-party appraisals.

Use the VA Home Loan benefit multiple times

The VA Home Loan program is a lifetime benefit with no expiration or usage limitations. Eligible service members can use the VA loan benefits to buy their first home and subsequent homes in their lifetime.

VA Home Loans can be passed to the next homeowner

VA-backed mortgages are assumable. They can be assigned to a future home buyer with the mortgage rate intact – even if that buyer is a non-Veteran. The buyer who assumes the VA home loan must meet standard VA credit and income qualifications and may be subject to a 0.5 percent fee on the remaining loan balance.

There are no VA mortgage loan limits

VA loan limits refer to the amount of money the Department of Veterans Affairs will guarantee on a mortgage loan. There is no VA loan limit for first-time home buyers and veterans with full VA entitlement. Buyers whose entitlement is less than full are subject to standard VA loan limits which mirror conforming mortgage loan limits.

VA Home Loan Eligibility Requirements

VA home loan eligibility is split into two parts: service-based eligibility and mortgage-based eligibility. 

Service-based eligibility includes active duty and retired personnel from all branches of the U.S. military:

• Army
• Navy
• Air Force
• Marines
• Coast Guard
• Space Force

National Guard and Reserves members meet service-based eligibility requirements, too. 

Home buyers must provide a valid Certificate of Eligibility (COE) to get approved and meet the minimum service time standards required by the Department of Veterans Affairs.

Mortgage-based eligibility standards include:

• Occupancy rules
• Residual income levels
• Debt-to-income ratios
• Minimum credit scores

Let’s review what it takes to get your VA mortgage approved.

Must provide a Certificate of Eligibility (COE)

A Certificate of Eligibility (COE) proves a home buyer’s military service and VA home loan benefits eligibility. It’s a standard government document that buyers can retrieve online via the eBenefits website or mail.

A COE also shows whether buyers qualify for a mortgage funding fee discount.

Must meet VA minimum service requirements

Home buyers must meet one or more VA service requirements to qualify for the VA Home Loan program.

• 90 consecutive days of active service during wartime
• 181 days of active service during peacetime
• Six years of service in the National Guard or Reserves
• 90 days under Title 32 orders with at least thirty consecutive days

Spouses of service members who died while serving or from service-related disabilities may also be VA loan-eligible.

The VA makes service requirement exceptions for home buyers discharged from the military for specific reasons, including medical conditions or service-related disabilities, hardship, and a reduction of force. 

Exceptions may also apply for service members who were discharged for early out and served at least twenty-one months of a two-year enlistment. 

Must live in your home as a main residence

VA home loans require home buyers to move into their homes within 60 days after closing and to make that home their principal residence. Exceptions are available for active duty service members and civilian borrowers working overseas.

Homes may not be used as rental properties.

Must meet VA residual income requirements

Residual income is the amount of money left over after a buyer pays their major monthly expenses. Major monthly expenses include loan payments, credit card bills, child care, and utility costs. The VA requires that buyers meet residual income thresholds based on where they live, the size of their family, and how much money they’re borrowing. 

Get pre-approved to verify your residual income requirements.

Must meet lender’s debt-to-income requirements

Because the VA uses residual income as its measure of home affordability, the agency doesn’t use a debt-to-income (DTI) limitation within its guidelines. Instead, the Department of Veterans Affairs advises mortgage lenders to give extra scrutiny to buyers whose DTI exceeds 41 percent.

As a result, some mortgage lenders limit DTI on VA-backed mortgages to forty-one percent. Other mortgage lenders allow debt-to-income ratios over 50 percent or higher, based on credit and financial profile. 

Must meet lender’s credit score requirements

There is no minimum credit score required to use a VA-backed mortgage loan. However, because the VA instructs its mortgage lenders to make sound lending decisions, many mortgage companies enforce a minimum 580 FICO. Learn more about how to fix your credit score.

According to mortgage software company ICE, the FICO of a typical VA home buyer is 723.

Must meet VA minimum property requirements (MPRs)

The VA requires homes backed by VA loans to be “safe, structurally sound, and sanitary” and certified via a professional home inspection.

• Safe: mechanical and electrical systems are in working condition; paint is not lead-based; local safety codes in effect
• Structurally sound: foundation, floors, and walls intact; roof in good condition; adequate drainage
• Sanitary: home is pest-free; absence of mold and rot; safe water supply

VA-backed homes must also be free of workmanship defects and decay.

Types of VA Loans

The VA Home Loan program guarantees mortgage loans of all types – purchase, refinance, and cash-out refinance. The VA guarantees construction-related mortgages, too, so eligible service members can use VA loans to buy, build, or improve residential property.

VA loans can be used anywhere in the United States, its territories, and its possessions, including Puerto Rico, Guam, the Virgin Islands, American Samoa, and the Northern Mariana Islands.

VA Purchase Loan

VA purchase loans are mortgage loans used to purchase an owner-occupied home. Homes may be 1-4 units, attached or detached, and must meet VA minimum property requirements. No down payment is required, and neither are ongoing mortgage insurance payments. 

VA IRRRL / VA Interest Rate Reduction Loan

The VA Interest Rate Reduction Loan (IRRRL) is a streamlined refinance program available to VA-backed homeowners. According to VA Home Loan guidelines, an IRRRL (pronounced “earl”) approval only checks payment history and payment savings. Appraisals, credit scores, and income verification aren’t required for an IRRRL mortgage approval.

VA Cash Out Refinance

The VA Cash Out Refinance program allows veterans to replace their current VA-backed loan with a new, larger VA-backed loan. The loan size difference is paid out in cash which veterans can use for any purpose, including home improvement, paying off debt, and education costs.

According to VA mortgage guidelines, there is no VA Cash Out Refinance maximum loan-to-value (LTV). However, many lenders enforce a 90% LTV cash-out limitation.

Native American Direct Loan (NADL)

The VA Native American Direct Loan is for veterans who are Native American, married to a Native American and want to buy a home on federal trust land. The Department of Veterans Affairs issues NADL mortgages, and NADL interest rates can be as much as 1.5 percentage points below standard VA mortgage rates.

How To Buy a Home With a VA Loan

Buying a home with a VA loan is different from buying a home with conventional mortgage financing or with an FHA-insured mortgage.

The VA Home Loan program is more structured than its government-issued counterparts. VA loans ensure safety, soundness, and sanitation standards for every backed home, and program guidelines take a buyer-first attitude toward VA home affordability.

The Department of Veterans Affairs also maintains a public-facing website that describes how to buy a home with a VA-backed loan. 

The process breaks down into ten steps.

1. Get your Certificate of Eligibility (COE) from the VA website
2. Set your monthly housing budget and decide whether you want to make an optional down payment
3. Get a mortgage pre-approval that performs a review of credit and income
4. Select a real estate agent from a personal referral or online web service
5. Find your ideal home and submit a sales contract with the proper VA clauses
6. Negotiate your sales contract for terms and closing date
7. Commit to a mortgage rate with your VA mortgage lender
8. Have the home inspected for soundness and defects
9. Receive and review your VA disclosures and mortgage approval contract
10. Sign for your home and move in within 60 days

The VA Home Loan program assigns a one-time, upfront closing cost to most loans, called a Funding Fee. Funding fees range up to 3.6 percent of the VA loan size. First-time home buyers pay a 2.3 percent funding fee.

Certain VA borrowers are exempt from paying funding fees, including Purple Heart recipients, veterans with service-related disabilities, and surviving spouses of service members who receive Dependency and Indemnity Compensation.

Funding fees decrease with larger down payments.

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Frequently Asked Questions About VA Loans

Do I apply for VA loans with the Department of Veterans Affairs?

No, the Department of Veterans Affairs is not a mortgage lender. Home buyers can apply for a VA-backed mortgage with a VA-approved lender. Get started with Homebuyer.com here.

What is the VA loan limit for a first-time home buyer?

The VA Home Loan program is an optimal home loan for first-time home buyers because buyers can borrow as much money to buy a home as their lender allows.

Can I use my VA Home Loan benefits if my income is marijuana-derived?

No, home buyers cannot use marijuana-derived income to qualify for a VA loan. The Department of Veterans Affairs follows federal law, and marijuana is illegal on the federal level. Income from industries not prohibited at the federal level, such as the legal hemp industry, is allowed.