How the VA Home Loan Works

The basic idea

The VA home loan is not really a loan from the government. It is a promise. A bank, credit union or mortgage company lends you the money, and the Department of Veterans Affairs (VA) promises to pay the lender back for part of the loss if the loan ever ends in foreclosure. That promise is called the guaranty, and the amount of it you are allowed to use is called your entitlement.

Because the lender has less risk, it can give you better terms than it would on most other loans. That is the whole reason the benefit exists: to help people who served buy a home without needing a big pile of cash.

What you get

• No down payment in most cases. If you have full entitlement and the price is not higher than the appraised value, VA does not require any money down.
• No monthly mortgage insurance. FHA loans and most conventional loans with less than 20% down add a monthly insurance charge. VA loans do not.
• Limits on closing costs. VA controls which fees a Veteran may pay. The lender can charge up to a 1% flat origination fee, plus certain itemized costs.
• No prepayment penalty. You can pay extra or pay the loan off early at any time.
• Reusable benefit. You can use it again after you sell, and sometimes while you still own a home bought with an earlier VA loan.
• Assumable loans. A future buyer may be able to take over your loan, rate and all.

What it costs

Most borrowers pay a one-time VA funding fee. For a first-time buyer putting less than 5% down, it is 2.15% of the loan amount. It can be paid at closing or added to the loan. Veterans who receive VA disability compensation, and several other groups, do not pay it.

You will also pay normal costs like an appraisal, title insurance, recording fees and prepaid taxes and insurance. The seller can pay many of these for you.

What you can buy

A VA purchase loan can be used for a house, a condo in a VA-approved project, a 2 to 4 unit building you live in, a new home you build, a manufactured home and lot, or a home plus repairs or energy-efficient upgrades. The home must be your primary residence. You cannot use the benefit for a vacation home or a pure investment property.

Who is involved

• You, the borrower, who must have a Certificate of Eligibility (COE) and meet the lender's credit and income standards.
• The lender, who makes and funds the loan.
• The VA appraiser, who is assigned by VA, not picked by the lender, and who checks both value and VA's Minimum Property Requirements.
• VA, which guarantees the loan and sets the rules lenders must follow.
• The servicer, the company you will send payments to after closing.

Step by step: from first call to keys

1. Check eligibility. Review the service rules or ask a lender to pull your COE.
2. Get preapproved. Talk to at least two or three VA lenders. Compare rates and fees on their Loan Estimates.
3. Shop for a home. Work with an agent who knows VA loans. Since August 2024, VA lets you pay your own buyer's agent if needed.
4. Make an offer. Your contract will include VA's escape clause, which protects your deposit if the home appraises low.
5. Order the VA appraisal. The lender requests it through VA. You will get a Notice of Value.
6. Finish underwriting. The lender checks income, credit, debts and residual income.
7. Close. Sign the final papers, pay any cash due, and get your keys.

Things people get wrong

Many people think the VA loan is only for first-time buyers. It is not. Others think VA sets a credit score minimum. It does not; each lender does. And a lot of Veterans still believe there is a VA loan cap. Since 2020, there is no VA limit for borrowers with full entitlement. Limits matter only if part of your entitlement is already in use.

The best next step is simple: get your COE and talk to a few lenders. You will learn quickly what you can afford.