What Is A VA Loan And How Does It Work? A Home Buyer’s Guide

For active service members, veterans or surviving spouses, there are mortgage options created with you in mind. VA loans can make it easy for you to qualify for a less-costly mortgage, even if your credit isn’t the best. 

Interested in learning more about these unique loans for service members? Read on for our guide to VA home loans and whether they may be the right choice for you. 

What Is A VA Loan?

VA loans are mortgages specifically for veterans, active service members and eligible spouses who are backed by the U.S. Department of Veterans Affairs (VA). Though the terms of these home loans are determined by the VA, the loans themselves are issued by private lenders. Comparing VA loans and conventional loans, VA loans are typically easier to qualify for and often don’t require a down payment unless the lender deems it necessary.

VA loans were created in 1944 as part of the Serviceman’s Readjustment Act, also known as the GI Bill of Rights. These loans were invented as a way to make mortgages more accessible to service members, who may otherwise struggle to finance a home.

How Does A VA Loan Work?

VA loans are a similar loan type to conventional loans with a few key differences. Conventional loans are not backed by any government entity, but VA loans are backed by the VA. This means that the VA is responsible for some of the loan if the borrower defaults. Each borrower has what’s called “entitlement.” This is the maximum amount the VA will repay the lender if the borrower defaults on the loan. With full entitlement, that amount is up to 25% of the approved loan amount.

This guarantee gives private lenders more leniency with the requirements they set for borrowers. This is how the VA home loan program has become known for competitive rates and a nonessential down payment. 

The VA home loan program also has less strict requirements for borrowers. The VA itself sets no required minimum credit score, though lenders are free to set their own. Most lenders prefer somewhere between 580 – 650. Rocket Mortgage^® requires a minimum 580 credit score for VA loans. Conventional loans can require a minimum credit score of 620 or higher, making them more difficult to qualify for.

The process of getting a VA loan is nearly identical to that of conventional loans for houses and condos. The typical path of preapproval and making an offer is the same, but when it comes to the appraisal you’ll have to get a VA appraisal on top of any other inspections. A VA appraisal is a type of home appraisal performed by someone certified by the U.S. Department of Veterans Affairs. This step is required to make sure the property in question meets VA minimum property requirements and can help you make sure you’re not overpaying on a home. 

To qualify for a VA loan, you’ll also need a Certificate of Eligibility (COE), an official document that confirms you meet the requirements for a VA loan and verifies previous or current time in the military. 

What Are The Terms Of A VA Loan?

VA Loan Requirements And Eligibility

To qualify for a VA loan, you’ll need to meet certain guidelines for military service in addition to specific loan qualifications. 

Eligibility 

To get a VA loan, you must meet a few eligibility requirements that allow you to receive a COE, which is required for the loan:

• You must be a service member on active duty or an honorably discharged veteran. 
• You must have served 90 consecutive days of active service during wartime or 181 consecutive days during peacetime. 
• You can also qualify if you have served over 6 years in the National Guard or Selected Reserve. You may also serve at least 90 days under Title 32 and meet the requirements, provided at least 30 of those days are served consecutively.
• You may also qualify if you are a surviving spouse of a service member receiving dependency and indemnity compensation. 
• If you were discharged as a result of a service-connected disability, service time requirements don’t apply.

You can apply for a COE on the VA’s website or contact your lender directly about receiving one. Some VA-approved lenders may be able to expedite the application process for you. 

The documents you’ll need to obtain a COE can vary based on your role. 

• Veteran: You will need a copy of your DD214 discharge or separation documents.
• Active service member: You will need a statement of service signed by your commander or personnel officer which includes your name, social security number, date of birth, starting date of your service, any lost time and the name of the command providing this information.
• Surviving spouse: You will need your deceased spouse’s DD 214 papers. You may need further documentation depending on whether you’re receiving Dependency & Indemnity Compensation (DIC) benefits.

You can find more information on the COE application process for these and other roles on the VA Benefits website. 

Loan Requirements

The VA sets some requirements when it comes to your loan, while your lender sets others. And while VA loans typically offer more flexibility than conventional loans, you’ll still have to qualify.

Here’s what to expect:

• Debt-to-income ratio: The VA recommends a debt-to-income (DTI) ratio below 41%, though in specific circumstances, you may be able to get a VA loan with the right compensating factors.
• Employment history: Most lenders prefer a borrower who has had a steady job for 2 years but may make exceptions for recently discharged veterans.
• Credit score: The VA loan credit score requirement varies from lender to lender, though most lenders prefer somewhere between 580 – 650. Rocket Mortgage requires a minimum 580 credit score for VA loans. Conventional loans can require a minimum credit score of 620 or higher, making them more difficult to qualify for, especially with bad credit.
• Occupancy: VA loans must be used to finance a primary residence. However, there may be some ways to use a VA loan to buy a second home or investment property, but that comes with many caveats and only works in certain situations, including moving into the new home as a primary residence. It’s best to talk to your lender about your options if you’re thinking of doing this. 
• Appraisal: An appraisal for a VA loan must be done by an appraiser certified through the VA and must meet the VAs standards.

Types Of VA Loans 

There are a few different types of VA loans available to eligible borrowers. Let’s go over them. 

VA Rehab Loan

Similar to a traditional VA mortgage, the VA Rehab Loan amount covers the cost of the house plus any repairs or improvements that need to be made.

Interest Rate Reduction Finance Loan 

Also called an Interest Rate Reduction Refinance Loan (IRRRL), this option is meant to “streamline” or simplify the refinancing process for you. You can use this loan option to refinance your existing VA mortgage for a lower interest rate or change an adjustable-rate VA mortgage to a fixed one.

VA Cash-Out Refinance 

A VA cash-out refinance can replace your old mortgage with a new one that allows you to cash out the difference between your equity and the home’s value, typically to use for renovations. You can do this type of refinance with an existing VA loan or replace a conventional loan with a VA loan, should you qualify.

NADL Loan 

A Native American Direct Loan (NADL) is a unique type of VA loan that can help Native American veterans buy, build or refinance property on federal trust land.

VA Loan Funding Fee And VA Closing Costs

VA loans have plenty to offer, but it’s also important to note some of their unique fees. 

Funding Fee 

Most borrowers will be required to pay a one-time VA funding fee, which lowers the cost for taxpayers since the VA home loan program doesn’t require down payments or mortgage insurance. 

The VA funding fee varies based on loan type, down payment amount and what your current military role is. It can range between 0.5% - 3.3%, depending on these factors, and can be paid upfront or incorporated into your total loan amount. 

Some borrowers who are exempt from the funding fee include those with a service-connected disability, certain surviving spouses of a veteran and Purple Heart recipients.

Additional Closing Costs

The funding fee is usually rolled in with closing costs, which can also include:

• Loan origination fee
• VA appraisal fee
• Credit report and payment of any credit balances or judgements
• Hazard insurance and real estate taxes
• State and local taxes
• Title insurance
• Recording fee

VA Loan Limits 

Eligible borrowers with full entitlement don’t have limits on how much they can borrow with 0% down, although lenders may have their own policies.

Borrowers with reduced entitlement, also called impacted entitlement, do have limits on how much they can borrow. Impacted entitlement means you're in the process of paying off an existing VA loan, you've paid your loan off but haven't asked for restoration of your entitlement, or you defaulted on a prior VA loan.

The VA loan limit for impacted entitlement is determined by your remaining entitlement and the county limit, which is based on conforming loan limits. As of 2024, the conforming loan limit is $766,550 for a one-unit home for most of the U.S. In high-cost areas, like Alaska and Hawaii, the limit is $1,149,825. 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.

Let's take a brief look at how to calculate your remaining loan amount if you have impacted entitlement. The first thing you're going to do is calculate what the maximum entitlement would be based on the conforming loan that in your county. Because the VA guarantees 25% of your entitlement amount, you'll multiply the county loan limit by 0.25. Let's substitute the typical one-unit conforming limit in most of the country into the formula.

$766,550 × 0.25 = $191,637.50

Next, you'll need to determine how much of your VA entitlement you've already used. You do this by multiplying your outstanding, defaulted or unrestored loan loan by 0.25. Let's say you originally used a VA loan to buy a $400,000 home

$400,000 × 0.25 = $100,000

Subtract the maximum entitlement from your used portion to come up with the remaining entitlement.

$191,637.50 - $100,000 = $91,637.50

Now that you have the entitlement figured out, multiplying by four will give you the maximum loan you can take out without having to make a down payment under VA rules. If the purchase price is higher than this number, most lenders will still let you take out the loan by making a down payment to make up the difference between what would be guaranteed by the VA and 25% of the loan amount.

$91,637.50 × 4 = $366,550

Remember that entitlement is the maximum amount the VA will repay the lender if the borrower defaults on the loan. With full entitlement, the VA will repay your lender up to 25% of the approved loan amount if you default on your loan. With impacted entitlement, the VA will repay your lender up to 25% of the county limit. This information is more important for lenders because it can help protect them from potential loss.

The Pros And Cons Of A VA Home Loan

With the details covered, let’s go over everything that VA loans have to offer – and what they don’t. 

Pros 

• No down payment required
• No PMI required
• Typically lower interest rates than conventional loans
• Some closing cost exemptions
• Less strict credit score and DTI requirements than with conventional loans
• You may be able to use your VA home loan benefit multiple times, so long as it’s for a primary residence each instance.
• You may be able to qualify for a VA loan even if you recently went through the foreclosure process or bankruptcy. The waiting period is typically 2 years.

Cons

• VA loans are exclusively for service members who meet certain requirements, so make sure you meet the terms required of a potential borrower.
• Though there’s no PMI, the federal government mandates the VA funding fee. 
• Only primary residences qualify for a VA loan - meaning you can’t use one to finance your vacation home or any investment properties.
• There are misconceptions surrounding VA loans, such as the myth that VA loans take longer to close or may have difficulty closing. Though these are misconceptions, they may make sellers wary of working with you. 

How To Get A VA Loan

Applying for a VA loan is a lot like any other mortgage process. Here’s what to expect when applying. 

Step 1: Apply For Certificate Of Eligibility 

You need to secure a COE to satisfy the military service part of your VA loan eligibility. 

Once you’ve verified that you meet the requirements for a VA loan, you’ll also need to provide your lender with your income, assets and credit score to review. 

Step 2: Calculate Your Finances

Buying a house is a big financial commitment, so make sure you’re prepared. Consider the overall price, plus closing costs, the VA funding fee and what your monthly payments will look like. 

Step 3: Find A VA Approved Lender

Not all lenders offer VA loans and not all loan officers know how to process them. Be sure to find a reputable lender with positive servicing reviews to work with. Rocket Mortgage offers VA loans and can help get you started today. 

Once you find a lender, make sure you get prequalified, which will help you determine how much house you can afford and make your offer stronger.

Step 4: Choose A Real Estate Agent 

Working with the right real estate agent can save you time, and potentially, money. The home buying process can be stressful, so equip yourself with the right team to get you in your dream home. 

Ask friends or family for any real estate agent recommendations in your area or find a vetted and verified Rocket Homes^SM agent, who’s an expert in your area.

Step 5: Shop And Find A Home 

Finding a house with a VA loan will look the same as with any other loan option. Be sure to look at houses in your price range and prioritize what’s important to you. School districts, location and the age and condition of the home are all important factors to keep in mind. 

Step 6: Sign A Purchase Agreement 

Once you find your perfect home, you’ll put in an offer. If the seller accepts, you’ll need to work with a real estate agent or attorney to draw up the purchase agreement - a sales contract which stipulates the terms of the sale between the buyer and seller. 

The purchase agreement for a VA loan will usually specify that the buyer is responsible for the cost of the appraisal. Additionally, most purchase contracts will include what’s called a VA escape clause or a VA option clause. This clause protects the buyer against any penalties or fees should they back out of the purchase, due to a lower-appraised value of the home than expected. 

Step 7: Get The House Inspected And Appraised 

You’ll need to get a home inspection and a VA appraisal prior to buying. Whatever property you buy must meet the VA’s Minimum Property Requirements, or MPRs. MPRs ensure the home is safe, structurally sound and sanitary. VA loan inspection requirements vary according to known risks in an area.

Step 8: Gather Financial Documents And Give Them To The Lender 

To make for an efficient loan application process, be prepared to provide the right documentation. This can include: 

• A COE
• A government-issued ID 
• Proof of employment
• Two years of tax returns
• Two years of W-2 statements
• Bank statements 

Step 9: Close On The Home 

Once the VA appraiser says your new home is safe and sound, it’s time for you to sign on your new home, get your loan and receive the keys to your new property.

The Pros And Cons Of A VA Home Loan

With the details covered, let’s go over everything that VA loans have to offer – and what they don’t. 

Pros 

• No down payment required
• No PMI required
• Typically lower interest rates than conventional loans
• Some closing cost exemptions
• Less strict credit score and DTI requirements than with conventional loans
• You may be able to use your VA home loan benefit multiple times, so long as it’s for a primary residence each instance.
• You may be able to qualify for a VA loan even if you recently went through the foreclosure process or bankruptcy. The waiting period is typically 2 years.

Cons

• VA loans are exclusively for service members who meet certain requirements, so make sure you meet the terms required of a potential borrower.
• Though there’s no PMI, the federal government mandates the VA funding fee. 
• Only primary residences qualify for a VA loan - meaning you can’t use one to finance your vacation home or any investment properties.
• There are misconceptions surrounding VA loans, such as the myth that VA loans take longer to close or may have difficulty closing. Though these are misconceptions, they may make sellers wary of working with you. 

FAQ: VA Home Loans

How long does VA loan approval take? 

This varies, but the longest part of the process is usually waiting for your COE which can take up to 6 weeks if you mail it in. Applying through the VA’s eBenefits portal or with a lender will give you much faster results. You can apply for a VA loan as soon as you receive your COE. 

Does the VA set its own loan limits?

No, there are no loan limits set by the VA. Lenders set loan limits, which usually apply in the case of impacted entitlement. When applicable, they're usually calculated by subtracting your remaining entitlement from the maximum entitlement based on conforming loan limits, which, in 2024, are $766,550 for most of the U.S.and $1,149,825 for high-cost areas like Alaska and Hawaii. Lenders may also have stricter standards or require a down payment at higher loan amounts.

How many times can I use my VA loan benefit?

If you’ve paid off the loan and no longer own the property, you can have your VA entitlement restored as many times as you want, for every new home purchase. Remember, VA loans are intended for primary residences, so you’ll be met with more restrictions otherwise. 

The Bottom Line: VA Loans Can Help You Afford A Home With Low Interest Rates And No Down Payment Required 

While VA loans aren’t for everyone, they’re an incredibly valuable resource for qualified buyers. With low rates and $0 down, VA loans can make buying your dream home all the more accessible. 

Ready to start looking for your new home? Buy with an agent today.