How Do VA Loans Work?

If you heard about a home loan that offered 100-percent financing and competitive terms with relaxed standards for qualifying, no requirement for mortgage insurance, and limits on closing costs, would you be interested in learning more? Offered as part of the U.S. Department of Veterans Affairs’ home loan program, VA home loans are known for delivering those benefits and more to eligible borrowers. How do VA loans work?

As Investopedia explains, VA loans are offered through the VA’s home loan program, but the VA doesn’t make the loans. How do VA loans work? The VA sets the basic qualifying standards for borrowers, lays out mortgage terms, and guarantees a portion of each loan. Meanwhile, private lenders add some underwriting requirements of their own and provide the actual funding for the loans that they agree to issue. Why are they willing to issue loans with such favorable terms? For lenders, every loan is a calculated risk. The VA’s guarantee reduces the risk that they take when issuing a VA loan.

VA Loan Possibilities

What can you do with a VA loan? According to Credit Karma, there are several possibilities:

You can buy a home.
You can buy a home and make improvements to it.
You can purchase a condo in a VA-approved building.
You can build a home.
You can purchase land and a manufactured home.
You can make energy-efficient improvements to your current home.
You can refinance your existing home loan.

Who Is Eligible for a VA Loan?

VA loans are earned with service, so the option to use them is not available to every borrower. The exact requirements for eligibility vary depending on the timing and nature of your service, but VA loans are designed to help service members, veterans, members of the National Guard and Reserve, and the surviving spouses of veterans become homeowners. If you’re not sure about your eligibility, one way to check is to request your Certificate of Eligibility (COE). Issued by the VA, the COE confirms your eligibility and provides information your lender will need to process your loan.

Qualifying for a VA Loan

As Experian reports, being eligible for a VA loan is only part of the battle. To qualify for a VA loan, you’ll need to have proof of a steady monthly income that is sufficient for the size of the loan that you’re seeking. In addition, you’ll need to have adequate credit. The VA recognizes that serving can make building a traditional credit history tough, so it encourages lenders to take a relaxed, flexible approach when evaluating a borrower’s credit. While the VA doesn’t set a minimum credit score requirement, it doesn’t forbid lenders from doing so. It’s also worth remembering that your interest rate will be tied to your credit. Borrowers with higher credit scores tend to be offered lower interest rates.

The VA Funding Fee

What about the VA funding fee? While borrowers using VA loans save money by not paying mortgage insurance, they do have to pay a funding fee. As Forbes explains, this one-time fee is used to support the VA home loan program and keep it financially viable. A small percentage of your purchase price, the funding fee is either paid at closing or rolled into your loan. In limited cases, it may be waived.

How to Get a VA Loan

If you’re interested in using a VA loan to buy a home, the VA suggests taking the following steps:

Request your COE.
Assess your finances.
Choose a reputable lender.
Choose a real estate agent that you feel comfortable working with.
Search for a home until you find the right property.
Work with your real estate agent to create a purchase offer that includes the VA option clause.
Have the home inspected and appraised.
Review any pre-closing paperwork carefully.
Go to closing.

How Do VA Loans Work?