The US Department of Veterans Affairs (VA) offers veterans and their families a way to finance their homes. These loans can come with terms and interest rates that are more favorable than traditional home loans. In the sections below, you’ll learn more about the many types of VA loans and what these programs have to offer.
VA purchase loans generally fall within two different categories: VA direct loans and VA- backed loans, the latter of which is more common. The VA also offers cash-out refinance loans and various other options. There are distinct requirements for VA loans, which you’ll learn all about here.
How Do VA Home Loans Work?
Veterans and their families can finance their dream home with help via several VA home loan programs. Applicants have a chance to either build or buy a new home, remodel or even refinance their current mortgage.
These loans come in the form of either VA direct loans or 3 different types of VA-backed loans. There are several items to consider as you mull the option of getting a direct loan versus approaching one of the private lenders. You can learn more about the differences between these in the sections below.
VA Direct Home Loan
In a VA direct home loan, the Department of Veterans Affairs is the lender. Better terms can typically be found in the Native American Direct Loan (NADL) program compared to a private lender such as a bank, mortgage lender, or credit union.
You should be advised that only select members qualify for VA direct home loans. Servicemembers and veterans with service-connected disabilities are the focus of the program. You can visit this website to see if you qualify for the program under the current protocol.
VA-backed Home Loans
Those who don’t qualify for VA direct home loans can still find a helpful hand in financing with VA-backed loans. Here’s how it works: a portion of the loan is guaranteed by the VA. As such, the agency reports that nearly 90% of all such loans are made without a down payment.
VA-backed purchase loans don’t require a down payment as long as the sales price does not exceed the appraised value. You can also borrow up to the Fannie Mac/Freddie Mac conforming limit without even needing to lay down a down payment in most areas.
Who’s Eligible?
Any veterans and spouses with a valid Certificate of Eligibility (COE) can qualify for a VA-backed home loan, which does have some advantages over conventional home loans. Many of the factors that influence eligibility for conventional loans will apply as well.
Since you are applying through private lenders, many of the typical income and credit score requirements will apply. If service requirements are not met on a technicality, you may be able to apply for a minimum for a COE through a discharge upgrade.
What Are The Benefits Of Va-Backed Home Loans?
Here’s what can be bought with VA-backed purchase loans:
- A single-family home
- A condo in a VA-approved development
- Existing homes can be improved
- New construction
As is the case with all private mortgages, applicants will need to have a good credit score and a quality debt-to-income ratio. You may need to pay a VA funding fee, but at least you don’t have to lay down a down payment or pay for monthly mortgage insurance.
Cash-Out Refinance Loan
These types of loans can be used to access up to 100% of your home’s equity. If you were to apply for a similar loan with the FHA, you would be maxed out at 85%. With conventional loans from private lenders, the cap falls in the 80% range.
This is a way that you can convert a non-VA loan into a VA-backed loan. This may be necessary since VA loans can be restricted in terms of their purposes. For example, you cannot qualify for a VA-backed loan unless you have a place of residence on the property. Construction or self-build loans will require you to go to a non-VA lender for the project, which will be discussed in further detail later.
Who’s Eligible?
To qualify for a cash-out refinance loan, you must have a Certificate of Eligibility for a VA-backed home loan. You must also meet all the typical lender requirements for refinancing a loan. Applicants must also be currently living in the home that they are planning on refinancing.
What Are The Benefits Of A Cash-Out Refinance Loan?
Why would you want to use a cash-out refinance loan?
- Cut credit card debt
- Renovate your home
- Add to your savings account for a major purchase
You are encouraged to do a bit of a cost-benefit analysis when it comes to refinancing your VA-backed loan in this manner. The closing costs for this type of loan can add up to thousands of dollars. You certainly want to know what you are getting into.
What Is an IRRRL?
An IRRRL is an “interest rate reduction refinance loan”, which you may have heard of before under the moniker of “VA streamline” refinance. This can provide applicants with an opportunity to lower their monthly mortgage payments.
An IRRRL will allow you to refinance a fixed-rate mortgage if you aren’t enrolled in an adjustable-rate mortgage program where the interest rates would potentially decrease after 5 years. Fixed-rate loans do not experience a switch over to lower rates unless intervention like this is done.
Who’s Eligible?
To qualify for an IRRRL, you must already have a VA-backed home loan. You must also use the IRRRL to refinance this loan and be able to certify that you either currently live or formerly lived in the home.
How Do You Apply For An IRRRL?
To apply for an IRRRL, you’ll approach a private lender, such as a mortgage company or credit union. Shop around for lenders, as term limits and interest rates will certainly vary. You are encouraged to be wary of any offers with significantly lower interest rates, as these may be misleading.
You’ll have to prove your VA-loan eligibility with either a physical Certificate of Eligibility or an electronic version. This is another circumstance in which you may need to pay a VA funding fee as part of your closing costs.
There are a couple of ways to avoid paying the closing costs up-front:
- Include the VA funding fee costs in the loan
- Make the interest rate high enough so that the lender will pay the costs.
Native American Direct Loan (NADL)
For veterans who are of Native American descent or veterans with a spouse that is Native American, there is a program that can help you finance a buy, build or remodel project for a property on federal trust land. There are many benefits to those who qualify.
If you already have a NADL loan, you can reapply to refinance the loan to achieve a more favorable interest rate. A NADL also does come with many of the benefits associated with a typical VA-backed home loan.
Who’s Eligible?
Here is who qualifies for a NADL:
- Your tribe has an agreement with the VA
- You have a VA home loan Certificate of Eligibility
- All the typical requirements, such as credit score, are met
What Are The Benefits of The NADL?
As is the case with other purchase loans through the VA, you won’t have to place a down payment in the majority of cases. Private mortgage insurance also won’t be necessary for this type of loan. The interest rates for NADLs start low, with the current rate for VA-backed NADLs being just 2.75%.
VA Energy Efficiency Mortgage
Are you looking to increase the energy efficiency of your home? These types of projects, such as window replacements or solar panels, can come with high up-front costs. Fortunately, there are ways for veterans and their families to get the ball rolling on these projects, which will be discussed in further detail below.
VA energy efficiency mortgages can be used to finance up to an extra $6,000 to cover the cost of improvements such as updated windows, heat pumps, and solar heating/cooling systems. Learn more about which types of projects are covered in the section below?
Who Is Eligible?
Many home improvement projects can be covered by the energy-efficient mortgage such as:
- Storm/Thermal Windows
- Heat pump HVAC systems
- Solar heating/cooling
Some projects may not be covered, however, since these are not considered to be solely energy improvements. Even if you are upgrading to Energy Star appliances, these loans will not cover these. Neither will this program cover non-permanent solutions, such as window AC units.
What Are The Benefits Of An Energy Efficient Mortgage?
An upgrade to thermal windows may cost up to $850 per window. These high up-front costs can discourage homeowners from engaging in these projects, even though there are many long-term benefits to energy efficiency improvements.
The VA energy efficiency mortgage program allows borrowers to finance these projects with terms and rates that are competitive.
Supplemental Loans
A supplemental loan is another way to pay for alterations, repair, or home improvement projects. A supplemental loan can be beneficial because it will not raise the interest rate on your current loan. There are some restrictions to keep in mind, however, which may influence your interest in this program.
How Do VA Supplemental Loans Work?
Supplemental loans are either added to an existing loan/refinance or applied in the form of a second mortgage much like a home equity loan. Although this will not increase the interest rate of your current mortgage, you may have to pay a higher rate for the supplemental loan specifically.
How Do You Qualify For A Supplemental Loan?
To qualify for a supplemental loan, you must have already secured a VA loan for your home. You cannot get a supplemental loan if you have never had a VA-backed loan, to begin with. The property also must be owned and occupied by the veteran, or owned with the possibility of reoccupation.
Other restrictions exist:
- The improvements must be to protect or improve the basic livability/utility of the property.
- Installation of recreation items, such as swimming pools or barbecue pits, will not qualify under the program.
Also, only 30% of the loan proceeds may be used for the maintenance, repair, or purchase of non-fixtures. So if you were renovating a kitchen, you would only be able to use 30% of the loan proceeds to buy/repair the fridge, oven, microwave, and other such appliances.
What Is VA Basic Entitlement?
The term entitlement refers to the absolute dollar amount that the VA guarantees to pay to the lender. Simply put, this is the amount that the VA promises to repay the lender if you default on your mortgage. The entitlement process is one of the biggest security blankets of the VA program. Continue to find the amount of entitlement that you may be eligible for.
There are two different types of entitlement: basic and secondary, or bonus. The basic entitlement guarantees 25% of each loan at $36,000.
- If you default on a loan under $144,000, then the VA will pay the lender up to $36,000.
- For loans over $144,000, the VA promises to pay the lender up to 25% of the total.
The secondary entitlement program was created to link its guarantee amounts with the conforming loan limit for conventional financing. In most countries, this limit is set at $548,250. So the secondary entitlement program was created for Veterans purchasing homes that cost more than $144,000.
If you don’t understand what this all means, there is no need to worry. It’s useful to be aware of these details when considering the benefits of VA-backed loans, but please be advised that you do not have to make choices in terms of entitlement types. Rather, this is a subject matter that is discussed exclusively between the VA and lenders.
Home Loans For Surviving Spouses
Do surviving spouses qualify for VA loans? Yes, under VA-backed home loan protocol, these programs benefit widowed spouses in certain circumstances. The Certificate of Eligibility remains valid for spouses in one of the scenarios mentioned below.
Surviving spouses receive the same benefits that they would receive otherwise. They may not have to pay a funding fee and a down payment may not be necessary as well. They will also qualify for loans with nationally compatible low-interest payments.
How Do Spouses Qualify For VA Loans?
Spouses can apply for a VA loan if they fall into one of these categories:
- The veteran is missing in action
- The veteran is a prisoner of war
- Died while in service and you didn’t remarry
- Died from a service-connected disability
VA Farm Loans
Can VA loans be used to purchase farms? There are not necessarily any restrictions as far as using VA-backed loans to provide financing for the residential portion of the farms. Home loans cannot be used for business purposes, so land without a place of residence cannot be financed under this program. There are still many benefits to using VA-backed loans to help finance farms.
How Can A Farm Qualify For A VA Loan?
There are some restrictions, which may prevent you from using a VA loan for these purposes. Not too fret, since you may be better served by the USDA (U.S Department of Agriculture) if you fall within the following circumstances.
- You wish to include farm equipment, livestock, and supplies in the value of the property.
- The above are not considered as being for residential purposes and will not qualify.
What Are The Benefits Of Using A VA Loan For A Farm?
Even though there are certain restrictions on how VA home loans are used, these programs can still be plenty useful for those who live on a farm.
- There are no restrictions on the size of a property that can qualify for a VA home loan.
- Underwriting guidelines for farmhouses tend to echo those for non-farms.
- All of the income necessary to support loan payments may come from the farm itself.
Fixed-Rate vs. Adjustable Rate Mortgages
The VA does not determine whether you will be going with a fixed-rate or adjustable-rate mortgage. This will be between you and your lender. There are advantages and disadvantages to both types of mortgages such that one of these will make more sense than the other. You are encouraged to continue below to learn about the differences between these.
Fixed-Rate Mortgage
A fixed-rate VA-backed mortgage offers the advantage of offering just one stable interest rate for the term. Fixed-rate mortgages are typically carried in terms of either 15 years or 30 years. The shorter-term comes with the advantage of having lower interest rates, but the monthly payments will be higher.
| Pros | Cons |
| Interest rates are predictable | Rates won’t be lowered unless you refinance |
| Lower Risk | Less opportunity for high payouts if you sell your house within 5 years |
| You can always refinance your mortgage to cash in on lower rates | You’ll have to lower your house budget if market rates are high |
Why Go With A Fixed Rate for a VA Loan?
There is less of a risk associated with fixed-rate home loans vs. adjustable-rate mortgages. If you plan on living in your home for a long time, then you can always refinance your mortgage several years down the road. This will help you cash in on low market rates.
Adjustable-Rate Mortgage
With an adjustable-rate mortgage (ARM) you will have a loan with a rate that changes during the duration of its term. With VA-backed ARMs, you may have a lower introductory rate versus a fixed-rate loan, and the interest rate will change over time as the market changes.
| Pros | Cons |
| Rates may be lower | An economic index may cause rates to rise |
| VA loans have a cap on rate increases | Rates only change 5 years after loan closing |
| No need to refinance during falling rates | You’ll need to strongly consider your future |
Why Go With An ARM for a VA Loan?
Since they are government-backed mortgage programs, VA adjustable-rate mortgages do come with some special perks that private mortgages do not. A special government cap, called the “1/1/5 cap” means that the interest rate will not rise rapidly and unexpectedly.
Here’s what the 1/1/5 cap entails:
- Cap on first adjustment (first interest rate change): Increase of 1% or less
- Cap on annual adjustments following the first adjustment: Increase of 1% or less
- Cap on rate increase over the life of the loan: 5%
The government-mandated cap reduces the likelihood that a borrower could get burned from choosing an ARM mortgage over a fixed-rate mortgage. Seems like a no-brainer right? Not quite.
The rates from ARM loans are sometimes called “teaser rates”. The government-mandated restrictions also mean that the interest rate for an ARM may not be that much lower than the rate for a fixed loan. This is most evident when market rates are at all-time lows. ARMs are typically most advantageous to borrowers who apply during times of high market rates and who plan on selling their home within the next 5 years.
VA Loans For New Construction
Self-build loans, also called construction loans, are special types of loans that are used for financing a home build. Payments for self-build loans generally work differently than standard home loans, since payments are released during the stages of a construction project. The VA does have a VA Construction Loan, though it can be difficult to find – ADPI’s in-house lending team may be able to help see if it’s a good fit – you can contact them here
If you are a veteran needing assistance with new home construction, you may also choose go with a traditional self-build loan that is not backed by the VA. This will typically require a down payment. After your house has been constructed, you may still be able to pay the rest of your mortgage off with a VA-backed loan. You’ll need to take some special steps during the construction process, however, to make sure that you qualify.
How To Turn A Construction Loan Into A VA-Backed Loan
The home will need to be constructed by a builder holding a valid VA builder ID. Fortunately, it is not difficult for builders to register with the VA. You’ll also need to contact the VA for an appraisal for the new home. You may be asked to submit construction plans before the home is built and then schedule a physical inspection once the house is complete.
Why You Should Consider A Cash-Out Refinance For New Construction
You can apply for either a VA purchase loan or a Cash-Out Refinance. The latter of these may allow the homeowner to borrow up to 100% of the value appraised.
In a purchase loan, the lender will lend the borrower either the appraised value of the home or the total payoff for the construction process. The lender will go with whichever amount is lower.
VA Programs Built To Avoid Foreclosures
The VA does have programs set up as security for borrowers who are struggling with their payments for their VA-backed home loans, which may be more lenient in this regard versus conventional home loans.
The VA has its loan technicians to help borrowers get a second opinion for guidance from the private lender. A good rule-of-thumb is that if anything seems too good to be true, it probably is.
The VA suggests the following methods for avoiding foreclosures:
- Go on a repayment plan: this allows you to repay missed mortgage payments slowly over time.
- Special forbearance: this provides you with extra time to pay missed mortgage payments.
- Loan modifications: you can contact your servicer for a meeting to set up a new mortgage payment schedule.
There are several other ways that a VA loan technician may be able to help a borrower avoid foreclosure, by stepping in and acting as an intermediary between the borrower and the private lender.
Are There VA Business Loans?
The VA does not provide any business owner. Veterans looking for assistance with their start-ups or existing businesses are encouraged to apply for a special loan program provided by the Small Business Administration (SBA).
The SBA special loan program is called the “Patriot Express”. Under current regulations, borrower upfront fees are set at zero for loans of up to $350,000. According to the SBA, 73% of loans that go to veterans are below $350,000.
Final Thoughts
The VA offers loans for veterans and their families to refinance their homes while enjoying many benefits that private lenders don’t normally bestow upon borrowers. These loans do come with restrictions, particularly in terms of who’s eligible for these types of loans.
The VA offers purchase loans, which generally exist in the form of VA-backed loans that are supplied through private lenders such as banks, mortgage companies, and credit unions. There are also many convenient ways for borrowers to seek out financing for renovation projects, particularly those which make the home more energy-efficient.
