How does a VA loan work?

VA loans offer numerous benefits for active-duty service members, veterans and their surviving spouses.

Eligible individuals have access to flexible, simple loan options, including the potential for no down payment and no monthly mortgage insurance.

What's in this article?

What is a VA loan?
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How does a VA loan work?
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Who is eligible for a VA loan?
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VA home loan benefits
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Cons of VA loans
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How do I get a VA loan?
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Let’s take a look at how VA loans work, including who qualifies and how to apply.

What is a VA loan?

A VA home loan is a government loan backed by the U.S. Department of Veterans Affairs.

Government-backed loans generally offer greater flexibility to borrowers. The VA will protect its approved lenders if the borrower can’t repay the loan, so lenders are able to offer more options and VA-specific loan benefits to the borrower.

VA loans were created to help eligible active-duty service members, veterans and surviving spouses afford a home.

VA loans allow the following:

Conventional loans are the most common loan type for homebuyers. 

Compared to VA loans, conventional loans require higher credit scores, a minimum 3% down payment and monthly private mortgage insurance payments unless your down payment is a minimum of 20%.

By eliminating these traditional requirements, VA loans make homeownership more accessible for eligible individuals who need the advantage these loans offer.

Types of VA loans

The most common type of VA loan is a purchase mortgage, which can be used to purchase your first home or just to buy a home anytime.

VA purchase loans also can be used again if you sell the house and pay off your original VA loan or if you repay the loan in full and keep the house.

Some lenders also offer eligible borrowers refinance options, including a VA cash-out refinance or VA interest rate reduction refinance loan (IRRRL).

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How does a VA loan work?

The VA loan process works similarly to a traditional loan in many ways, but you will have to fulfill slightly different requirements.

First, you’ll have to find a VA-approved lender and apply for a loan pre-approval. Not all lenders offer VA loans, but most do. Compass Mortgage offers VA loans for eligible borrowers.

Next, you’ll apply for the loan and share your financial and credit history with the lender.

Here’s where the differences begin: You will have to verify your military service history with a Certificate of Eligibility (COE). Your lender can help you with this step.

Here are the general VA loan eligibility requirements for a COE request for veterans, active duty service members and surviving spouses:

  • Veterans: You need a copy of your discharge or separation papers (DD214).
  • Active-duty: You need a statement of service signed by your commander, adjutant or personnel officer. 
  • Surviving spouses: You need the veteran’s discharge documents (DD214) if available and other documentation such as a copy of your marriage license and your spouse’s death certificate.

VA loans require VA funding fees, which usually are rolled into the loan amount. Closing costs cannot total more than 1% of the loan amount. 

To compare, traditional loan closing costs are around 2% to 5% of the loan amount.

VA loans don’t have federal loan limits, but your lender may have established loan limits for this type of loan.

Who is eligible for a VA loan?

Eligible borrowers must meet one of the following VA service or spouse requirements:

  • You’re on active duty and have served for at least 90 continuous days.
  • You’re a veteran who meets the minimum active duty service requirements (these depend on where you served).
  • You’re the surviving spouse of a veteran or the spouse of a veteran who’s missing in action or being held as a prisoner of war.

You also must meet ALL of the following VA loan requirements:

  • You are able to acquire a COE.
  • You meet the minimum credit score requirement of at least 580.
  • Your debt-to-income (DTI) ratio is at or below 60%. 
  • The property you’re considering meets the VA’s minimum property standards for safety, security and soundness.

You may still be able to get a COE if you meet certain criteria, so be sure to discuss your options with your lender.

VA home loan benefits

VA loans offer wonderful benefits to those who qualify, including the following:

  • No down payment or mortgage insurance
  • Lower interest rates
  • Lower closing costs
  • Flexible credit score and debt requirements
  • Certain exceptions for paying the funding fee, including Purple Heart recipients

Cons of VA loans

Every loan type has its pros and cons. The right loan for you depends on your unique financial and personal circumstances.

To ensure you’re armed with everything you need to make the right decision, check out the following drawbacks to a VA loan:

  • VA funding fee ranges from 1.4% to 3.6% of the loan amount.
  • You can only use the loan for a purchase property, not an investment property.
  • The property you want to purchase must meet certain VA standards, so some properties may not be eligible.

How do I get a VA loan?

VA loans offer eligible borrowers the opportunity to purchase a home when they otherwise may not be able to qualify with a conventional or FHA loan.

Compass Mortgage is proud to offer VA loans to our borrowers. We care about your financing needs and promise to be your advocate and partner throughout every step of the loan process.

If you’re ready to get started with a VA loan, apply today for pre-approval and, better yet, our Get Committed® loan commitment program. 

Get Committed alleviates the intense competition and your concerns about rising interest rates with a loan commitment that is better than standard pre-approvals.

With Get Committed, we provide a fully underwritten loan commitment and lock in your interest rate before you even find the property you want to buy. 

A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.

Reach out to the Compass Mortgage team today to get started or ask any questions you may have about the VA loan process. We can’t wait to help you secure your dream home with an affordable loan that fits perfectly into your lifestyle.

Photo by RODNAE Productions

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