The United States Department of Veterans Affairs offers loans to support veterans and surviving spouses during homebuying. Understanding the eligibility requirements and application process can help you decide whether one of these programs is right for you.

Understanding the Different Types of VA-Backed Loans

Each of the four main VA-backed home loans has unique terms.

1. VA-Backed Purchase Loan

In this program, private lenders provide the loan. The government guarantees a considerable portion of that credit, allowing the bank or mortgage company in charge to offer more favorable terms. This is how the department can compete with conventional creditors.

2. Interest Rate Reduction Refinance Loan (IRRRL)

If a veteran already has an existing VA-backed loan, they may be eligible for the IRRRL program. It can reduce or stabilize their monthly payments, preventing them from going into default. This makes it easier to maintain your credit score and avoid foreclosure.

3. Native American Direct Loan (NADL)

If the service member or their spouse is Native American, the NADL program can help them get a loan to build, buy or renovate a house on federal trust land.

4. Cash-Out Refinance Loan

The cash-out refinance loan lets veterans take money out of their home equity to pay off debt, go to college or take care of other needs. They essentially replace their current plan with a new one under different terms to gain more financial flexibility.

Advantages of Taking out a Home Loan Through the VA

The VA doesn’t require a down payment. Financial institutions can technically request one, but that’s rare. Almost 90% of this department’s home loans are made without one. The VA can also limit closing costs and get you a competitive interest rate.

Financial institutions are comfortable extending payment windows and getting rid of fees because the government guarantees the funds. You incur no late charges unless your payment is 15 or more days overdue. Even then, the lender can only charge you up to 4% of the payment. There is also no prepayment penalty if you pay off early or make extra payments.

While these programs are beneficial, you shouldn’t automatically rule out conventional credit — some creditors may offer better terms. For instance, credit unions may charge lower fees or provide better interest rates than traditional banks. Comparing your options can help you decide.

How Do VA Loans Compare to Conventional Loans?

You may get better terms if you go through the government.

VA-Backed Loans

The department has no formal credit score minimum or debt-to-income ratio limit. Your creditor may have one, but they’re typically only picky if financial or eligibility issues exist. Either way, you receive competitively low interest rates. The mortgage is unlimited if you can meet every official financial guideline and haven’t defaulted previously.

While the VA limits your closing costs, you may have to pay a one-time funding fee of up to 3.3% of the total loan amount to the department, barring an exemption.

Conventional Loans

Private lenders typically require down payments. If you put less than 20% down, they need private mortgage insurance, which costs around 0.4% of the total loan amount as of 2024.

Banks often have strict credit score minimums and lower debt-to-income ratio limits than the VA. Moreover, their interest rates are higher. As of 2024, they range from 7.99% to 24.99% on average. You might also have to cover closing costs, pay uncapped late fees and accept early repayment penalties.

Eligibility Requirements for VA-Backed Loans

You may have to jump through some administrative hoops before a bank approves you. For starters, you can only build, buy, upgrade or refinance property in the U.S. or its territories. The house must be your primary residence — you can’t buy a vacation home or an investment property.

According to the VA, you are only eligible if you meet the minimum active-duty service requirement based on when you served. Generally, you must spend at least 90 consecutive days on active duty — less if you’re discharged for a service-connected disability. However, depending on when you served, it may be up to 181 days.

You can receive a certificate of eligibility if you’re honorably discharged. The VA accepts discharges for hardship, reduction in force, the convenience of the government, service-connected disabilities or certain medical conditions.

If you received a dishonorable discharge, you aren’t automatically ineligible. You can try to qualify by applying for a discharge upgrade or undergoing a review. In this process, professionals evaluate your submitted records and evidence to determine whether your service was honorable for VA purposes.

A Guide to the Eligibility and Loan Application Process

Proving eligibility is usually relatively easy. Veterans must request a certificate of eligibility (COE) from the VA to show the lender the government will guarantee the funds. The process may get complicated if you don’t meet all the requirements or have an existing debt with the department.

While the VA home loans are a lifetime benefit — meaning there is no limit to the number veterans can take out — they can only have one at a time.

Prequalification is based solely on borrower-stated financial details. Based on that information, the bank tells you what amount you qualify for. Then, you move into preapproval, where the creditor verifies claims by requesting tax records, pay stubs and financial documents.

Once the soon-to-be borrower finds a house, negotiates a contract and sets a timeline for closing, an appraisal is required. Financial institutions won’t loan more than a property is worth, so they evaluate the property to verify its fair market value. They may request repairs or changes before signing off, depending on what they find.

Common Misconceptions About VA Loans for Veterans

There are some misconceptions about the department’s home loans.

The VA Acts as a Loan Creditor

The VA doesn’t give you money. Instead, it guarantees the mortgage, essentially promising to pay the mortgage company a predetermined dollar amount if you default. Banks, mortgage companies and federal credit unions accept the deal because it removes risk.

Conventional Loan Terms Are More Competitive

Since the department has competitive interest rates, doesn’t require PMI, has no down payment and limits closing costs, it is on par with — and often cheaper than — other programs.

VA Loans Take Longer to Close

Some service members believe confirming eligibility and closing takes ages. In reality, the VA typically moves faster than other financial institutions. Most veterans obtained a COE in just one day in 2023. Closing took 32 days on average, less than the 45 days for conventional credit.

Veterans Should Take Advantage of This Opportunity

Since the VA home loan is a lifetime benefit, there’s no rush to decide whether it’s right for you. Even if you’ve already gone through the process, you can always sell your property and try again. This program is a valuable financial tool, but you should carefully consider any major financial decisions.