A Guide To The Types Of VA Loans
Scott Steinberg6-minute read
April 24, 2021
VA loans, backed by the Department of Veterans Affairs, are designed to help veterans, active duty servicemembers, and qualifying spouses access affordable mortgages and housing. If you’re eligible to receive one, you’ll enjoy a raft of benefits from being able to borrow funds without a down payment to the ability to avoid mortgage insurance. To learn more about the different types of VA loans available to you as a prospective home buyer, simply read on.
What Is A VA Loan?
A VA loan is issued by a financial lender such as a bank, credit union, or mortgage provider and backed by the federal government – not issued through the Department of Veterans Affairs itself. However, thanks to these home loans’ federal backing, they pose less of a risk to lenders and require less of an up-front investment by potential borrowers.
In effect, under the terms of a VA loan, the government provides a measure of guarantee to the lender that it will recover some (if not all) of its losses in the unfortunate event that the homeowner stops making payments and the home winds up going into foreclosure. This typically allows financial lenders to provide program applicants loans under more favorable terms than with conventional or FHA loan programs.
Offering a significant source of financial aid to veterans and servicemembers, VA loans aren’t just easier to qualify for than loans provided under alternate programs as well. They’re also highly versatile and can be used to finance home upgrades and renovations or even cash out the equity that you possess in your home. VA loans additionally use a different formula when calculating applicant’s debt-to-income (DTI) ratio, which can help qualifying borrowers afford more home as well.
Compared with other forms of home loans, VA loans don’t require any down payment and don’t come with credit score requirements attached. Note that there are several types of VA loans. Each type comes with its own benefits and disadvantages – making choosing which form to go with largely a function of figuring out which is the right fit for you. If eligible to obtain one, you’ll be given the opportunity to apply for a VA loan through a qualified lender of your individual choice and preference.
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Who Qualifies For A VA Loan?
To obtain a VA loan, you must meet certain minimum criteria. This includes:
- Being an active duty member of the military or a veteran who meets certain minimum length-of-service requirements.
- Being the surviving spouse of a military servicemember who died while on active duty or from a disability connected to their service.
- You are able to meet your chosen lender’s individual credit and income requirements (minimums which are set by the lender, not the VA itself).
- The property will be your primary residence (not a vacation or investment home).
In order to obtain a VA loan, you’ll need to receive a VA certificate of eligibility which verifies your status as a qualifying servicemember or surviving spouse, which can be procured from the Veteran’s Administration.
Note that not all properties are eligible to receive a VA loan either – a VA-approved appraiser will need to make sure that the home adheres to the VA’s minimum property requirements, and that its value aligns with current government-issued guidelines.
What Types Of Loans Are Available?
Each different type of VA loan comes with its own benefits and disadvantages – you’ll want to compare features and options to determine which is the right fit for you.
VA Purchase Loan
A VA purchase loan is the standard form of mortgage that you might expect to see issued under a VA loan. It allows buyers to purchase properties with a $0 down payment. Obtain one, and you’ll be able to secure better terms than you would on a conventional mortgage issued by a private lender. Note that terms vary by individual lenders though, and not all lenders offer this form of VA loan.
VA Cash-Out Refinance
A VA cash-out refinance loan lets you take up to 100% of your home’s equity out to pay for medical bills, pay off family debt, pay for education, or otherwise put the money to alternate uses. Able to be used toward home improvements or to burnish your investment and savings accounts, a VA cash-out refinance allows you to access more of the value in your home (and enjoy greater borrowing power) than with a conventional or FHA loan. Veterans can use this option as a rate-and-term refinance if desired, and it is also available to borrowers both with and without current VA loans.
VA Interest Rate Reduction Refinance Loan (IRRRL)
A VA IRRRL can help you reduce your monthly mortgage payments on an existing home loan by lowering your interest rate or enjoy greater stability in terms of predicting your regular amount of cash outlay by switching to a fixed-rate mortgage. Also known as a VA streamline refinance, you won’t have to conduct an appraisal or provide additional documentation concerning your income in order to procure one. Note that borrowers should consider their closing costs when determining whether or not to pursue this option.
VA Native American Direct Loan (NADL)
Do you happen to be a Native American veteran? Are you a veteran who’s married to a Native American? If so, you may be eligible to obtain an NADL, which allows you to buy, build, or improve a home that’s situated on federal trust land. Qualified borrowers can also refinance a current NADL loan to obtain a lower interest rate. Benefits of exercising this option include, but are not limited to, limited closing costs and no need for private mortgage insurance.
VA Renovation Loan
Under the terms of a VA renovation loan, borrowers can obtain funds through which to purchase and renovate a property and otherwise finance the cost of home improvements. Similar to a traditional VA loan, it’s designed to facilitate the alteration and repair of a home. However, not many lenders offer this loan option.
Things To Consider About The Types Of VA Loan Programs
As noted, different types of VA loan programs come with different upsides and downsides attached. As you begin the purchase or refinance process, you’ll want to start by researching which makes the most sense for your household – and shop around to find a lender who not only offers favorable rates, but also understands the various types of VA loans.
When Does The VA Funding Fee Apply?
Mortgage insurance is typically paid on conventional loans when less than a 20% upfront down payment is made as a form of guarantee to help protect lenders worried that you might default on your loan. But a VA loan does not require mortgage insurance to be paid – rather, it comes with a VA funding fee attached, a flat fee set by the federal government that runs between 1.4%-3.6% of the loan (the cost of which can be paid up-front or incorporated into your total loan amount) depending on your down payment amount.
As a general rule, the ultimate cost of the funding fee is calculated based on the borrower’s individual circumstances and loan.
Also be advised: If you have a disability due to military service, you may also be able to obtain a waiver that allows you to avoid the VA funding fee. Contact the Veteran’s Administration if you have questions regarding your eligibility for a VA funding fee waiver.
What Are The VA Loan Limits?
Interestingly, VA loan limits are not based on which type of VA loan that you select as a borrower. Rather, they’re determined by how much mortgage that any given individual lender is willing to extend. VA loan limits may be impacted by your income, credit score, DTI ratio, and other factors.
Which Type Of VA Loan Is Right For Me?
Determining which type of VA loan is right for you is largely a function of your eligibility, individual situation, and current/future financial needs. Happily, no matter which type of loan option that you choose, you can take advantage of all VA loan benefits. Again, the myriad upsides to acquiring a VA loan include:
- No down payment necessary
- No mortgage insurance required
- Lower interest rates vs. FHA or conventional loans
- Lower closing costs
The Bottom Line
There are many different types of VA loans that you can acquire, including VA purchase loans, cash-out refinances, IRRRLs, NADLs and renovation loans – each of which is designed to serve a different set of needs and purposes.
In general though, all can help you obtain a mortgage and purchase a home under more favorable terms than conventional or FHA loans, and enjoy significant benefits if you are a veteran or active duty servicemember. Bearing this in mind, there are many reasons to seek out a VA loan if you qualify to obtain one.