A Guide To The Types Of VA Loans

VA loans, backed by the Department of Veterans Affairs, are designed to help veterans, active-duty, reserves, national guard service members and qualifying spouses access affordable mortgages and housing. If you’re eligible to receive a VA loan, you’ll enjoy a raft of benefits that include avoiding mortgage insurance and being able to borrow funds without a down payment.

Many different types of VA loans exist, ranging from home purchase loans to refinancing options, and they’re all available to qualifying service members and surviving spouses who meet certain qualifications.

Let’s walk through the different types of VA loans available to you and consider the eligibility requirements for each.

A VA loan is issued by a financial lender such as a bank, credit union or mortgage provider, and it’s backed by the federal government – not issued through the Department of Veterans Affairs (VA) itself. However, thanks to these home loans’ federal backing, they pose less of a risk to lenders and require less of an upfront investment by potential borrowers.

With VA loans, like with other government-backed loans, the government provides a measure of guarantee to a 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 goes into foreclosure. This typically allows financial lenders to provide applicants with loans that have more favorable terms than a loan they would get through a conventional or FHA loan program.

Each type of VA loan comes with advantages and disadvantages, so you’ll want to compare features and options to determine the right fit for you.

Let’s take a look at some of your VA loan options below.

VA Purchase Loan

A VA purchase loan or a VA jumbo loan is the standard form of mortgage you might expect to see issued under a VA loan. It allows buyers to purchase properties with a $0 down payment. 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 lender, and a down payment may still be required with a VA jumbo loan despite the Department of Veterans Affairs not requiring one.

As with most types of mortgages, a VA purchase loan gives you the option to choose an adjustable- or fixed-rate mortgage.

VA Renovation Loan

Under the terms of a VA renovation loan, borrowers can obtain funds to purchase and renovate a property, and otherwise finance the cost of home improvements. Similar to a traditional VA loan, a VA renovation loan is designed to facilitate the alteration and repair of a home. However, not many lenders offer this loan option.

Native American Direct Loan

The Native American Direct Loan (NADL) is available to qualified service members and their surviving spouses as long as one of them is of Native American descent. The loan program is backed by the Department of Veterans Affairs and can be used for home purchases or to refinance an existing mortgage. Like other types of VA loans, NADL mortgages allow you to finance the full purchase price of the home with no down payment required unless your lender says otherwise.

You can also use a VA loan to refinance your mortgage, as long as you meet all of the requirements. Here are some types of refinance loans available through the VA.

VA Cash-Out Refinance

A VA cash-out refinance loan lets you use up to 100% of your home’s equity to pay on medical bills, family debt, educational costs or any other expenses. You can also use a VA cash-out refinance for home improvements or to boost your investment and savings accounts. Eligible borrowers can use this option as a rate-and-term refinance, if desired. Cash-out refinances are  also available to non-VA borrowers, but you won’t be able to tap into as much of your home equity.

VA Interest Rate Reduction Refinance Loan (IRRRL)

A VA IRRRL, also known as a VA Streamline Refinance, can help you reduce your monthly mortgage payments on an existing home loan by lowering your interest rate or helping you switch from an adjustable-rate loan to a fixed-rate mortgage. Also, you won’t have to conduct an appraisal or provide additional documentation concerning your income with this type of refinance. Furthermore, you can also add borrowers through a joint VA loan. Note that borrowers should consider their closing costs when determining whether to pursue this option.

To obtain a VA loan, you must be one of the following:

• An active-duty, national guard or reserves service member or a veteran who meets certain minimum length-of-service requirements
• A surviving spouse of a military service member who died while on active duty
• An active-duty military member or veteran with a disability connected to their service

Keep in mind that you also need to be able to meet your lender’s individual credit and income requirements. These requirements are set by the lender, not the VA. Also, the property you intend to purchase with the VA loan must be your primary residence, not a vacation or investment home.

You Must Have A Certificate Of Eligibility

To obtain a VA loan, you’ll need a VA certificate of eligibility (COE) verifying your status as a qualifying service member or surviving spouse. You can get your COE from the Department of Veterans Affairs. Surviving spouses may face additional requirements for VA loan eligibility.

The Property Must Meet Certain Requirements

Not all properties are eligible to receive a VA loan, regardless of the borrower’s status. A VA-approved appraiser will need to make sure the home adheres to the VA’s minimum property requirements and that its value aligns with current government-issued guidelines. If the property doesn’t appraise well, your lender may not issue you the loan.

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 program 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.

VA loans aren’t just easier to qualify for than loans provided through non-government-backed loan programs. They can also be used to finance home upgrades and renovations, or even cash out the equity you possess in your home. VA loans additionally use a different formula when calculating an applicant’s debt-to-income ratio (DTI), which can help qualifying borrowers afford a larger home or a home with more amenities.

Here are a few of the top benefits you can expect from using a VA home loan:

• No down payment: When you buy a home with a VA loan, you’re able to finance 100% of the home’s purchase price as long as the individual lender is agreeable. That means you won’t have to worry about saving for a down payment.
• No mortgage insurance: Unlike with conventional loans, you won’t have to pay for mortgage insurance if you don’t have a 20% down payment saved up.
• Easier requirements: Lenders tend to offer more flexible credit score and financial requirements for VA loans than most mortgage options. Qualifying service members may find it easier to be approved for a VA home loan than another mortgage type.

VA loans don’t require borrowers to pay mortgage insurance if they put less than 20% down on the home. Instead, borrowers pay the VA funding fee, which is a flat fee set by the federal government that’s 1.4% – 3.6% of the loan amount for purchase loans in 2023. You can pay the VA funding fee upfront or incorporate it into your total loan amount, depending on your down payment amount.

As a general rule, the cost of the funding fee is ultimately calculated based on the borrower’s individual circumstances and loan.

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 Department of Veterans Affairs if you have questions about your eligibility for a VA funding fee waiver.

VA loan limits aren’t based on which type of VA loan you select as a borrower. They’re determined by how big of a mortgage an individual lender is willing to extend. VA loan limits may be impacted by your income, credit score, DTI and other factors.

Determining which type of VA loan is best for you is largely a function of your eligibility, individual situation and financial needs.

Think about what you want to accomplish with your home loan. If you’re planning on refinancing an existing loan, a VA IRRRL may be a great option. If you want to make home improvements and already have equity in your home, a VA cash-out refinance can be a solid choice. If you’re buying a new home, using a VA purchase loan may save you money in the long run.

Each of the different types of VA loans – including VA purchase loans, cash-out refinances, IRRRLs, NADLs and renovation loans – is designed to serve a different set of needs and purposes.

However, all of them can help you obtain a mortgage and purchase a single-family home, condo or townhouse under more favorable terms than a conventional loan or FHA loan can offer, and you’ll enjoy significant benefits if you’re a veteran or active-duty service member.

For qualified borrowers, a VA loan can be a great way to finance a new home or refinance an existing mortgage. If you’re interested in a VA home loan, apply online with Rocket Mortgage®.