A Guide To The Types Of VA Loans

VA loans, backed by the Department of Veterans Affairs, are designed to help veterans, active duty service members 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.

This article will guide you through the different types of VA loans available to you, as well as eligibility requirements for each.

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 (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.

Like with many 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 winds up going into foreclosure. This typically allows financial lenders to provide applicants loans under more favorable terms than with conventional or FHA loan programs.

Offering a significant source of financial aid to veterans and service members, VA loans aren't just easier to qualify for than loans provided through other programs. They can also 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 larger homes or homes with more amenities as well.

Compared with other types of mortgages, there is no VA loan down payment and VA loans don't come with credit score requirements attached. Note that there are several types of VA loans, and each type comes with its own benefits and disadvantages. 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.

To obtain a VA loan, you must meet certain minimum criteria. To qualify, you must be one of the following:

• An active duty member of the military 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, you need to be able to meet your chosen lender's individual credit and income requirements. Minimums are set by the lender, not the VA itself. Also, the property you intend to purchase with the VA loan must 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 (COE) which verifies your status as a qualifying service member or surviving spouse, which can be procured from the Veterans Administration. There may be other VA requirements for surviving spouses, as well.

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. As a non-conforming loan, though, a VA mortgage would also not be subject to the traditional Fannie Mae and Freddie Mac purchasing standards. 

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.

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 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.

As with most types of mortgages, you can have the option for an adjustable or fixed-rate mortgage with a VA purchase loan.

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.

You can also use a VA loan to refinance your mortgage, as long as you fit 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 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. Since it’s able to be used toward home improvements or to burnish your investment and savings accounts, a VA cash-out refinance can allow you to access more of the value in your home – and enjoy greater borrowing power – than with a conventional or FHA refinance. 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, 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 enjoy greater stability in terms of predicting your regular amount of cash outlay by switching to a fixed-rate mortgage. You also won't have to conduct an appraisal or provide additional documentation concerning your income in order to procure a VA streamline refinance, and through this refinancing option you can also add borrowers through a joint VA loan. Note that borrowers should consider their closing costs when determining whether or not to pursue this option.

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.

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 1.25% – 3.3% of the loan (the cost of which can be paid upfront 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 Veterans Administration if you have questions regarding your eligibility for a VA funding fee waiver.

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.

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 Federal Housing Administration (FHA) or conventional loans
• Lower closing costs

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 of them can help you obtain a mortgage and purchase a single-family home, condo or townhouse under more favorable terms than conventional or FHA loans, and enjoy significant benefits if you are a veteran or active duty service member. Bearing this in mind, there are many reasons to seek out a VA loan if you qualify to obtain one.

If you think a VA loan sounds right for you, you can apply for one today with Rocket Mortgage^®.