What Is A VA Guaranteed Loan?

A VA guaranteed loan is one of the biggest benefits offered to those who have served our country in the military. Typically, you can get a mortgage with no down payment at very competitive rates.

The Department of Veterans Affairs (VA) guarantees mortgages originated by lenders that meet their guidelines. These loans are available to eligible active-duty service members, National Guard personnel, reservists, veterans and qualifying surviving spouses. Guaranteed home loans make up the vast majority of VA loans issued each year.

When the VA backs guaranteed home loans, it certifies to the lender that if the borrower defaults, it will pay the lender the amount of the VA entitlement available to the veteran. In exchange, the lender agrees to underwrite the loan based on standards set by the VA regarding credit, debt-to-income ratio (DTI) and the way the property is occupied, among others.

You may also see VA guarantee spelled guaranty. It means the same thing.

The overwhelming majority of loans from the VA are guaranteed, meaning they’re originated by lenders. They are not provided directly from the VA, but are backed by the agency. However, there is one direct loan program available to Native Americans who have served.

The Native American Direct Loan (NADL) offers a zero-down payment loan option directly from the VA with favorable terms around the interest rate and closing costs. Interest rates start at 2.5% (as of May 2023) for eligible Native American service members, veterans and their spouses who are purchasing on tribal trust land.

Because these loans come directly from the VA, no lender can help you with these, but we did want you to understand the difference between direct and guaranteed loans.

A VA guaranteed loan is one that’s been backed by the VA but originated by a lender such as Rocket Mortgage^®. As long as you meet certain standards set by lenders and/or the VA, it can be used for both a new home purchase and refinancing. Here are some of the common loan purposes:

• Purchase: You can use a VA loan to purchase a single-family home, multi-family property (up to four units), a condo, a manufactured home or to construct a new home. It should be noted that not all lenders offer all options. As an example, for Rocket Mortgage to finance a newly built home, construction must be completed.

• VA Streamline: Also referred to as an Interest Rate Reduction Refinance Loan (IRRRL), this allows existing VA loan holders to refinance for the purpose of lowering their interest rate or changing their term while dealing with less documentation. There’s often no appraisal required either.

• VA rate/term refinance: A traditional rate/term refinance accomplishes the same goal as a streamline, but this would be used if you’re moving from another loan type such as a conventional or FHA loan into a VA loan. You might do this if you wanted to buy a home, but it took you a while to meet the service requirements to get a VA loan.

• VA cash-out refinance: As with other loans, you can use your VA loan to cash out your existing equity. What’s unique is that the VA loan is the only one that can be used to convert up to 100% of your equity to cash. Different lenders will have different requirements to do this. The minimum qualifying FICO^® Score to do this is 620 at Rocket Mortgage. Otherwise, you have to leave a minimum of 10% equity in your home.

When it comes to eligibility for a VA loan, there are two major considerations you need to think about: minimum military service requirements and your financial qualifications. When it comes to qualifying financially, every lender is going to have different requirements.

What’s more unique about VA loans is the service time requirements.

If you’re an active-duty service member, you meet the requirement if you’ve been on active duty for at least 90 consecutive days at any point. If you’re a veteran, National Guard personnel or reservist, it’s going to depend on your time of service. If your service was before August 2, 1990, the VA has an eligibility guide.

Veterans meet the active-duty requirement if they meet one of the following:

• At least 24 continuous months of active-duty service

• A full period of service (at least 90 days) during which you are called or ordered to active duty

• At least 90 days service if you were discharged based on a hardship or a reduction in force

• Less than 90 days if you were discharged because of a service-connected disability

National Guard personnel must serve 90 days on active duty. The requirement is the same for reservists.

Finally, you may qualify for a VA home loan if you’re a surviving spouse and one of the following is true:

• The veteran is missing in action (MIA)

• The veteran is a prisoner of war (POW)

• The veteran died while in service or from a service-connected disability and you didn’t remarry

• The veteran died while in service or from a service-connected disability and you didn’t remarry before you were 57 years old or before December 16, 2003

• The veteran had been totally disabled and then died, but their disability may not have been the cause of death (in certain circumstances)

If you remarried before December 16, 2003 on or after your 57^th birthday, you must have received your Certificate of Eligibility (COE) prior to December 15, 2004, to be eligible for a home loan.

Beyond service time or surviving spouse requirements, you have to meet the lender’s guidelines in order to qualify for a VA loan. Here are the guidelines of Rocket Mortgage.

• Minimum 580 qualifying FICO^® Score (however, a minimum of 620 can provide the most DTI and credit score flexibility)

• DTI may vary, but if your score is 580 – 619, no more than 38% of your monthly income can go toward your house payment and no more than 45% of your monthly income can go toward your total monthly debt payments (including the mortgage payment).

Beyond these requirements, there are rules which apply no matter what lender you go with.

• You need to purchase a single-family residence or a multi-family property of no more than four units

• The home must be your primary residence

For an overwhelming number of borrowers, the benefits associated with a VA loan will outweigh the downsides.

Pros

• Usually no down payment required: The one exception to this is if you have impacted (partial) entitlement. It can be complicated, but this basically means that the VA will insure you for something less than the typical 25% of the loan amount. This typically only applies if you have something like a foreclosure on your record.

• Competitive rates: Because it’s meant to really benefit those who have served our country, VA loans typically offer some of the lowest rates available for a given set of qualifications.

• Cash-out refinance flexibility: A VA loan is the only one that allows you to convert 100% of your existing home equity into cash as long as you qualify.

Cons

• Funding fee: Depending on the size of your down payment (if any) and whether it’s your first or a subsequent use of a VA loan, you’ll pay a funding fee of between 1.25% – 3.3% of the loan amount. This can be built into the loan or paid at closing. The fee is 0.5% on VA Streamlines. You’re exempt if you receive VA disability, qualify as a surviving spouse or you’ve returned to active duty after receiving a Purple Heart.

• VA appraisal: This shouldn’t really be a con because it’s for your protection, but the health and safety requirements on VA loans are sometimes perceived to be a little more stringent than they are on conventional loans. The reality is if a home would fail a VA inspection, it may also fail a conventional appraisal as well. It may just be a matter of education if sellers blanch at accepting offers involving VA financing.

• Primary properties only: This loan can’t be used to purchase vacation or rental properties.

To get a VA loan, you do have to work with a VA-approved lender. Rocket Mortgage has VA approval. Beyond that, it’s a matter of filling out the application and sharing the appropriate documentation.

Required Documentation

There are a couple of pieces of documentation that are unique to VA loans. The most important and the one that everyone needs is the Certificate of Eligibility (COE). This certifies to the lender that you’ve met the service time requirements to get a VA loan.

If you don’t already have one, you can apply online through the VA. Lenders like Rocket Mortgage also have the ability to help you get one and may be able to expedite the process.

Additionally, be sure that you have any documentation around VA disability or currently being on active duty after receiving a Purple Heart. This will be key to being exempted from the funding fee. Disability income received can be used to qualify for the loan.

Beyond that, the information collected by your lender will be the same as it would be with any other loan. For example, you can expect to share W-2s, 1099s and tax returns as well as pay stubs and bank statements. This is a non-exhaustive list. The lender needs to know about any income or assets you plan to use to qualify, as well as your liabilities from your credit report and any real estate you already own.

VA guaranteed loans are loans originated by third-party lenders, like Rocket Mortgage, and backed by the VA. This accounts for an overwhelming number of VA home loans. Lenders have loans insured by the VA after making sure they meet specific guidelines set by the Department of Veterans Affairs.

The biggest benefits include typically having no required down payment and some of the most competitive rates. You can qualify if you meet service time requirements, were discharged because of a service-connected injury or you’re an eligible surviving spouse. You can apply for a VA loan online or give one of our Home Loan Experts a call at (833) 326-6018.