What is a VA-guaranteed loan?

The Department of Veterans Affairs offers mortgages to help active-duty military personnel, veterans, and their surviving spouses afford homes.¹ Most VA loans are issued by private lenders to ensure access for eligible borrowers. A VA-guaranteed loan is insured by the agency, which means the government compensates lenders if the borrower on a VA loan defaults.

The VA home-loan guarantee, explained

Who guarantees VA loans? The guarantee on a VA loan is between the government and the lender. Lenders who issue loans that meet VA guidelines are guaranteed. If a borrower defaults on their VA loan, the VA guarantees it will pay the lender a specific amount to compensate it for any losses.

This lowers the risk lenders take in issuing VA loans. The guarantee allows lenders to offer VA loans with no down payment requirement, no minimum credit score, and favorable mortgage rates to borrowers who may not qualify for a conventional loan.

Are there direct loans from the VA?

Yes, the VA has one direct loan program. It’s specifically for Native Americans who serve or have served in the military, or for qualifying service members with a Native American spouse.

Native American Direct Loan program

The Native American Direct Loan program allows eligible borrowers to borrow money from the VA to buy a home with no down payment.

The NADL program offers favorable terms, such as lower closing costs, no mortgage insurance, and a low-interest rate 30-year mortgage.

It’s available to Native American military personnel, veterans, and their spouses to buy a home on tribal trust land. NADLs are only available directly from the VA. Private lenders do not offer NADLs.

How a VA-guaranteed loan works

Most VA loans originate from a private lender, such as Rocket Mortgage®, with a portion of the loan amount guaranteed by the VA.

A mortgage backed by the VA home loan program can be used to buy a home, refinance, or borrow home equity. Here's how the process works in each scenario.

• Home purchase. A home can be a single-family residence, a multifamily property with up to four units, a condominium, a manufactured home, or a new-construction home. Not all lenders offer all options. A 2020 law eliminated loan amounts on VA loans, so you can borrow as much as a bank is willing to lend you and the VA will back up to 25% of it as long as one of three things are true: you have never used your VA home loan benefit; you sold the property you financed with a VA loan and paid the loan off in full; or, you did a short sale or foreclosed on a property you used a VA loan with and repaid the VA in full.
• Refinancing an existing VA loan to a lower rate. Also known as a VA Streamline because it’s designed to make refinancing simpler and faster, the Interest Rate Reduction Refinance Loan, or IRRRL, allows you to refinance to a lower rate with better terms, fewer fees, and less documentation – often with no appraisal.^2,3
• Borrow your equity with a cash-out refinance. A VA loan allows you to convert up to 100% of your home equity into cash. Home equity is the difference between what you owe on your mortgage and its current fair market value. Not all lenders will allow you to borrow 100% of your equity. Rocket Mortgage, for example, requires a FICO® Score of at least 640 for a 90% cash-out.

Eligibility requirements for a VA-guaranteed home loan

VA loans are available to all active-duty military personnel, veterans, and their eligible spouses. To qualify for VA benefits, including a VA house loan, you need a Certificate of Eligibility. The minimum qualification is at least 90 days of active-duty service.

However, depending on the exact nature of your service, when you served, and your standing when you left the service, there may be exceptions. It’s best to consult the VA’s eligibility guidelines to make sure you qualify.

Most VA loans are funded by private lenders. Each lender will have its own qualifying standards.

To qualify for a VA loan from Rocket Mortgage with no down payment, you will need to meet the following standards:

• A minimum FICO^® Score of 640.
• A debt-to-income ratio (DTI) no higher than 45%.
• You must buy a single-family residence or a multifamily property of no more than four units.
• The home must be your primary residence

Should you use a VA-guaranteed home loan?

VA loans are a valuable benefit for those who have served or are currently serving in the military, allowing them to purchase a home with no down payment. Since the VA guarantees it will pay back the lender up to 25% of your mortgage if you default, lenders carry less risk and can offer significantly better rates and terms than with conventional loans. Benefits include:

• No down payment for borrowers with full entitlement.
• Competitive interest rates. Provided you meet the minimum requirements, VA mortgage rates are typically lower compared with those of conventional loans.
• No private mortgage insurance.
• You can use your VA loan benefit more than once. You can apply for another VA loan if you sell your previous house and pay off the loan, or if you pay off the loan in full and wish to buy another home.

You'll have to pay closing costs, which usually total 3% – 6% of the loan amount.

You also may have to pay a VA funding fee of between 1.25% and 3.3% of the loan amount. In many cases, you can fold this amount into the loan, which means you won't have to bring that cash to closing. The funding fee on a VA Streamline refinance is 0.5% of the loan amount.

You may need to demonstrate a cash reserve that satisfies your lender, showing that you will be able to make immediate payments. Note that a VA loan can only be applied to your primary residence, not to a vacation home or rental property.

The bottom line: Using a VA home loan guarantee could be your path to homeownership

VA-guaranteed loans are originated by third-party lenders, like Rocket Mortgage, and backed by the VA. The guarantee allows lenders to offer loans with no down payment to military personnel, veterans, and their surviving spouses.

If you're ready, start an application for a VA loan with Rocket Mortgage today.

¹ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

³ Refinancing may increase finance charges over the life of the loan.