Section 2.1

What Is a VA Loan, and How Does It Work?

What is a VA loan?

VA loans are a type of home loan option that is backed up to 25% by the Department of Veterans Affairs. These loan types are only available to servicemembers, veterans, and their surviving spouses.

One reason VA loans are only available to such a select group is that they're one small way the Department of Veterans Affairs thanks its servicemembers. By providing a home loan program that often has lower interest rates than other loan types, in addition to many other benefits, the VA shows their appreciation for everything our military has sacrificed.

Types of VA Loans

The VA loan program has three main loan options. Each of these different loans has their own specific uses. Depending on what your needs and goals are, one of these loans should be a perfect fit for you.

VA Purchase Loans

VA Cash-Out Refinances

VA Interest Rate Reduction Refinance Loans (IRRRLs)

Buy your dream home with a VA home loan.

VA Purchase Loans

When you want to buy a home, you'll want to get a VA purchase loan. One of the main benefits of this type of VA loan when compared to other types of purchase loans is that you don't have to have a down payment or pay private mortgage insurance (PMI).

Additionally, when compared to other loan types, VA purchase loans also tend to have fewer closing costs, better terms, and lower interest rates. And you don't ever get penalized for paying your loan off early.

However, VA purchase loans do have some specific requirements. For starters, you will need to get a VA appraisal. During the appraisal, a VA-certified appraiser will evaluate the home to make sure it's fairly priced and safe for occupancy. Because of these requirements, not all homes can be purchased with a VA loan. Fixer-uppers, for example, usually don't pass the appraisal process.

But even if you can't finance a fixer-upper with a VA purchase loan, there are still plenty of homes you can buy. These include:

  • Single-family homes
  • New constructions if you want to build and design your home
  • Condos in a VA-approved complex
  • Manufactured homes with a permanent foundation†

With all of these types of homes approved for purchase with a VA loan, they still have to meet one other condition: the VA's occupancy requirement. This requirement states that VA purchase loans can only be used to buy a home that will be your primary residence.

†In addition, manufactured homes must be classified as real estate, which typically means that you own the land or lot it is built on, instead of renting it from someone else.

Buy your dream home with a VA home loan.

VA Cash-Out Refinance Loans

VA cash-out loans are the perfect type of VA loan if you want to take out equity from a home you already own. This equity can be used for a variety of reasons, including paying for college or other types of higher education, making home improvements, or paying off other debts. Basically, the options are endless because there are no limits on how you can use the money. It's your money, so you can use it however you want!

You can also use a VA cash-out refinance loan to move from another loan type into a VA loan. If you originally bought a home using a conventional, FHA, or USDA loan, but now you want all the benefits of having a VA loan, the VA cash-out option can make it happen.

By switching into a VA loan, you'll be able to drop any PMI or other type of mortgage insurance payments, which will save you money. You'll also likely enjoy a lower interest rate.

Buy your dream home with a VA home loan.

VA Interest Rate Reduction Refinance Loan (IRRRL)

If you already have a VA loan and you want to refinance, a VA IRRRL is one of the quickest, easiest ways to get that done. VA IRRRLs can be completed in as few as 10 days because most of your original loan information can be reused. Because the process is so fast, IRRRLs are often referred to as the streamline loan.

But if we go back to the IRRRL's original name—the interest rate reduction refinance loan—you can see that's is about more than just refinancing quickly. As the name suggests, a VA IRRRL is meant to lower the interest rate of your loan. This means a lower monthly mortgage payment and more savings in your pocket.

An IRRRL can also help you stabilize the amount of your monthly mortgage payment. If you currently have a VA loan with an adjustable interest rate, you can use an IRRRL to refinance into a fixed-rate loan.

Who Qualifies for a VA Loan?

Even though we already mentioned that VA loans are only available to servicemembers, veterans, and surviving spouses, being in one of these groups is not the only requirement.

In order to qualify for a VA loan, you also have to meet all of the VA's service requirements for both length and type of service. For example:

  • 181 If you only ever served during peacetime, you'll generally need 181 continuous days of service.
  • 90If you served during a specified wartime period, you'll need 90 total days of service.
  • 24 However, some specific time periods may require 24 continuous months of service. Details for all of these requirements can be found on the VA's website.

In addition, if you've separated from service, your eligibility is also dependent on your military discharge classification. Specifically, your character of discharge must be either "honorable," "under honorable conditions," or "general."

Your Certification of Eligibility (COE) from the Department of Veteran Affairs will detail whether or not you meet all of these service eligibility requirements. In order to begin the application process, your VA loan lender will request a copy of your COE.

Learn More about VA Loans

Interested in getting more information about VA loans and how they work? Feel free to check out the related videos section above. Or, if you'd rather keep moving forward through the Education Center, click the link below.

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