Types of VA Home Loans
The world of home loans is often overwhelming, particularly for veterans and active-duty service members trying to understand their benefits. The Department of Veterans Affairs offers a loan program to meet diverse housing needs, whether you’re buying your first home, building one, or refinancing to save money.
Veterans Guide is here to help you go into the home buying process with a clear understanding of the different types of VA home loans. Learn your options so you can make a confident, informed decision and avoid common pitfalls.
Introduction to the VA Home Loan Program
VA home loans help current and former members of the military buy, repair, and refinance their homes. The VA either offers a loan directly or, in most cases, guarantees a portion of the loan from a private lender, like a bank, mortgage company, or credit union. This backing reduces the lender’s risk and encourages them to give you more favorable terms.
The home loan program is available to any eligible service member or veteran, unlike the VA’s housing allowance, which is reserved for veterans with disabilities. You will need a certificate of eligibility, or COE, confirming you meet the eligibility requirements.
Although the specific requirements differ based on your dates of service, you generally must have served in the military for a minimum amount of time. You may also qualify if the military discharged you under a qualifying exception, such as hardship, involuntary reduction in force, or a service-connected disability.
Types of VA Home Loans
There are numerous options for VA home loans, each with a specific purpose and advantages for buyers. VA home loans are issued by private lenders such as banks, mortgage companies, and credit unions. However, the VA guarantees a portion of the loan amount, thus encouraging lenders to offer better terms.
VA Purchase Loan
A VA purchase loan is a government-backed loan you take out from a private lender, who, in turn, may offer you better terms. This is particularly beneficial if you have bad credit or can’t afford a down payment.
You can use the money you borrow through a purchase loan to buy, build, or improve your home, and anyone who has a valid COE can apply. However, you may have to pay a VA funding fee, depending on factors like your VA disability rating.
VA Interest Rate Reduction Refinance Loan
If you already have a VA home loan, an Interest Rate Reduction Refinance Loan, or VA IRRRL, may be a good solution. As with a purchase loan, you obtain an IRRRL through a private lender, and the VA backs the loan.
This type of loan can help you get a lower interest rate, which reduces your monthly mortgage payment. If your existing loan has an adjustable or variable interest rate, an IRRRL can switch you to a fixed one, which stays the same over the life of the loan.
VA Cash-Out Refinance
The primary purpose of a VA-backed cash-out refinance loan is to replace your existing loan and get cash from your home equity. You can use this money to cover home improvements, pay for an education program, or consolidate your debt.
To secure a cash-out refinance, you must be eligible for a COE, meet the income and credit standards set by the lender and VA, and plan to use the home as your primary residence. You will most likely need additional information and documents, such as your pay stubs and pay dates, W-2s, and federal tax returns.
Native American Direct Loan
The VA also offers Native American Direct Loans, or NADLs. You can apply if you’re a Native American veteran or active duty service member, or married to a Native American veteran or active duty service member. To be eligible, you must be financing a home on federal trust lands.
The NADL program has several benefits, including a low interest rate, no down payment, and limited closing costs. Your tribal government must have an agreement with the VA explaining how the program works on its trust lands. You must also have a COE, meet the VA’s credit standards, and plan to live in the home.
Unlike the other loan programs, the VA directly funds these loans.
VA Construction Loans
A VA-backed construction loan can help you get the financing you need to purchase land and build a custom home as your primary residence. The builder you choose must be licensed and insured, and the home must meet VA property standards.
Lenders typically offer either one-time or two-time close VA loan options. Under a one-close scenario, a single loan covers the financing for construction and long-term financing. Once construction is complete, the loan automatically transitions into a typical VA mortgage. A two-close loan has separate closings and closing costs for construction and your permanent mortgage.
VA Renovation Loan
If you want to improve your primary residence, you can apply for a supplemental VA-backed renovation or rehab loan. The changes to the property must either increase its value or make it more livable.
Some upgrades you might complete include replacing windows, repairing your roof, or installing a new HVAC system. Finding a lender willing to offer a renovation loan can be challenging, so VA backing may help you secure financing.
VA Jumbo Loans
A jumbo loan has an amount exceeding the local conforming home loan limits, which determine how much money you can borrow without a down payment if you don’t have your full VA entitlement. Veterans with full entitlements typically don’t have to put any money down, no matter how large the loan is.
While VA jumbo loans are government-backed, lenders are often more strict in issuing them. You may need a higher credit score and income level to qualify.
VA Loans for Mobile and Manufactured Homes
The low price of mobile and manufactured homes makes them appealing options for many homebuyers. You can use a VA loan benefit to purchase a manufactured or mobile home as long as it meets the following requirements:
- Must be classified as real estate.
- Single-wide homes must be at least 400 square feet.
- Double-wide homes must be at least 700 square feet.
- Must sit on a permanent foundation.
You can use a VA loan to purchase only the home, buy the home and the land, or refinance your current manufactured home.
VA Loans vs. Conventional Loans
The chart below lists the most important distinctions between VA home loans and conventional loans offered by private lenders with no government backing:
| VA Home Loan | Conventional Loan | |
|---|---|---|
| Down payment | Usually $0 | Usually ranges from 3% to 20% of the loan amount |
| Eligibility | Only open to veterans, active service members, or surviving spouses with valid COEs | Open to anyone |
| Credit leniency | Credit requirements depend on the lender, but are often less strict | Usually requires a minimum FICO score of 620 |
| Private mortgage insurance | None | Required when the down payment is less than 20% |
While every borrower has to evaluate their specific circumstances, a VA home loan is generally the better option for eligible borrowers.
Choosing the Right VA Loan for Your Needs
Purchasing a home is a major financial decision, and selecting the right loan is a key step. The type of property you are financing will determine whether you need a purchase loan, a construction loan, or a manufactured home loan. As you explore your options, consider your credit score and budget, and whether they will meet the more stringent requirements of a jumbo loan.
A knowledgeable lender can also help you determine which type of loan is most appropriate for your situation. For instance, a cash-out refinance may be better than an IRRRL if you have credit card debt with a high interest rate.
FAQs About VA Loan Types
Taking out a home loan is a complex process. These answers to some of the most frequently asked questions will help you navigate it more smoothly.
What Is the Best Type of VA Loan?
The best VA loan depends on your financial situation and goals. For example, if you or your spouse is Native American, the NADL program may offer a lower interest rate than a VA home purchase loan.
Can I Switch Between Different VA Loan Types?
Yes, you can switch between some VA loan types. For instance, you can take out an IRRRL to refinance an existing purchase loan or transition a short-term construction loan into a permanent purchase loan.
Are There Limits on How Often I Can Obtain a VA Loan?
You may not use a VA loan for an exclusive rental property, but you may purchase a multifamily home provided you live in one of the units.
Can I Use a VA Loan Benefit More Than Once?
Yes, you can use your VA loan benefit multiple times if you’re still eligible and have entitlement remaining. You can use this entitlement in addition to or in place of a down payment when taking out another loan.
Are VA Loan Types State-Specific?
VA home loans generally aren’t state-specific, but your state may have local requirements for the loan. In addition, some states have separate loan programs for veterans.
Ready To Apply? Here’s What To Do Next
Home loans are just one of the many benefits the VA offers. At Veterans Guide, we provide resources about the wide range of benefits available to veterans, including informational videos, a disability calculator, and a back pay calculator.
If you’re ready to apply for a VA home loan, start by checking your eligibility and talking to a trusted lender. Contact us today for help applying for a VA home loan. We will connect you with our trusted partner, Novus Home Mortgage, to answer your questions.
Client Reviews
ANN WILLIAMS SHELLY DONNETT'E Want to Increase Your VA Rating?
