What Is a VA Loan and How Does It Work?

What Is a VA Loan and How Does It Work?

If you've served in the military, you may be wondering: What is a VA loan? And how do you know if you qualify for one?

For retired veterans, a Veterans Affairs (VA) loan can provide a path to homeownership with benefits beyond what a conventional loan or mortgage offers. Aside from purchasing a home, VA loans can also help you meet financial goals such as paying off debt or making major improvements to your home.

If you're a veteran, here's what you need to know about the different types of VA loans, their benefits and the eligibility requirements for different programs.

What Is a VA Loan?

The VA loan program is available to active and retired military service members.

VA home loans require zero money down to purchase a house, which is unique. Traditionally, buyers put down between 5% to 20% of the purchase price when buying a home. By contrast, about 90% of VA home loans are made with zero down payment.

Homebuyers can procure VA loans through private lenders and banks. However, the loans are still guaranteed by the U.S. Department of Veterans Affairs, which provides extra protection for lenders and more favorable terms for homebuyers.

What Are the Benefits of a VA Loan?

Compared with conventional loans, VA loans offer several perks, including lower interest rates, no minimum down payment and no private mortgage insurance when purchasing a home. These benefits can translate to lower monthly mortgage payments than what you might otherwise pay with a conventional loan.

You may also have limited closing costs as well as access to assistance to help you avoid default — plus, many VA mortgage lenders don't charge a prepayment penalty to veterans who pay off their loans early.

These benefits help put homeownership within reach for veterans by eliminating the need to put down a large sum of money toward a down payment and lowering the amount paid in interest.

Aside from home loans, there are also other types of VA loans available. For instance:

  • Refinancing loans allow veterans to refinance a current home loan under new terms. This is an attractive option for homeowners looking to lower their interest rates.
  • Cash-out refinance loans let homeowners tap into their home's equity and use that money toward expenses like home improvements or paying down debts.
  • The Native American Direct Loan Program is available to Native American veterans or veterans whose spouses are Native American. These loans can be used toward purchasing, building or renovating a home on federal trust land. They offer many of the same perks as regular VA loans, including low fixed interest rates.
  • You may also qualify for grants to assist disabled veterans when purchasing or renovating a home to meet accessibility needs. If you have a service-connected disability, these loans can help you make practical changes to your home so that you can live more easily and comfortably with your disability.

Who Qualifies for VA Loans?

VA loans are available to veterans who meet certain eligibility requirements outlined by the U.S. Department of Veterans Affairs. If you meet the minimum service requirements, which vary based on when you served, you can receive a Certificate of Eligibility for a VA loan.

Veterans who do not meet the service requirements but were discharged under certain circumstances such as hardship or certain medical conditioners may still be eligible to receive a Certificate of Eligibility. Surviving spouses of veterans may also be eligible for a VA loan. You can confirm your eligibility on the Veterans Affairs website.

If you're applying for a particular loan such as the Native American Direct Loan Program or grants for disabled veterans, you will also need to meet additional eligibility requirements.

How Can VA Loans Benefit You in Retirement?

The benefits VA loans provide can help support veterans as they set out to reach their financial goals in retirement. Low fixed interest rates can reduce your monthly mortgage payments and make your payments more predictable, which is especially helpful for retirees budgeting on a fixed income.

If you currently have a traditional mortgage but qualify for a VA loan, consider looking into a VA-backed refinancing loan to refinance your home under more favorable terms. Qualifying veterans can also explore options including Native American Direct Loans and grants for disabled veterans — both of which can help finance improvements to your current home. Native American Direct Loans are also a reusable benefit, which means you can take out more than one loan and continue to take advantage of this benefit over time.

Even if you aren't in the market to purchase a house or make improvements to your home, you may be able to take advantage of the VA's cash-out refinance loans. This can be a compelling option for veterans who need access to cash for pressing needs such as paying down credit card debt or medical bills. Low interest rates make this a more affordable way to tap into your home's equity than conventional home equity lines of credit.

Getting Started With VA Loans

As a retired veteran, it's worth getting to know the different types of VA loans and understanding which options can best help you reach your financial goals in retirement. To get started, apply for your Certificate of Eligibility or meet with a trusted financial advisor to review your options in detail.

Lauren Sieben AuthorThumbnail

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