VA mortgages are backed by the Department of Veterans Affairs (VA). Similar to FHA mortgages, the VA does not loan money directly, but protects lenders who offer these loans, shielding the lender from losses if the borrower defaults on the loan. VA mortgages are offered to active-duty U.S. military personnel, military veterans, and in some circumstances, their spouses.
Eligibility for a VA mortgage is a benefit earned through military service. Qualifying individuals include:
- Active-duty personnel
- Reserve members
- National Guard members
- Surviving spouses, under certain circumstances
The VA does not set a minimum credit score requirement for VA mortgages. Instead, lenders that offer loans under the VA program determine credit requirements for the loans they make. Most VA mortgage lenders require a credit score of at least 620.
The most notable benefit of a VA mortgage is no down payment requirement; borrowers may finance up to 100% of the purchase price of a home. Here in Los Angeles County, the VA loan limit is currently $625,500, which makes it possible to purchase entry-level or better homes in a wide range of communities without any money down. Other advantages of VA loans include competitive interest rates, reasonable closing costs and fees, and no private mortgage insurance requirement. VA loans do require the payment of a funding fee, which is a percentage of the loan value. This fee ranges from 1.25% to 3.3%, depending on the amount of the down payment and other factors. However, this fee can be financed in the loan or waived for veterans with service-connected disabilities.
VA mortgages are exclusively for current or past members of the U.S. military, so most people do not qualify. These loans have strict eligibility and inspection requirements for properties to be financed; not all houses and condominiums for sale will qualify for a VA mortgage. The zero down payment option can lead some buyers to purchase more home than they can comfortably afford, leaving them vulnerable to unexpected financial setbacks. Plus, with no or a low down payment, it takes much longer to build equity in a home, which can make selling it within the first several years of ownership a difficult financial proposition.