What Is A VA-Guaranteed Loan?

The primary purpose of the Department of Veterans Affairs (VA) home loan program is to help members of the veteran/military community afford homes. VA-guaranteed loans allow private lenders to participate in the program, increasing the number of veteran families who can secure mortgages.

VA Home Loan Guarantee, Explained

The overwhelming majority of VA loans do not come directly from the VA. Instead, the VA guarantees mortgages originated by lenders that meet their guidelines. These loans are available to eligible active-duty service members, National Guard personnel, reservists, veterans and qualifying surviving spouses. Guaranteed home loans make up the vast majority of VA loans issued each year.

When the VA “guarantees” a loan, it means they will cover a percentage of the loan value if the borrower defaults on the mortgage. This reduces the loan’s risk, allowing lenders to underwrite loans with conditions they normally couldn’t, like not needing a down payment. In short, the VA guarantee is what allows participating lenders to offer special terms to qualifying service members.

Are There Direct Loans From The VA?

There is one direct loan program available. It’s specifically for Native Americans who have served, or for qualifying service members with a Native American spouse.

The Native American Direct Loan (NADL) offers a zero-down payment loan option directly from the VA with favorable terms around the interest rate and closing costs. Interest rates start at 2.5% (as of July 2023) for eligible Native American service members, veterans and their spouses who are purchasing on tribal trust land.

Because these loans come directly from the VA, no lender can help you with these, but we did want you to understand the difference between direct and guaranteed loans.

How A VA-Guaranteed Loan Works

As mentioned, a VA-guaranteed loan is one that’s been backed by the VA but originated by a lender such as Rocket Mortgage^®. As long as you meet certain standards set by lenders and/or the VA, it can be used for both a new home purchase and refinancing. Here are some of the common loan purposes:

• Purchase a home. You can use a VA loan to purchase a single-family home, multi-family property (up to four units), a condo, a manufactured home or to construct a new home. It should be noted that not all lenders offer all options. As an example, for Rocket Mortgage to finance a newly built home, construction must be completed.
• Refinance to a lower interest rate. Also referred to as an Interest Rate Reduction Refinance Loan (IRRRL), this allows existing VA loan holders to refinance for the purpose of lowering their interest rate or changing their loan term with less documentation and fees needed for a typical refinance. There’s often no appraisal required either.
• Cash out your home equity. You can use your VA loan to cash out your existing home equity. In fact,  the VA loan is the only mortgage option that can be used to convert up to 100% of your equity to cash. Different lenders will have different requirements to do this. The minimum qualifying FICO^® Score to do this is 620 at Rocket Mortgage. A FICO® Score of 580 allows you to cash out a maximum of 90% of your home equity.

Eligibility Requirements For A VA-Guaranteed Home Loan

When it comes to eligibility for a VA loan, there are two major considerations you need to think about: minimum military service requirements and your financial qualifications.

Military Service Requirements

If you’re an active-duty service member, you meet the requirement if you’ve been on active duty for at least 90 consecutive days at any point. If you’re a veteran, National Guard personnel or reservist, it’s going to depend on your time of service. If your service was before August 2, 1990, the VA has an eligibility guide.

Veterans satisfy qualifying requirements if they meet one of the following:

• At least 24 continuous months of active-duty service with an honorable discharge
• A full period of service (at least 90 days) during which you are called or ordered to active duty
• At least 90 days service if you were discharged based on a hardship or a reduction in force
• Less than 90 days if you were discharged because of a service-connected disability

National Guard personnel must serve 90 days on active duty. The requirement is the same for reservists.

Finally, you may qualify for a VA home loan if you’re a surviving spouse and one of the following is true:

• The veteran is missing in action (MIA)
• The veteran is a prisoner of war (POW)
• The veteran died while in service or from a service-connected disability and you didn’t remarry
• The veteran died while in service or from a service-connected disability and you didn’t remarry before you were 57 years old or before December 16, 2003
• The veteran had been totally disabled and then died, but their disability may not have been the cause of death (in certain circumstances) 

Financial Requirements

Beyond service time or surviving spouse requirements, you have to meet the lender’s guidelines in order to qualify for a VA loan. Each lender may have slightly different requirements. Here are our guidelines at Rocket Mortgage.

• Minimum 580 qualifying FICO^® Score (however, a minimum of 620 provides the most debt-to-income ratio (DTI) and credit score flexibility)
• DTI may vary, but if your score is 580 – 619, no more than 38% of your monthly income can go toward your house payment and no more than 45% of your monthly income can go toward your total monthly debt payments (including the mortgage payment).
• You need to purchase a single-family residence or a multi-family property of no more than four units
• The home must be your primary residence

The Pros And Cons Of The VA Home Loan Guarantee

For an overwhelming number of borrowers, the benefits associated with a VA loan will outweigh the downsides.

Pros

• No down payment: In most cases, there’s no down payment required for a VA loan. The one exception to this is if you have impacted (partial) entitlement.
• Competitive rates: Because it’s meant to really benefit those who have served our country, VA loans typically offer some of the lowest rates available for a given set of qualifications.
• Cash-out refinance flexibility: A VA loan is the only one that allows you to potentially convert 100% of your existing home equity into cash.

Cons

• Funding fee: Depending on the size of your down payment (if any) and whether it’s your first or a subsequent use of a VA loan, you’ll pay a funding fee of between 1.25% – 3.3% of the loan amount. This can be built into the loan or paid at closing. The fee is 0.5% on VA Streamlines. You’re exempt if you receive VA disability, qualify as a surviving spouse or you’ve returned to active duty after receiving a Purple Heart.
• Primary residences only: This loan can’t be used to purchase vacation or rental properties.

The Bottom Line

VA-guaranteed loans are loans originated by third-party lenders, like Rocket Mortgage, and backed by the VA. This accounts for an overwhelming number of VA home loans. Lenders have loans insured by the VA after making sure they meet specific guidelines set by the Department of Veterans Affairs.

The biggest benefits include typically having no required down payment and some of the most competitive rates. You can qualify if you meet service time requirements, were discharged because of a service-connected injury or you’re an eligible surviving spouse. You can apply for a VA loan online or give one of our Home Loan Experts a call at (833) 326-6018.