What is a VA home loan and who can apply for one?

If you're an active-duty service member or a veteran looking for a home consider a VA loan.

Backed by the U.S. Department of Veteran Affairs, these mortgages offer a range of benefits, including little or no money down and no private mortgage insurance. And because the federal government assumes much of the risk, lenders can offer lower interest rates.

Here's what you need to know about VA loans, including who qualifies and how to apply.

The Department of Veteran Affairs (VA) backs mortgage loans for active service members and veterans. A VA-backed loan is typically issued by a private lender, like a bank or mortgage company, but the VA promises to cover the lender's losses if the borrower defaults.

Much like conventional mortgages, VA loans can be used to buy a primary residence, refinance an existing mortgage or make home improvements. Here are some of the more common types of VA loans.

• VA purchase loan: Borrowers can get a mortgage on a new or existing home with no down payment and no mortgage insurance.
• VA cash-out refinance: Homeowners can replace their current mortgage with a new VA loan that's for up to 100% of the home's appraised value. The difference between the two is paid out in cash and can be used to pay off debts, make home improvements, pay off debt, refinance a non-VA loan and more.
• VA Streamline refinancing: Also known as an Interest Rate Reduction Refinance Loan (IRRRL), this offering allows borrowers to replace an existing VA loan with a new one and reduce their monthly payment, shorten their loan term or get a lower interest rate.
• VA rehab and renovation loan: Eligible borrowers can finance the purchase price of a home and certain renovations within a single package. 
• Native American Direct Loan: Qualified Native American veterans and their spouses can purchase, build, refinance or renovate homes on federal trust land.

As of December 2023, the VA no longer places limits on VA loans for eligible veterans, service members and survivors with full entitlement, provided the mortgage is over $144,000. Approved borrowers with full entitlement can get a loan for any amount a lender will give them and the VA will guarantee 25% of the loan amount without requiring a down payment.

Navy Federal Credit Union offers many benefits to current and retired service members taking out a VA loan, including a rate-match program, a rebate of up to $9,000 and a closing cost credit of $1,000. (Sellers can also contribute up to 4% of the home's value toward closing costs.)

PenFed Credit Union offers conventional fixed-rate and jumbo VA loans, with an option to purchase mortgage points. While origination fees are typically 0.5% and 1.5% of the total loan amount, PenFed charges a flat $995. Even at a modest 0.50%, you would save over $1,000 in fees on a $400,000 mortgage.

USAA issues both conventional and jumbo VA loans at rates that are considerably lower than the competition. It doesn't charge origination fees on VA loans and is known for its speedy preapproval process and 24-hour customer support.

Active-duty U.S. military personnel, veterans, Reserves and National Guard members and some surviving military spouses may qualify for VA loans.

You must meet the minimum service requirements and not have received a dishonorable discharge: Active-duty service members must serve for at least 90 continuous days but eligibility for the National Guard, Reserves and veterans varies depending on when you served. (The VA website has a list of current requirements.)

If you are active military, you will likely need a statement of service signed by your commanding officer. Veterans will need a copy of their discharge paperwork. All applicants will need a Certificate of Eligibility to confirm they've met the service requirements for a VA loan.

In addition to service qualifications, lenders have income, debt-to-income ratio and credit score requirements. According to Veterans United, mortgage lenders usually want a credit score of at least 620 for a VA loan.

A property purchased with a VA loan must be a primary residence and pass a VA appraisal.

If you're interested in applying for a VA loan, you can follow these steps to get started:

• Determine your eligibility: See if you meet the eligibility requirements.
• Obtain a Certificate of Eligibility: You can get one through the VA eBenefits web portal, by mailing your regional VA loan center or from a VA-approved lender.
• Find a VA-approved lender: CNBC Select gathered some of the top VA loan providers.
• Complete the loan application: The lender will guide you through the application process and help you gather the necessary documents, including ones for income and employment verification, credit reports and bank statements.
• Wait for approval: Once you submit your application, the lender will review it and determine if you meet the credit and income requirements. They will also order an appraisal of the property to determine its value.

VA-backing provides a layer of security, so lenders will offer VA mortgages to borrowers otherwise considered too risky, like those with a limited credit history or poor credit. The loans typically have lower interest rates and closing costs than conventional loans.

In addition, VA loans usually don't require a down payment or private mortgage insurance, which can save borrowers thousands of dollars.

A VA loan usually also requires a funding fee, a one-time charge to offset the program's cost. It can range from 1.25% to 3.3% of the loan amount, depending on whether it is the borrower's first VA loan. (Borrowers can pay the VA funding fee upfront or roll it into their monthly mortgage payments.)

The home appraisal process for VA loans can also be more rigorous. The VA requires that an approved appraiser conduct a thorough check of the property to determine its value and ensure that it meets the VA's minimum property standards.

Veterans or service members looking to buy a home or refinance an existing mortgage should strongly consider a VA loan. In addition to enjoying lower interest rates and special rebates, eligible borrowers can often avoid a down payment or private mortgage insurance.

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