VA Loan

A VA loan is a home loan made by a private lender and guaranteed in part by the Department of Veterans Affairs under chapter 37 of title 38 of the United States Code. VA is not the lender and, in the ordinary case, not the insurer either: it promises to reimburse the lender for a defined share of its loss, and 38 USC 3703(b) makes that liability rise and fall with the unpaid balance. Because the lender's downside is covered at the top, it can lend the whole purchase price without requiring either a down payment or mortgage insurance.

The contrast with an FHA loan is a genuine legal difference rather than branding. FHA insures the loan and charges every borrower two premiums for the insurance. VA guarantees a portion of it, charges a one-time funding fee instead, and exempts several categories of borrower from the fee completely. Eligibility rests on service rather than on income or geography.

The funding fee is a statutory table, not a lender's price. 38 USC 3729(b)(2) sets it as a percentage of the loan amount, and the two variables are whether this is the borrower's first use of the benefit and how much they put down. For a purchase loan closed on or after April 7, 2023 and before June 9, 2034:

An interest rate reduction refinancing loan is 0.50 percent, and so is a loan assumption. The statute also allows the fee to be included in the loan and paid from the proceeds (3729(a)(2)), which is why it is commonly financed rather than paid in cash, and correspondingly easy to overlook.

Two details in that table repay attention. The statutory term for the top row is "0-down", and it is defined as a down payment "of less than 5 percent" rather than of nothing, so a borrower putting down 3 percent pays the same rate as one putting down nothing. And the subsequent-use surcharge applies only in that top row: put 5 percent down and a repeat user pays exactly what a first-time user pays.

A step-down is already enacted, dated June 9, 2034. For loans closed on or after that date the same table falls to 1.40 percent for a first use with under 5 percent down, 1.25 percent for a subsequent use, 0.75 percent at 5 percent down and 0.50 percent at 10 percent down. That is why every figure above is stated with its window, and it is a change no annual inflation review would catch.

The waiver is broader than its shorthand, and the shorthand names the wrong test. Under 38 USC 3729(c)(1) no fee may be collected from a veteran who is receiving compensation, or who "but for the receipt of retirement pay or active service pay, would be entitled to receive compensation"; from a surviving spouse of a veteran who died from a service-connected disability, including one who died in active service; or from a member of the Armed Forces on active duty who provides evidence of a Purple Heart award on or before the date of closing. There is no percentage rating in the statute. Subsection (c)(2) adds that a veteran rated eligible through a pre-discharge examination or memorandum rating counts as receiving compensation from the date of the rating, whatever the award's effective date. For that borrower the loan is nothing down and no fee.

The loan-limit question turns on entitlement rather than on the calendar. 38 USC 3703(a)(1)(C) splits borrowers in two. A veteran who is not a "covered veteran" gets a guaranty of 25 percent of the loan with no dollar ceiling at all. A "covered veteran", defined at (C)(iii)(I) as one who has previously used entitlement that has not been restored, is capped at 25 percent of the Freddie Mac conforming loan limit, reduced by the entitlement already used. So the conforming limit still binds, for partial entitlement only.

What that cap limits is the guaranty, not the loan. A lender is free to lend more than the guaranteed portion supports, and whether it will do so with nothing down is a lender decision rather than a statutory one, which is why a borrower in this position is often asked for a down payment covering the shortfall.

Reservists no longer pay a surcharge. The statutory table's pre-2020 rows do charge a Reservist more than an active-duty veteran, 2.40 percent against 2.15 percent in the top row. Every row from January 1, 2020 onward carries identical columns for both. A page or calculator still showing two tiers is describing law that no longer applies to any loan being written today.

You obtain a certificate of eligibility, apply to a lender that writes VA loans, and close in the ordinary way. The guaranty attaches when the loan complies with chapter 37, and the property has to meet the standards VA prescribes. The funding fee is collected at closing, in cash or financed into the balance.

A hypothetical example. Talia buys a house for $350,000 with no down payment, and this is her first use of the benefit. Her loan is $350,000, so the funding fee is 2.15 percent of that, or $7,525 ($350,000 multiplied by 0.0215). Financed, her balance at closing is $357,525.

Three variations show what actually drives the number. Putting 5 percent down means borrowing $332,500 and paying 1.50 percent, a fee of $4,987.50, so a $17,500 down payment also cuts the fee by $2,537.50. Using the benefit a second time with nothing down would charge 3.30 percent of $350,000, or $11,550. And if Talia were receiving VA disability compensation, the fee in every one of those cases would be zero.

Pros

• No down payment is required, and no monthly mortgage insurance is charged, which is a combination no other widely available loan offers.
• The funding fee is waived entirely for veterans receiving or entitled to disability compensation, for Purple Heart recipients on active duty, and for certain surviving spouses.
• A veteran with full entitlement faces no dollar cap on the guaranty, so the conforming loan limit does not constrain them.
• The fee may be financed rather than paid in cash, and an interest rate reduction refinancing loan carries only 0.50 percent.

Cons

• Borrowing 100 percent of the price means starting with no equity and a balance that includes the financed fee, so an early sale can leave the borrower short.
• A repeat user with nothing down pays 3.30 percent, which is the highest rate in the table and is easy to overlook when reusing the benefit.
• A borrower whose entitlement has been used and not restored is capped against the conforming loan limit, which can mean a down payment after all.
• The benefit is limited to those with qualifying service, and the property must meet VA requirements, which can complicate a purchase in poor condition.