How Does The VA Loan Work?

The VA Loan is a mortgage backed by the Department of Veterans Affairs. While a conventional mortgage goes directly through the lender, who approves you based on income, credit, and other factors, the VA Loan has added protection for the lender. If you were to default on the loan, the Department of Veterans Affairs would step in to pay what you owe.

The VA won’t actually pay the entire amount of your loan. Instead, they pay 25% of the remaining loan amount if you go into foreclosure. The lender still gets possession of the home, so it is a good assurance for them that they will not lose money if they lend to someone using the VA Loan.

Why a VA Loan?

What makes the VA Loan different for the borrower? It does not require a down payment. While most loans require between 3.5% and 20% of the purchase price down as a down payment, the VA Loan has a 0% down payment requirement. For many potential home buyers, saving up for a down payment can take years. For those in a seller’s real estate market or high-priced market, it may not even be possible. 

History of the VA Loan

Historically, the VA Loan was designed to help those returning from service overseas to attain home ownership without the need for a down payment. It began after World War II. Because they had sacrificed years of potential earnings to serve, those Veterans and service members returning home had the benefit of the VA Loan in addition to their other Post-World War II GI Bill benefits, such as money for education. 

Once you decide to use your VA Loan entitlement, you will still need to go through the other steps required to qualify for and take out a mortgage. This is done independently through your lender. They will need to know that you want to use a VA Loan and have the required paperwork to support your eligibility as part of your overall loan application. Once approved, you make mortgage payments directly to your lender just like you would with any other loan.