How to Use Your VA Loan: Step-by-Step Guide

Start with your COE and financial prep to unlock the benefits of your VA loan today.

A Beginner's Guide To Using Your VA Loan For the First Time

Getting Ready to Apply for a VA Loan

Before diving into the VA loan process, it’s important to gather the necessary documents and check your financial situation. This preparation will help make the process smoother.

Getting Your Certificate of Eligibility (COE)

The Certificate of Eligibility (COE) proves you’re eligible for VA loan benefits. The documents required to obtain it vary depending on your military status.

• Veterans: You’ll need to submit your DD214 (preferably Member Copy 4) as proof of discharge. If you’ve lost your DD214, you can request another copy through the U.S. National Archives and Records Administration.
• Active-duty service members: A statement of service signed by your commander, adjutant, or personnel officer is required.
• National Guard and Reserve members: The required documents depend on whether you’ve been activated:

For surviving spouses, the requirements depend on whether you’re receiving Dependency & Indemnity Compensation (DIC):

• If receiving DIC, submit VA Form 26-1817.
• If not receiving DIC, you’ll need VA Form 21P-534EZ, a copy of your marriage license, and the veteran’s death certificate.

The quickest way to get your COE is through your lender, as they can access it directly using the Automated Certificate of Eligibility (ACE) database.

Checking Your Financial Readiness

Before applying for a VA loan, it’s essential to evaluate your credit, debt, and income to ensure you meet the requirements.

• Credit Assessment: Start by getting your free credit reports from all three major bureaus - Equifax, Experian, and TransUnion - at AnnualCreditReport.com. Look for any errors or outdated information that could hurt your credit score.
• Debt-to-Income Ratio (DTI): Calculate your DTI by dividing your total monthly debt payments (like car loans, student loans, and credit card minimums) by your gross monthly income. While the VA prefers a DTI under 41%, some lenders may approve higher ratios if your overall financial profile is strong.
• Residual Income: This is the money left after covering major expenses each month. The VA requires borrowers to meet specific residual income guidelines, with stricter requirements if your DTI is over 41%.

If your financial profile has weak spots, certain factors can help, such as a strong credit history, stable employment, significant savings, military benefits, or prior homeownership. If needed, focus on paying down debt or increasing income to improve your DTI ratio. Keep in mind that some income sources, like overtime or self-employment earnings, usually require at least two years of documented history.

Setting a Realistic Budget

A well-thought-out budget is essential when preparing for a VA loan. It helps you understand what you can afford and plan for additional expenses.

• Track Income and Expenses: Begin by listing all your monthly income and expenses, including housing, loans, food, transportation, and utilities. Tools like spreadsheets, Mint.com, or You Need a Budget can help you monitor spending.
• Estimate Your Mortgage Payment: Use a VA Loan Calculator to estimate monthly payments, including principal, interest, property taxes, and homeowners insurance, based on different home prices and interest rates.
• Plan for Extra Costs: Homeownership comes with expenses beyond the mortgage. For example:
• Build an Emergency Fund: Save at least three months’ worth of living expenses in a separate account. Additionally, aim to save around 5% of the purchase price to cover moving expenses and closing costs. VA loans also allow sellers to cover mortgage-related closing costs and up to 4% in concessions, which can help reduce your out-of-pocket expenses.

Finally, consider life changes that could affect your financial situation, such as family expansion, career moves, or lifestyle adjustments. A disciplined budget that accounts for these factors will not only help you meet VA loan requirements but also set you up for long-term success as a homeowner.

The VA Loan Application Process

The VA loan application process is your gateway to accessing the exclusive benefits available to military families. Once you’ve organized your finances and gathered the necessary documents, it’s time to tackle the application itself. This involves finding the right lender, completing a home appraisal, and understanding the costs tied to closing your loan.

Choosing a VA-Approved Lender

Picking the right lender is a critical step that can shape your entire VA loan experience. Not every mortgage lender handles VA loans, and even fewer have deep expertise in this area. To ensure a smooth process, confirm that your lender is VA-approved and has a solid track record with these loans. You’ll also want to check that they can secure your Certificate of Eligibility (COE).

When comparing lenders, it’s smart to get offers from at least three to evaluate your options. Pay close attention to the Annual Percentage Rate (APR) rather than just the interest rate, as the APR includes additional fees, giving you a clearer picture of the loan’s total cost. Keep in mind that the VA doesn’t set interest rates; these are determined by the lender based on factors like profit margins and market conditions. Before committing, check online reviews, confirm if you’ll have a dedicated loan team, and clarify which military-related documents you’ll need to provide.

Once you’ve chosen a lender, the next step is meeting the VA’s appraisal and property standards.

Home Appraisals and Property Requirements

After selecting your lender, the VA appraisal becomes a key part of the process. This step assesses the home’s fair market value and ensures it meets the VA’s safety and habitability standards. It’s important to note that a VA appraisal is not the same as a home inspection. While the appraisal focuses on value and basic safety, a home inspection offers a more detailed look at the property’s overall condition.

VA appraisals typically take one to two weeks and cost between $400 and $1,200, depending on the property type and location. A VA-certified appraiser will evaluate both the interior and exterior of the home and compare it to at least three similar properties recently sold in the area. The findings are compiled into a report, which is uploaded to the VA’s secure portal within about 10 business days.

Every appraisal is reviewed by either a VA staff appraiser or the lender’s Staff Appraisal Reviewer (SAR), who then issues the Notice of Value (NOV). This document outlines the appraised value and flags any issues that must be resolved before the loan can close. To pass the appraisal, the property must meet the VA’s Minimum Property Requirements, which cover areas like drainage, roof condition, zoning compliance, electrical and heating systems, water supply, and termite inspections.

If the appraisal identifies problems, you’ll need to address them promptly. This might involve negotiating repairs with the seller, covering repair costs yourself, or reevaluating the purchase if the appraised value is lower than the agreed price. A VA-savvy real estate agent can help you identify homes more likely to meet VA standards from the start. Additionally, consider a separate home inspection (costing $300 to $500) to uncover potential issues beyond the VA’s basic criteria.

Closing Costs and Funding Fees

Once your lender and appraisal are squared away, it’s time to understand the closing costs. VA loan closing costs typically range between 3% and 5% of the home’s purchase price, with the VA imposing strict limits on certain fees. These costs include the VA funding fee, loan origination fee, appraisal fee, and title insurance.

The VA funding fee is unique to VA loans. For first-time buyers with no down payment, the fee is 2.15% of the loan amount. For those using their VA benefits again, it rises to 3.3% without a down payment. You can lower this fee by making a down payment:

Veterans receiving VA compensation for a service-related disability are exempt from the funding fee, and the fee can also be rolled into your loan.

Other closing costs include the loan origination fee, capped at 1% of the loan amount, and the appraisal fee, which varies between $400 and $1,200 depending on location. If you’re pursuing a VA Interest Rate Reduction Refinance Loan (IRRRL), the funding fee drops to just 0.5%.

A major perk of VA loans is that sellers can contribute up to 4% of the home’s appraised value in concessions. These funds can go toward closing costs, paying off existing debt, or prepaying insurance premiums. To prepare for closing, carefully review your Loan Estimate for a detailed breakdown of costs. You might also negotiate with the seller or explore lender credits in exchange for a slightly higher interest rate to offset upfront expenses. Compared to conventional loans, VA loans often come with lower upfront costs, thanks in part to the absence of recurring mortgage insurance and strict fee limits.

Other Ways to Use VA Loans

Beyond buying a home, VA loans offer a variety of options, including refinancing, building a home, and specialized programs like the Native American Direct Loan (NADL). Let’s dive into these additional opportunities.

Refinancing With a VA Loan

VA loans provide two refinancing paths: the Interest Rate Reduction Refinance Loan (IRRRL) and the Cash-Out Refinance.

The IRRRL, often referred to as a "streamline" refinance, is designed to lower your monthly payments by reducing your interest rate or converting an adjustable-rate mortgage into a fixed-rate one. However, this option is only available for existing VA loans.

The Cash-Out Refinance allows you to tap into your home equity for purposes like home improvements, debt consolidation, or even education expenses. You can borrow up to 100% of your home's appraised value, though many lenders limit the loan-to-value ratio to 90%. The funding fee is 2.15% for first-time users and 3.3% for subsequent uses, with total closing costs typically ranging from 3% to 5% of the loan amount.

To make an informed decision, calculate your break-even point by dividing the closing costs by your monthly savings. Be wary of unsolicited offers, and always compare terms from multiple lenders to secure the best deal.

Now, let’s look at how VA loans can help you build your dream home.

Building a Home With a VA Construction Loan

VA construction loans make it possible to finance both land and construction without requiring a down payment. Unlike standard VA loans, these loans involve specialized lenders experienced in handling construction financing.

There are two types of VA construction loans: one-time close and two-time close. The one-time close combines both construction financing and the permanent mortgage into a single transaction. In contrast, the two-time close involves separate closings for the construction and permanent financing phases.

"The advantages of a VA construction loan include no down payment required for fully entitled veterans, 640 minimum credit scores, and no private mortgage insurance required on the VA one-time close, which is completed in one loan versus up to three for the traditional route." – Richie Duncan, Division Manager with VANationwide.com

To start, verify your eligibility, choose an experienced lender and builder, and submit approved construction plans. The VA will appraise your project based on these plans, and funds will be released to the builder in stages as construction progresses. Keep in mind that construction loan interest rates are typically at least 1% higher than standard mortgage rates. Additionally, many major VA lenders do not handle the construction phase, so you may need to work with a local lender or builder for that portion, then refinance into a permanent VA loan once construction is complete.

Now, let’s explore the Native American Direct Loan program.

Native American Direct Loan (NADL) Program

The Native American Direct Loan (NADL) program is specifically designed to assist eligible Native American veterans, as well as their spouses, in purchasing, building, or improving homes on federal trust land. Unlike standard VA loans, where private lenders are involved, the VA itself acts as the direct lender in NADL transactions.

To qualify for an NADL, your tribal government must have a Memorandum of Understanding with the VA, and you need a valid Certificate of Eligibility. You’ll also need to meet VA credit standards, have sufficient income to cover mortgage payments, and plan to use the home as your primary residence.

The NADL program offers several advantages, such as no down payment in most cases, no private mortgage insurance, limited closing costs, and 30-year fixed-rate mortgages starting at just 2.5% interest. The funding fee is 1.25% for purchases and 0.5% for refinances, and you can borrow up to the Fannie Mae/Freddie Mac conforming loan limits without a down payment. Even better, you can reuse this benefit for future home purchases.

To get started, request your Certificate of Eligibility and contact an NADL coordinator to begin the application process.

Common VA Loan Mistakes to Avoid

When navigating the VA loan process, being aware of common mistakes can save you both money and stress. Veterans and service members often face avoidable challenges with VA loans, but understanding these pitfalls can make all the difference.

How Entitlement Restoration Works

A common misunderstanding about VA loans is the belief that the benefit can only be used once. In reality, VA loan entitlement can be restored and reused multiple times throughout your life, provided you take the right steps to restore your eligibility. This flexibility ensures that veterans can continue to benefit from VA loans for future home purchases.

"Veterans sometimes think they're stuck with only one shot at a VA loan. But the truth is, you can restore your entitlement repeatedly and enjoy VA perks for multiple home purchases over your lifetime." – Avery Thompson, Mortgage Analyst

Restoring entitlement involves notifying the VA and completing specific paperwork. Here are the main ways to restore your entitlement:

• Selling the property and paying off the loan: This requires submitting VA Form 26-1880 along with proof that the loan has been satisfied.
• Refinancing into a non-VA loan: This option is more complex and requires special exceptions.
• Using the one-time restoration option: This can only be used once in your lifetime.

It’s also important to note that subsequent uses of a restored entitlement come with higher funding fees. For instance, if you use your entitlement again without a down payment, you’ll face a 3.6% funding fee. However, this fee decreases with a larger down payment:

"Full restoration of your VA loan entitlement can save you tens of thousands of dollars over the life of your next loan, especially if you're eyeing a higher-priced home." – John Bell, Deputy Director of the VA Home Loan Program

Divorce-related issues, such as an ex-spouse remaining on the loan, can also complicate entitlement restoration.

Next, let’s look at how to handle common appraisal challenges to keep your VA loan process on track.

Dealing With Appraisal Issues

Appraisals can be a sticking point in the VA loan process, but with the right preparation, you can avoid unnecessary headaches. Before making an offer, work with a VA-savvy real estate agent who can identify potential Minimum Property Requirement (MPR) issues. These might include faulty heating systems, roof problems, or pest infestations - any of which could lead to a low appraisal.

It’s also smart to research comparable sales in the area to ensure your offer aligns with market values. If the appraisal comes in low or highlights problems, you can negotiate with the seller to make the necessary repairs to meet VA standards. Many sellers are open to making repairs rather than losing the sale.

Since appraisals can sometimes take longer than expected, include reasonable deadlines in your purchase contract to account for potential delays. Additionally, while VA loans don’t require a home inspection, getting one is a good idea. Inspections can uncover issues that appraisals might miss, giving you a clearer picture of the property’s condition.

Other common missteps include not securing your Certificate of Eligibility early, underestimating closing costs, working with inexperienced loan officers, or making large purchases before closing. Veterans also frequently skip home inspections, overspend on homes beyond their budget, and fail to shop around for competitive interest rates.

Next Steps for Your VA Loan

✅ Confirm your VA Loan eligibility

✅ Get your Certificate of Eligibility (COE)

✅ Track your budget & spending with RocketMoney

✅ Open a HYSA to boost your savings

✅ Monitor your credit & fix errors

✅ Get pre-approved

✅ Download the free VA Loan Checklist

✅ Explore credit-building cards with waived fees

Your VA loan benefit is a lifetime resource, so it’s time to take action and make the most of it. Here's how to move forward confidently.

Start by getting preapproved. This step not only helps you understand your budget but also shows sellers that you’re a serious buyer. Chris Birk, VP of Mortgage Insight at Veterans United, puts it this way:

"Getting preapproved is like getting your golden ticket to house hunt with confidence. This is a non-binding step that ensures you know what you can afford and lets home sellers know you've got what it takes to get to closing day."

Stay on top of things by being organized. Respond quickly to lender requests, gather all your financial documents in one place, and avoid taking on new credit or making big purchases before your loan closes. It’s also wise to prepare for unexpected challenges - flexibility is key.

Work with professionals who have VA loan expertise to ensure a smooth process. If you’re unsure about any paperwork or requirements, reach out to your loan officer - they’re there to help. The sooner you provide the necessary documents, the quicker your loan can progress.

Once you close on your home, carefully review all the documents and do a final walkthrough to confirm that any agreed-upon repairs have been completed. If you spot any problems, contact your real estate agent immediately to address them.