What is a VA Loan?

What is a VA loan?  A Veterans Administration (VA) loan can be used to help American servicemen or women and/or their spouses secure financing for a mortgage purchase. You can check with the Veterans Administration (through its website or through other information exchanges) to find out whether you are eligible given your service history. Only service members who have received honorable discharges and who have served 90 days or more may qualify for VA loans.

Bear in mind that the Veterans Administration isn't actually giving money towards your house or property. It provides a kind of insurance to lenders that you will make good on your obligation. If you get a loan for $144,000 or less, the VA will back you up to the tune of about $36,000 (this number may vary depending on the terms of your contract and agreement with the lender).

If you take out a mortgage for more than $144,000, the VA will back you up with $60,000 worth of funds if you default. Bear in mind this money won't go to your pockets -- it will go to the lender to whom you defaulted.

The advantages of VA loans are manifold. First, you can purchase relatively large properties without a down payment or with a minimum down payment. 100 percent financing is possible, although experts caution that former service members should work out long-term payment strategies (including researching pensions and other benefits) before taking on a significant interest-only loan.

A VA loan should be used as a leverage to reduce your rates and qualify for a larger house than you might otherwise get through conventional methods.  It should not be used as a tool to spend beyond your means.

VA loan qualifiers don't have to pay for private mortgage insurance, which can free up some funds for relieving consumer debt. If you come into funding early, you can prepay your VA loan without penalties. Finally, your seller can take care of closing costs for you, further reducing your upfront debt load.

On the flip side, VA loans sometime take longer to process. Moreover, sellers may not be thrilled by the prospect of paying closing costs. After all, the borrower gets to write off the closing cost payments on his or her tax return. Still, if you're a service member who qualifies, it might be in your best interests to compare VA loan rates with conventional and FHA loan program rates.