8 myths about VA loans that could cost you

Millions of veterans have used VA loans to buy their homes since the program's inception in 1944. However, despite the program's longevity—and the fact that 42,257 VA loans totaling $16.52 billion have been guaranteed so far this year alone, as of the end of August —a number of misconceptions about the loans persist.

"There's a lot of misinformation out there about VA loans—and it can cost veterans real opportunities. That's why it takes an experienced mortgage banker to cut through the noise and guide borrowers through the process," said Justin Coats, regional mortgage operations senior manager for BOK Financial Mortgage^®.

A VA loan allows active-duty service members, veterans and eligible surviving spouses to finance a home with no down payment, no mortgage insurance and typically more lenient credit requirements—but some people don't realize this.

Here are the facts—versus the fiction—about VA loans, according to Coats:

Fiction: You must put down 20% of the home value.
Fact: VA loans can be acquired with no down payment depending on the borrower's entitlement.

VA entitlement is the amount the Department of Veterans Affairs (VA) guarantees to repay the lender if the borrower defaults. Borrowers with a full entitlement can borrow without a down payment if they qualify. The amount of a veteran's entitlement is documented in a Certificate of Eligibility (COE) issued by the VA. "I think part of the confusion comes from the fact that the investors who buy loans (called the secondary market) require that the VA guarantees 25% of the loan amount, but this does not translate to a down payment. The guaranty is insurance provided by the VA for the lender," Coats explained. "The fact is, if a veteran borrower has sufficient entitlement available, they can purchase a home with $0 down payment."

Fiction: There's a limit to how much can be borrowed.
Fact: There is not a maximum loan size for VA loans, but lenders can set their own limits.

The VA has never imposed a maximum loan amount, and county loan limits were also recently removed. "In 2019, the Blue Water Navy Vietnam Veterans Act was signed into law and took effect on Jan. 1, 2020. Among several key changes to the VA loan program, one of the most impactful was the removal of county loan limits for veteran borrowers with full entitlement," Coats explained. "Removing the county limit means a veteran with full entitlement can purchase a home with BOK Financial for up to $1,500,000 with zero down payment. Each lender sets its own loan limits, so it's important to consult with an experienced mortgage banker."

Fiction: You can only use a VA loan once.
Fact: Borrowers can use the VA loan as many times as they'd like, but there are caveats.

"The VA doesn't set a limit on the number of active VA loans a veteran can have. The key factor is entitlement," Coats explained. "When a veteran has an active VA loan, a portion of their entitlement is tied up in that loan. If entitlement hasn't been restored, a calculation is required to determine how much is available for the new loan. That amount is then compared against the 25% VA guaranty requirement. Depending on the result, the borrower may be eligible for a second VA loan with zero down—or may need a down payment sufficient to meet the guaranty threshold."

Fiction: If you're rejected by one lender, you will be rejected by them all.
Fact: Each lender has their own lending criteria that borrowers must meet.

"One of the most misunderstood points about the VA loan process is that if you're denied by one lender, you can't get a loan—and that's just not true," Coats said.

"Some lenders have stricter criteria than others, so being denied by one doesn't mean you're out of options. It's worth checking with other lenders who may have different requirements," Coats said. "The VA views credit as reestablished once the borrower has demonstrated 12 months of consistent, on-time payment history."

Fiction: VA loans have higher interest rates.
Fact: VA loans do not inherently have higher interest rates than other types of loans.

Instead, the kinds of things that can affect interest rates are the borrower's credit score and debt-to-income ratio, as well as the Federal Reserve's monetary policy and the state of the bond and housing markets.

Fiction: Home inspections are mandatory with a VA loan.
Fact: The VA does not require a home inspection, but in many instances, the inspection becomes an important way to protect borrowers.

"Home inspections are not required, but they are recommended—especially for first-time buyers," Coats said. As a first-time homebuyer, it's a good exercise for understanding home maintenance and repairs, he said. "More seasoned homebuyers might better grasp what's needed without an inspection."

Fiction: You must have a high credit score.
Fact: The VA loan doesn't require a minimum credit score but your lender may.

"Traditional loans are very credit- score driven, while VA loans rely on additional factors to determine a borrower's eligibility," Coats said. "The bottom line is: Don't give up if your credit score is less than ideal."

Fiction: The appraisal process on a VA loan takes forever.
Fact: The requirement for a VA loan appraisal is 10 days.

The notion that the VA appraisal process takes longer than a traditional loan is by and large false, Coats said. If your property is in an urban or suburban area, there's plenty of VA appraisal coverage, but more rural areas tend to have fewer VA-approved appraisers who can provide that service. This can mean longer wait times, but it's not because of the VA loan process. That said, rural properties tend to take longer for approval regardless of the type of loan; it's not a VA-specific issue.