VA Loan Guaranty: What You Need to Know

By Bill Lyons | Published on May 17, 2023

A VA loan can help you secure financing for a primary residence with more flexibility. VA loan lenders typically have less stringent lending criteria, with lower credit scores and higher DTIs accepted and a zero percent down payment.

VA loans are only available for eligible veterans, active duty service members, and surviving spouses. However, understanding these loans can be a little confusing because they’re not offered by the US Department of Veterans Affairs (VA). Instead, you secure a VA loan from a lender, which is then guaranteed by the VA.

The VA loan guaranty is designed to help military members achieve their dreams of homeownership with fewer roadblocks, enabling them to become homeowners without having to make a down payment. But what is a VA loan guaranty, and how do you get it?

What Is a VA Loan Guaranty?

The VA guarantees a portion of the VA loan to the lender if a borrower defaults on the mortgage. It’s because of this guarantee that VA loans are available with a zero percent down payment, since the VA guarantees up to 25% of the mortgage loan.

If you apply for a VA loan, your lender will receive a Guaranty Certificate (LGC) from the VA. So what is a VA loan guaranty certificate? It’s a document that lists the amount the VA will guarantee as a percentage and dollar amount. If you default on your loan, the VA will reimburse the lender. The LGC acts as proof for the lender that the VA’s guaranty is given in good faith and contingent upon several factors, such as:

• The borrower and property are eligible for a VA loan
• No fraud or misrepresentation by the lender
• The lender’s compliance with applicable laws

Military members and veterans who have met the VA’s minimum service requirement and received discharges other than dishonorable are eligible for the VA loan, along with National Guard and Reserves members and veterans with honorable discharges.

Types of VA Loans

There are three VA loan guaranty programs for eligible borrowers, including the following:

• Purchase loan: With a VA purchase loan, you can buy, repair, or build a home with zero down payment required and a competitive interest rate. VA purchase loans typically offer better terms and more flexible lending requirements than conventional homes. Additionally, you can choose a fixed-rate or adjustable-rate mortgage (ARM) depending on your particular needs and financial situation.
• Streamline refinance loan: A streamline refinance loan, also known as an interest rate reduction refinance loan (IRRRL), is for borrowers who want to reduce their interest rates and, in turn, decrease their monthly mortgage payments. With a VA streamline refinance, you can switch from an ARM to a fixed-rate mortgage or refinance for a lower interest rate.
• Cash-out refinance loan: A cash-out refinance loan allows you to leverage your home’s equity and use the cash taken out for anything from medical bills to other debts. These loans can also be used for home improvements to increase your home value.

Additionally, eligible borrowers may use their VA loan as many times as they want to receive the zero percent down payment benefit as long as they have and/or restore their full VA entitlement. Borrowers with partial entitlement may have to make a down payment to cover the VA loan guaranty.

You can find more information about what you qualify for on your entitlement, and you can request your Certificate of Eligibility (COE) or ask your lender to do it for you. This document will tell you and lenders whether you’re eligible for a VA loan and how much of your entitlement is remaining.

If you’ve never used your VA loan guaranty, you have your full entitlement and there are no loan limits. However, if you’ve already used your entitlement and have remaining entitlement, conforming loan limits may determine whether or not you have to make a down payment. You can talk to your lender to learn more about how entitlement affects your VA loan.

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VA Loan Requirements

You must meet the VA’s and your lender’s eligibility requirements to qualify for a VA loan. Remember, the VA guarantees the loan, and they protect their investment. Not everyone who has served in the military is eligible for a VA loan. Instead, you must meet the minimum service requirements.

You meet the VA loan eligibility requirements if you served 90 days or more during wartime or 181 days or more during peacetime. However, a greater length of service may be required for some veterans. Additionally, if you received an other-than-honorable discharge, you may or may not be eligible for a VA loan.

Reserves and National Guard members not eligible for the VA loan guaranty might become eligible after years of service if they received an honorable discharge. Additionally, surviving spouses may be eligible for the VA loan if they’re unmarried and their spouse died as a result of the service or service-related disability, or their spouse is listed as missing in action (MIA) or a prisoner of war (POW) for at least 90 days.

The VA also has loan eligibility requirements for the property itself. To secure a VA loan, they must ensure the property meets the minimum property requirements (MPRs), determining that the home is safe and structurally sound. Some things that the VA checks for include:

• Residential zoning
• Sufficient space for living, sleeping, cooking, and bathrooms
• Access via street and private roads
• Proper drainage
• Flood hazards
• Safe water and sewage disposal
• Structural issues
• Heating
• Lead paint
• Pests

Since VA loans are provided by private lenders, eligible borrowers must also meet the lender’s criteria to be eligible for the loan. Since the VA loan guaranty protects the lenders if you default on the loan, they can provide much more flexibility when determining who qualifies. A few lender requirements include the following:

• Income: Lenders must determine that you earn enough income to repay your loan. While there are no set income requirements, it’s one of the main qualifying criteria for any type of home loan.
• Debt-to-income (DTI) ratio: Your income also affects your DTI ratio — the percentage of your income that goes to repaying debt, including a new mortgage. Lenders prefer borrowers to have a DTI of 43% or lower, but some may allow for higher ratios.
• Credit score: Lenders prefer that VA borrowers have a minimum 580 FICO score compared to the 620 score needed for traditional home loans. However, this requirement varies by lender.

Benefits of the VA Loan Guaranty

The VA loan guaranty ensures more flexible lending criteria for eligible veterans, active duty service members, and surviving spouses. Because the VA guarantees up to 25 percent of the loan, lenders can approve riskier borrowers who may not have excellent credit.

Additionally, VA loans typically cost less than other types of home loans because they don’t require a down payment. Most loans that allow for a down payment of less than 20% typically require private mortgage insurance (PMI) that can add hundreds of dollars to your monthly mortgage payment, but this isn’t a requirement for VA loans. You can also expect lower VA loan rates and closing costs compared to conventional loans.

How to Get the VA Loan Guaranty

The VA loan guaranty is given to eligible borrowers who meet the VA’s minimum service requirements. First, you’ll need to apply for a home loan by obtaining your Certificate of Eligibility (COE) from the VA to prove to the lender that you’re eligible for the benefit. Then, you can apply for a VA-guaranteed loan through a participating mortgage lender.

Lenders can obtain the VA loan guaranty certificate directly from the VA, which states how much they’re willing to guarantee on the loan. From there, you’ll continue through the steps of applying for a home loan by filling out an application with a lender and working with the VA to schedule an appraisal. Once you’re approved by the lender and the VA, the lender will work with you through closing to fund your loan.

Work With Us to Get Your VA Loan Guaranty Certificate

The VA loan guaranty can help eligible borrowers secure a home loan at a lower overall cost through benefits like zero down payment required, competitive interest rates, and lower closing costs. The VA loan certificate tells lenders how much the VA is willing to guarantee on the loan, effectively lowering the risk for the lender and allowing them to offer more flexibility during the underwriting process.

Griffin Funding is a premier provider of VA loans across the nation. We’ll work directly with you and the VA to help you get the financing you need to purchase a home. Contact Griffin Funding today or apply online.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.