Mortgages backed by the Veteran's Administration have helped countless veterans achieve the dream of homeownership. Unfortunately, many men and women who served in the military know little about this powerful homebuying opportunity. Additionally, most veterans are not familiar with the real facts behind VA loans. 

Here is how VA Home Loans work and what you can expect when you apply for a VA-backed mortgage. 

A Closer Look at VA Loans

The Department of Veteran's Affairs (VA) offers mortgage programs for qualified veterans and active-duty personnel to help them buy an affordable home or refinance an existing mortgage with reasonable terms. As a veteran, you can borrow up to the national conforming loan limit of $484,350, as of 2019. In high-cost locations such as San Francisco or New York, the conforming limit is higher.

Most VA-backed mortgages offer tremendous benefits that you cannot find with conventional home loans. First off, many VA loans require little to no money down. Also, you will not pay a monthly mortgage insurance premium (MIP) or an upfront fee like you would with a conventional, low-down-payment home loan. The VA does not have a private mortgage insurance (PMI) requirement. The bottom line here is if you want to buy a house but are on a strict budget, using a VA home loan can save you thousands in down payment costs and monthly payments. 

Interest rates on VA loans are some of the lowest in the mortgage industry, and you will pay far less in closing costs than you would with a conventional home loan. The VA only allows banks and mortgage companies to charge you up to 1 percent of your loan amount in lender's fees. Keep in mind the limit does not apply to fees charged by third parties (title insurance companies, recording fees, filing fees, etc).

However, many veterans believe the VA provides the actual financing. The reality is, private lenders offer the loan while the VA insures a portion of the mortgage in case you default. When your mortgage goes into default, it typically means you are more than 90 days past due, and foreclosure proceedings are imminent. 

VA Loan Eligibility Requirements

Only certain veterans and their spouses qualify for VA-backed mortgages. The good news is the qualifications are not as strict as you think. Here are the VA's eligibility requirements:

• Active-duty service for 181 days during peacetime
• Active-duty service for 90 consecutive days during wartime
• Member of the Reserves or National Guard for six consecutive years
• Married to a veteran who died as a result of a service-connected disability or in the line of duty 

Remember that it is ultimately up to the lender to decide to give you a loan. You will still need to meet certain requirements outlined by the bank or mortgage company. 

As previously mentioned, the VA only insures loans and banks or mortgage lenders provide financing. So, lenders are not required to approve you for a mortgage. However, lenders must follow the VA's underwriting guidelines if they do offer you a loan backed by the Veteran's Administration. 

Basic and Bonus Entitlement

The VA refers to your eligibility to borrow money using a VA-backed mortgage as your basic and bonus entitlement. The word "entitlement" is another word for insurance. However, your basic and bonus entitlement are not the same, but you can use them at the same time. Here is how they work:

When you receive your certificate of eligibility (COE) from the VA, it will show you are eligible for $36,000 in basic entitlement. Fortunately, the $36,000 on your COE is not the maximum amount you can borrow. The figure is how much the VA will pay if you default on your loan.

Most banks and mortgage lenders will lend you up to four times your basic entitlement, which is $144,000 ($36,000 x 4 = $144,000). So, using your basic entitlement, you can borrow up to $144,000 to buy a home. You might be thinking $144,000 is not enough to buy a home in most places, and you are right. This is where your bonus entitlement kicks in. 

Since the median home value in many cities throughout the country is more than $300,000, you will need your bonus entitlement to buy a home. Using your bonus entitlement, you can borrow up to the national conforming loan limit of $484,350. In areas designated as high-cost, you can borrow up to $726,525. 

The VA determines your bonus entitlement by using the 25 percent it will pay in insurance on a defaulted loan and multiplying it by the national conforming loan limit of $484,350, which comes to $121,087. 

The VA then subtracts the $121,087 from your original basic entitlement of $36,000, leaving $85,087, which is your bonus entitlement. The VA then multiplies $85,087 by four since most lenders allow you to borrow up to four times your basic and bonus entitlement. The figure comes to $340,350, which is how much you can borrow with your bonus entitlement. The VA then adds the loan limit of $144,000 from your basic entitlement to the $340,350 loan limit from your bonus entitlement, which totals $484,350. As you can see, the total is the same as the conforming loan limit of $484,350.  

Other VA Loan Uses

You can use your VA home loan entitlement for more than just buying a house. You can use it to reduce the interest rate on an existing loan (known as an IRRRL), or you can take out some equity in your home with a 100 percent cash-out refinance. Additionally, you can use a VA home loan more than once as long as you have not used all of your basic and bonus entitlement. Now that you know the facts behind VA mortgages, you should comfortably find the loan program that fits your needs.