Although it may seem that a VA loan would be one provided by the government, this is not the case. Private lenders, such as banks or mortgage companies, actually make available this special type of home loan to US Armed Services veterans. The upside for the lender is that the VA guarantees a portion of this loan will be paid in the instance where the borrower is unable to fulfill his or her payment requirements. 

In financing your VA loan, you'll hear the word "entitlement" used a lot. This set amount of money isn't given to you, nor is it a cash payment to the bank. Your entitlement is what the VA promises the lender will receive in the event that you must default on your loan. Currently, the set entitlement for first-time buyers using their VA benefits is $36,000 for properties under $144,000, and $60,000 for properties between $144,000 and $240,000. 

Financing of your VA loan begins with filing and receiving a Certificate of Eligibility. This shows the lenders that you are, in fact, eligible for VA loan entitlement and benefits. While a Certificate of Eligibility is required by banks, this does not mean that they will approve your credit application. All other forms of typical credit checks are mandatory when filing for a VA home loan.

VA Loan Financing Fees

There are fees associated with a VA loan, for both you and possibly the seller of the home you intend to purchase. 

Funding fee. The funding fee is paid by you, the borrower. It is non-negotiable and required by law. However, the rates of the funding fees fluctuate depending on whether or not this is your first VA loan, or if you are submitting a down payment on the home you are purchasing. VA loans typically do not require a down payment, which is one of their many benefits. But there is a funding fee associated with this perk, and it is normally financed in with the final amount. The funding fee is designed to allow the veteran to contribute towards his VA loan without added burden to the taxpayers. The normal funding fee for a first-time VA loan with no down payment is 2.15%. Second-time home buyers using the VA loan program with no down payment will pay a 3.3% funding fee, but this can be incrementally reduced by providing higher down payments.

Other fees. In the normal loan process, there are other fees that are charged by escrow companies, lenders, title companies, and other entities. These fees are classified as "non-allowable." Non-allowable fees are not paid by the borrower who uses a VA loan. The VA (and FHA) prohibits the buyer from paying these fees, but they are often (nearly always) charged anyway. Thus, the burden of these fees falls on the seller. In the conventional loan process, non-allowable fees are commonly paid by the buyer, so this can prove difficult in finding a seller who will agree to pay them. When financing your purchase of a home through the VA loan program, sellers will often agree to pay the fees, but there will be little to no bargaining room on the original price of the home. 

VA Loan Financing Benefits

Although the added fees for both you and the seller may appear to make VA financing an unwanted prospect, there are several benefits to keep in mind. 

• Financing is usually 100% with no down payment required.
• Private Mortgage Insurance is not required.
• There are no penalties assessed if you prepay the loan.
• All closing costs may be paid by the seller.
• Interest rates are competitive.
• Loan qualification can be easier than a conventional loan.
• VA provides servicing and counseling options to those with financial difficulties.
• Competitive in terms of financing options and lengths as compared to traditional loans.