The VA Loan Benefit Most Veterans Never Claim

Four things make the VA loan structurally different from every other mortgage program. Not better in all cases — different in ways that matter enormously for some borrowers and not at all for others.

No down payment

A borrower with full entitlement can finance 100% of the purchase price. No other widely available program does this except USDA, which is restricted by geography and household income.

What it is not: free. It means the cash you would have put down stays yours, and it means your loan balance starts higher than it otherwise would. For a veteran who has the savings, putting money down is still an option and it reduces the funding fee. For one who does not, this is the difference between buying now and buying in four years.

No monthly mortgage insurance

This is the benefit people underestimate, and over the life of a loan it is usually worth more than the down payment.

Conventional loans under 20% down carry private mortgage insurance. FHA loans carry a mortgage insurance premium that, under 10% down, lasts the life of the loan — see our FHA benefits post for how that rule works. The VA loan carries neither. There is no monthly mortgage insurance on a VA loan at any down payment, including zero.

Compare a VA loan against a low-down-payment conventional or FHA loan and this line is often the whole difference in the monthly payment.

The residual income test

Most mortgage programs qualify you on debt-to-income ratio — what percentage of your gross income your obligations consume. The VA adds something else on top: a residual income test, which asks how many actual dollars are left over each month after the mortgage, the other debts, taxes, and maintenance.

The threshold varies by family size and region of the country.

This matters because it approves people whose ratios alone would not. A borrower with a high DTI but genuinely low fixed costs can clear residual income comfortably. The VA's underwriting asks the question a sensible person would ask — can this household actually afford to live — rather than only the arithmetic one.

It is also part of why VA loans have historically performed well. The test is not a formality.

The loan is assumable

A qualified buyer can take over your VA loan, including its interest rate, rather than getting their own financing.

In a falling-rate market this is worth little. In a rising-rate market it is a real asset attached to your house, and it is worth understanding before you list. Two things to know: assumption requires lender and VA approval, and if the buyer assuming the loan is not a veteran substituting their own entitlement, yours stays tied up in that property until the loan is paid off. That second point catches people. Ask about it before agreeing to an assumption, not after.

The cost: the funding fee

The VA charges a one-time funding fee in place of monthly mortgage insurance. It can be financed into the loan rather than paid at closing.

Per the VA's published schedule, effective April 7, 2023:

Purchase, first use of the benefit

• Less than 5% down — 2.15%
• 5% or more down — 1.5%
• 10% or more down — 1.25%

Purchase, subsequent use

• Less than 5% down — 3.3%
• 5% or more down — 1.5%
• 10% or more down — 1.25%

Refinance

• Interest Rate Reduction Refinancing Loan (IRRRL) — 0.5%
• Cash-out, first use — 2.15%
• Cash-out, subsequent use — 3.3%

Two things worth noticing. Putting 5% down cuts the subsequent-use purchase fee by more than half, which is a genuine argument for a down payment you might not otherwise make. And the IRRRL fee is a fraction of the cash-out fee, which is why taking cash out and dropping your rate are decisions worth separating rather than combining by default.

Who does not pay the funding fee at all

The exemption is the most valuable and least known part of the program. Per the VA, you do not pay the funding fee if any of these apply:

• You are receiving VA compensation for a service-connected disability
• You are eligible for VA disability compensation but receive retirement or active-duty pay instead
• You are receiving Dependency and Indemnity Compensation as the surviving spouse of a veteran
• You received a proposed or memorandum rating before closing indicating eligibility for compensation
• You are an active-duty service member who provided evidence of a Purple Heart on or before closing

If you are exempt, a zero-down VA loan has no mortgage insurance and no funding fee. That is a materially different loan from the one most people are comparing against.

If you have a disability claim pending, say so early. A rating that arrives before closing can remove the fee entirely, and the timing is worth managing deliberately.

Where a VA loan is not the answer

We would rather say this than have you find out later.

If you are exempt from the funding fee, the case is strong almost everywhere. If you are not exempt and you have 20% to put down, run a conventional loan against it. No funding fee, no mortgage insurance either at that down payment, and the comparison is genuinely close.

VA is for a home you will occupy. It is not an investment property program. There are legitimate multi-unit and subsequent-purchase scenarios, and they have rules.

Some sellers still misunderstand VA appraisals. The appraisal has minimum property requirements, and in a competitive market a listing agent who has been burned once may steer a seller away. That is an education problem rather than a loan problem, and it is one we deal with regularly.

Not sure whether you are eligible in the first place? Start with who qualifies for a VA loan.

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FAQ

Do VA loans require mortgage insurance? No. There is no monthly mortgage insurance on a VA loan at any down payment, including zero down. The VA charges a one-time funding fee instead, and many borrowers are exempt from that.

What is the VA funding fee? A one-time fee charged by the VA in place of monthly mortgage insurance. For a first-use purchase with less than 5% down it is 2.15% of the loan amount; 1.5% with 5% or more down; 1.25% with 10% or more down. Subsequent use with less than 5% down is 3.3%. An IRRRL is 0.5%. It can be financed into the loan.

Who is exempt from the VA funding fee? Veterans receiving VA compensation for a service-connected disability, those eligible for it but receiving retirement or active-duty pay instead, surviving spouses receiving Dependency and Indemnity Compensation, borrowers with a proposed or memorandum rating before closing, and active-duty service members with evidence of a Purple Heart on or before closing.

Can you really buy with no money down on a VA loan? Yes, with full entitlement. You will still have closing costs, though some can be paid by the seller or rolled in depending on the transaction.

What is the VA residual income requirement? A test of how many dollars are left each month after the mortgage, other debts, taxes, and maintenance. Thresholds vary by family size and region. It sits alongside the debt-to-income calculation, and it approves some borrowers whose ratios alone would not.

Are VA loans assumable? Yes, with lender and VA approval. If the buyer assuming the loan is not a veteran substituting their own entitlement, the original borrower's entitlement stays tied to the property until the loan is paid off.