If you can qualify for a mortgage guaranteed by the Department of Veterans Affairs, you should take advantage of it.

Simply put, it's the most generous mortgage program we know of. VA loans require no down payment or mortgage insurance. They're open to borrowers with bad credit, yet the rates are reasonable.

Millions of veterans, including members of the National Guard and reserve units, are eligible for VA loans. They're also available to anyone on active duty and widows whose spouses' deaths were war related. (Here's a complete rundown of eligibility requirements.)

To get started, you'll need to obtain a certificate of eligibility from the Department of Veterans Affairs by submitting VA Form 26-1880 with proof of your service. (Here's where to learn more about obtaining a certificate of eligibility.)

Once you have that, you can take it to almost any bank or mortgage company to apply for a VA loan. With these loans, the government covers the lender's losses if you default.

That allows the bank or mortgage company to offer lower rates on a loan that's easier to qualify for.

Here's how you can benefit:

Benefit 1. You don't need any money for a down payment.

This is the only major loan program we know of that still allows borrowers to finance 100% of a home's purchase price. Even FHA loans require a 3.5% down payment. Nine out of every 10 applicants for VA loans take advantage of the option to buy with no cash down.

Benefit 2. There is no monthly mortgage insurance premium.

Borrowers with less than 20% equity in their homes usually have to buy mortgage insurance that protects their lenders from default. The premiums typically boost their monthly payments by $100 to $200.

Instead of that, VA loans have a one-time funding fee that ranges from 0.5% to 3.3% of the loan, depending on the type of mortgage and whether the borrower made a down payment.

For most borrowers -- those taking out their first VA loan with no down payment -- the fee is 2.15%. (Here's a complete list of funding fees.)

But you don't need to pay the funding fee in cash. It can be rolled into the amount you're borrowing. The fee also is waived for most widows and vets with service-related disabilities.

Closing costs are another expense, but those occur with all mortgages. The costs for VA loans are right in line with closing costs for other comparable loans.

Benefit 3. You can have bad credit and more debt.

The government sets no minimum income or credit score standards for VA loans. Each bank or mortgage company has its own requirements.

Lenders across the country say the minimum credit score is about 570. It's almost impossible to qualify for any other mortgage with a subprime credit rating like that.

The key thing they look for is a history of making payments on time over the previous year and your debt-to-income ratio.

To qualify for a VA loan, borrowers can spend up to 41% of their pretax income on other debts, such as student loans, credit card bills and auto loans. That's considerably more than the 36% debt-to-income ratio limit imposed by most other types of mortgages.

You're eligible for a VA mortgage even if you've had a recent bankruptcy. Most VA lenders require two years' distance between the discharge of Chapter 7 bankruptcy and a mortgage application. If you filed for Chapter 13, you only have to wait one year. The lender, however, will want to see good credit re-established and a clean record of on-time payments since the discharge.

Benefit 4. Veterans Affairs won't let you pay too much -- or buy a mistake.

The government will assign an appraiser that's been trained and approved by the VA to inspect and value any home you want to buy without any pressure from real estate agents or sellers.

"It's the best and most accurate appraisal there is, period," says John Parker, a VA loan specialist at Supreme Lending Mortgage Banker in Dallas.

If the appraiser finds any significant damage or structural problem with the house, the VA will require it to be fixed before closing. (Here are answers to the most frequently asked questions about VA appraisals.

The only time that can be a problem is if you're bidding on a foreclosure that has been poorly maintained or vandalized by its previous owners. Banks often want to sell those properties "as is," and are reluctant to make VA-ordered repairs. (Here's where to check out our 10 smart rules for buying a foreclosure.

Benefit 5. The interest rates are very low.

Lenders typically charge what they would for a non-VA loan given to customers with good credit, and that's usually the best rate the bank or mortgage company offers.

Applicants aren't penalized for skipping because they didn't have money for a down payment or for making no down payment or having a bad credit score.

With non-VA loans, borrowers pay a higher rate for every 20 points their credit score drops below 720. But with a VA loan, borrowers get the same low rate, whether their credit score is 605 or 790.

Benefit 6. You can refinance up to 100% of the value of your home.

That's the highest loan limit you'll find for any refinancing.

It recently was increased from 90% of the property's value to help borrowers who can't get a new loan because falling prices have reduced the equity they hold in their homes.

With an FHA loan, lenders can provide no more than 95% of the home's value. Refinance without FHA or VA assistance, and you'll be able to borrow no more than 80% of the appraised price.

Benefit 7. The VA streamline refinance program is now available.

This type of refinance, so named because it requires little documentation and usually no appraisal, has worked well for FHA mortgage holders for years.

Your new interest rate must be lower than the original rate (unless you got an adjustable-rate mortgage), the refinance can only be used to lower your monthly mortgage payment (no cash out) and the term can be no longer than 30 years, or 10 years longer than the original mortgage (up to 30 years).

Only two points can be rolled into the loan plus allowable closing costs. A funding fee of approximately 0.5% can also be financed into the loan. A funding fee exemption may apply with proper verification of disability.

By Stephanie Chen

Interest.com Contributing Editor

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