- Official section
- National IV: Financing
- Broker weight
- 10% of the national broker portion
- Expected scored items
- Financing accounts for about 10 of 100 items
Illinois exam glossary
VA loan
The VA home loan benefit is powerful because the federal guaranty can replace the need for a down payment or monthly mortgage insurance in many transactions. It is not a blank check. Eligibility, entitlement, lender approval, residual income, occupancy, reasonable value, property requirements, and the funding fee all have separate jobs.
Last updated: August 1, 2026
What does this exam area cover?
Short answer: A VA-backed loan is funded by a private lender and partially guaranteed by the Department of Veterans Affairs for an eligible borrower. A COE proves benefit eligibility and shows entitlement, but not loan approval. Full entitlement removes the VA county loan-limit cap, while lender underwriting and property value still limit the debt. VA requires no monthly mortgage insurance. Many nonexempt borrowers pay a one-time funding fee based on loan type, first or later use, and down payment. Standard purchase loans require qualifying occupancy, reasonable value, and current Minimum Property Requirements.
This guide uses current VA.gov benefit pages updated through January 2026, VA Pamphlet 26-7 and revised Chapter 12 Minimum Property Requirements effective May 1, 2026, current VA funding-fee tables, current entitlement guidance, and the PSI Illinois exam outline, all checked through August 1, 2026. Circulars, handbook chapters, lender overlays, COE conditions, service history, joint-loan rules, state fee deviations, condominiums, manufactured homes, construction, IRRRLs, cash-out refinances, and NADLs require additional analysis.
What is on the official outline?
- Topic
- Identify the guaranty
- What to know
- Department of Veterans Affairs, private lender, VA-backed loan, guaranty, qualifying loss, borrower liability, foreclosure, claim, direct loan, and NADL
- Best exam move
- Private lender makes a typical VA-backed loan; VA guarantees part of the approved risk.
- Topic
- Establish eligibility
- What to know
- Veteran, active-duty service member, National Guard, Reserve, surviving spouse, service period, character of service, discharge exception, application, and VA determination
- Best exam move
- Service eligibility is determined under VA rules and documented through the COE.
- Topic
- Read the COE
- What to know
- Certificate of Eligibility, basic entitlement, prior use, entitlement charged, available, exempt status, restoration, cash-out condition, proof of service, and lender reliance
- Best exam move
- The COE proves benefit status, not income, credit, property, or final approval.
- Topic
- Understand entitlement
- What to know
- $36,000 basic entitlement, bonus entitlement, guaranty amount, 25%, loan above $144,000, prior loan, remaining entitlement, restoration, substitution, and COE
- Best exam move
- Entitlement is guaranty support, not loan proceeds and not the maximum amount borrowed.
- Topic
- Apply full entitlement
- What to know
- No VA loan limit, lender approval, income, credit, debts, assets, purchase price, reasonable value, full guaranty, down payment, and loan size
- Best exam move
- No VA cap does not mean unlimited credit or financing above reasonable value.
- Topic
- Apply remaining entitlement
- What to know
- Entitlement already used, county conforming loan limit, one-unit limit, 25%, remaining guaranty, restoration, prior VA loan, down payment, and lender coverage
- Best exam move
- Current FHFA county limits matter when full entitlement is not available.
- Topic
- Determine down payment
- What to know
- Zero down, full entitlement, remaining entitlement, price above value, guaranty plus down payment, 25% coverage, voluntary contribution, lender requirement, and funding-fee tier
- Best exam move
- No down payment is a possible benefit, not a promise for every borrower or property.
- Topic
- Apply occupancy
- What to know
- Personal occupancy, home, certification, reasonable time, 60 days, specific future event, 12 months, spouse occupancy, deployed service member, intermittent occupancy, and IRRRL exception
- Best exam move
- Standard purchase financing requires intent to occupy as home, generally within 60 days.
- Topic
- Underwrite credit
- What to know
- Satisfactory credit, payment history, housing history, bankruptcy, foreclosure, collections, judgments, federal debt, credit score, lender overlay, and explanation
- Best exam move
- VA does not publish a universal minimum credit score, but lenders can impose one.
- Topic
- Underwrite income
- What to know
- Stable and reliable income, employment, military income, allowances, tax-free income, self-employment, continuance, effective income, support, rental income, and documentation
- Best exam move
- Eligibility for benefits does not replace proof of repayment capacity.
- Topic
- Calculate DTI
- What to know
- Total monthly debt, gross monthly income, housing expense, installment debt, revolving debt, support obligation, 41%, guide, compensating factor, and tax-free income
- Best exam move
- VA's 41% ratio is a guide requiring analysis, not an automatic pass or fail line.
- Topic
- Calculate residual income
- What to know
- Net effective income, federal and state tax, Social Security, shelter expense, debts, maintenance, utilities, family size, region, guideline, and shortfall
- Best exam move
- Residual income is central in VA underwriting and is not the same as DTI.
- Topic
- Apply reasonable value
- What to know
- VA appraisal, Notice of Value, reasonable value, contract price, maximum loan, cash difference, Tidewater, Reconsideration of Value, comparable sales, condition, and repairs
- Best exam move
- No-down-payment financing generally cannot cover a price above reasonable value without borrower funds or renegotiation.
- Topic
- Apply current MPRs
- What to know
- Minimum Property Requirements, marketable real estate entity, access, drainage, hazards, defective conditions, utilities, water, sewage, heating, safety, soundness, and sanitary condition
- Best exam move
- Use revised Chapter 12 effective May 1, 2026, not an outdated property checklist.
- Topic
- Separate appraisal and inspection
- What to know
- VA appraiser, market value, MPR review, buyer inspection, systems, defects, warranty, contingency, report scope, and professional inspector
- Best exam move
- VA says the appraisal is not the same as an inspection.
- Topic
- Calculate funding fee
- What to know
- First use, subsequent use, purchase, construction, cash-out refinance, IRRRL, assumption, down payment tier, fee percentage, base loan, exemption, cash, and financing
- Best exam move
- Select the exact loan type, use status, down-payment tier, and exemption before multiplying.
- Topic
- Apply seller concessions
- What to know
- Four percent, reasonable value, funding fee, debt payoff, prepaid insurance, temporary buydown, normal closing cost, discount point, concession, and excessive amount
- Best exam move
- Normal discount points and buyer closing-cost payment are excluded from the VA four-percent concession calculation.
- Topic
- Handle assumptions
- What to know
- Current servicer, holder, credit qualification, approval, 0.5% funding fee, ownership transfer, release of liability, entitlement, substitution, non-Veteran assumer, and appeal
- Best exam move
- Assumption, release of liability, and restoration or substitution of entitlement are separate approvals.
- Topic
- Compare complete cost
- What to know
- Interest rate, APR, funding fee, no monthly MI, origination fee, discount points, seller credit, taxes, insurance, appraisal, cash to close, entitlement impact, and Loan Estimate
- Best exam move
- Compare actual lender offers because VA does not set most rates, points, or lender closing costs.
Which distinctions produce the most mistakes?
- Terms
- VA-backed loan vs. VA direct loan
- Difference
- A private lender funds a VA-backed loan and VA guarantees part. In a VA direct program such as an eligible NADL, VA acts as lender.
- Question cue
- Private credit with guaranty versus VA as creditor.
- Terms
- VA guaranty vs. FHA insurance
- Difference
- VA guarantees a qualifying portion under its benefit program. FHA insures approved lenders under HUD's separate mortgage-insurance program.
- Question cue
- Veteran guaranty versus federal mortgage insurance.
- Terms
- COE vs. preapproval
- Difference
- A COE documents benefit eligibility and entitlement. Preapproval is a lender's conditional credit and capacity assessment.
- Question cue
- Benefit proof versus credit decision.
- Terms
- Entitlement vs. loan amount
- Difference
- Entitlement is guaranty available to support the lender. Loan amount is the principal the borrower promises to repay.
- Question cue
- Guaranty support versus debt proceeds.
- Terms
- Full entitlement vs. remaining entitlement
- Difference
- Full entitlement removes the VA county cap. Remaining entitlement requires calculating guaranty support after prior entitlement charges and current limits.
- Question cue
- Unrestricted guaranty tier versus reduced benefit calculation.
- Terms
- Funding fee vs. mortgage insurance
- Difference
- Funding fee is generally a one-time VA program charge. Monthly PMI or annual FHA MIP is recurring insurance coverage under other programs.
- Question cue
- One-time program fee versus recurring premium.
- Terms
- Residual income vs. DTI
- Difference
- Residual income measures dollars left for family support after specified obligations. DTI measures monthly debt payments as a percentage of gross income.
- Question cue
- Dollar remainder versus percentage ratio.
- Terms
- Reasonable value vs. purchase price
- Difference
- Reasonable value comes from the VA valuation process. Purchase price is the buyer-seller contract amount.
- Question cue
- Collateral support versus negotiated consideration.
- Terms
- VA appraisal vs. home inspection
- Difference
- The appraisal supports reasonable value and MPR review. The inspection is a separate buyer-focused condition examination.
- Question cue
- Guaranty collateral review versus buyer due diligence.
- Terms
- Closing-cost credit vs. seller concession
- Difference
- VA excludes normal closing costs and normal discount points from its four-percent concessions calculation. Defined extra benefits count toward that cap.
- Question cue
- Ordinary cost payment versus capped inducement.
- Terms
- Assumption vs. release of liability
- Difference
- Assumption transfers payment responsibility under approved terms. Release of liability formally releases the original borrower from personal obligation to VA or the holder as applicable.
- Question cue
- New payer versus old borrower released.
- Terms
- Release of liability vs. restoration of entitlement
- Difference
- Release addresses personal debt liability. Restoration or substitution determines whether the seller's VA benefit becomes available again.
- Question cue
- End personal exposure versus recover benefit capacity.
The V-E-T-E-R-A-N loan check
- Verify eligibility: obtain the current COE and identify borrower category, entitlement, prior charges, exemption, and any condition.
- Entitlement: decide whether it is full or remaining, calculate guaranty support, and identify any down payment needed.
- Terms: compare lender rate, points, fees, funding fee, seller credits, Loan Estimate, note, and no-monthly-MI benefit.
- Earnings: verify income, debts, DTI, residual income, credit, assets, family size, region, and lender overlays.
- Residence: confirm qualifying personal occupancy, timing, property type, unit count, and any spouse or service exception.
- Appraisal: reconcile contract price, reasonable value, Notice of Value, MPRs, repairs, inspection, and reconsideration options.
- Next ownership: if assumption or transfer is planned, separate approval, liability release, funding fee, and entitlement substitution or restoration.
- Use status
- First use
- Down payment
- Less than 5%
- Funding fee
- 2.15%
- Use status
- First use
- Down payment
- 5% to less than 10%
- Funding fee
- 1.50%
- Use status
- First use
- Down payment
- 10% or more
- Funding fee
- 1.25%
- Use status
- Subsequent use
- Down payment
- Less than 5%
- Funding fee
- 3.30%
- Use status
- Subsequent use
- Down payment
- 5% to less than 10%
- Funding fee
- 1.50%
- Use status
- Subsequent use
- Down payment
- 10% or more
- Funding fee
- 1.25%
How do the rules work in scenarios?
COE is not loan approval
Scenario: A Veteran receives a COE showing full entitlement and assumes the lender must approve any requested amount.
- The COE proves home-loan benefit eligibility and entitlement status.
- The lender still evaluates income, debts, credit, assets, occupancy, and its own requirements.
- The property must support the price and loan through reasonable value and eligibility.
Answer: Full entitlement does not guarantee credit approval or unlimited loan size.
First-use funding fee
Scenario: A nonexempt first-use borrower obtains a $400,000 VA purchase loan with no down payment.
- Less than 5% down places the transaction in the 2.15% first-use tier.
- $400,000 times 2.15% equals $8,600.
- The borrower may generally pay the fee in cash or finance it under current rules.
Answer: The funding fee is $8,600.
Five-percent down changes the fee
Scenario: A nonexempt first-use borrower makes exactly 5% down and has a $380,000 VA loan amount after that down payment.
- Exactly 5% enters the 1.5% tier.
- The fee applies to the loan amount, not the purchase price.
- $380,000 times 1.5% equals $5,700.
Answer: The funding fee is $5,700.
Price exceeds reasonable value
Scenario: A property is under contract for $425,000, but the VA Notice of Value supports $410,000. The borrower wants zero down.
- The guaranty cannot be treated as support for value the appraisal process did not establish.
- Possible paths include price reduction, borrower cash for the gap, a successful reconsideration, or a contract remedy.
- Lender and entitlement requirements still apply.
Answer: The $15,000 price-value gap must be resolved; zero down is not automatic.
DTI above 41% is not automatic denial
Scenario: A VA file has 43% DTI, strong credit, and residual income exceeding its guideline by more than 20%.
- VA treats DTI as a guide secondary to residual income rather than a universal cliff.
- The excess residual income can affect the required scrutiny and documentation.
- The underwriter must still justify approval and apply all current requirements.
Answer: The file may be approvable; 41% is not an automatic rejection line.
Concession cap calculation
Scenario: Reasonable value is $350,000. Defined seller concessions total $15,000, excluding normal closing costs and normal discount points.
- Four percent of $350,000 equals $14,000.
- The counted concessions exceed that amount by $1,000.
- Normal costs excluded by VA should not be added back into the concession total.
Answer: Counted concessions are $1,000 above the VA four-percent limit.
Assumption does not restore entitlement automatically
Scenario: A qualified non-Veteran is approved to assume a seller's VA-backed loan, and the seller assumes entitlement is immediately restored.
- The assumption can transfer responsibility after proper approval.
- A non-Veteran cannot substitute VA entitlement for the seller's charged entitlement.
- Release of liability and entitlement restoration remain separate matters.
Answer: Approved assumption alone does not automatically restore the seller's entitlement.
What are the common exam traps?
- Trap
- Saying VA directly funds every VA loan
- Correction
- A private lender funds the typical VA-backed loan; VA guarantees a qualifying portion.
- Trap
- Calling the COE a loan approval
- Correction
- It proves benefit eligibility and entitlement, not credit, capacity, or property approval.
- Trap
- Calling entitlement the amount borrowed
- Correction
- Entitlement is guaranty support, not loan proceeds.
- Trap
- Saying full entitlement means unlimited borrowing
- Correction
- Lender underwriting and property value still constrain the loan.
- Trap
- Saying every VA loan is zero down
- Correction
- Entitlement, reasonable value, price, lender rules, and borrower choice can create a down payment.
- Trap
- Using a county limit for full entitlement
- Correction
- The VA county cap is removed for full entitlement, though it matters for remaining-entitlement calculations.
- Trap
- Saying VA requires a universal minimum credit score
- Correction
- VA states it does not, but participating lenders can impose minimum scores.
- Trap
- Treating 41% DTI as automatic denial
- Correction
- VA uses it as a guide with residual income and the complete credit analysis.
- Trap
- Ignoring residual income
- Correction
- Residual income is a central dollar-based capacity measure in VA underwriting.
- Trap
- Calling the funding fee monthly insurance
- Correction
- It is generally a one-time program fee, with no VA-required monthly PMI or MIP.
- Trap
- Using one funding fee for every borrower
- Correction
- Check exemption, loan type, first or later use, and down-payment tier.
- Trap
- Calling a VA appraisal a home inspection
- Correction
- It supports reasonable value and MPR review but does not replace independent inspection.
- Trap
- Using outdated pre-May 2026 MPR details
- Correction
- Use revised VA Pamphlet 26-7 Chapter 12 effective May 1, 2026.
- Trap
- Putting normal closing costs inside the four-percent concession cap
- Correction
- VA excludes normal discount points and normal buyer closing costs from that concession calculation.
- Trap
- Assuming an assumption releases liability and restores entitlement
- Correction
- Treat assumption approval, liability release, and entitlement substitution or restoration separately.
Can you answer these original practice questions?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. Who ordinarily funds a VA-backed purchase loan?
- A private lender
- The county recorder
- The Department of Defense directly
- The seller's broker
Show answer and explanation
Answer: A private lender
VA guarantees part of the approved loan rather than ordinarily advancing the purchase funds.
2. What does a COE establish?
- VA home loan benefit eligibility and entitlement information
- Final lender approval
- Appraised value
- Home inspection results
Show answer and explanation
Answer: VA home loan benefit eligibility and entitlement information
Credit, capacity, occupancy, and property approval remain separate.
3. Does a borrower with full entitlement have a VA county loan limit?
- No, but lender approval and reasonable value still limit the loan
- Yes, always the FHA floor
- No, so income never matters
- Only the broker sets it
Show answer and explanation
Answer: No, but lender approval and reasonable value still limit the loan
Full entitlement removes the VA cap, not underwriting or collateral constraints.
4. What is the current nonexempt first-use purchase funding fee with less than 5% down?
- 0.5%
- 1.25%
- 2.15%
- 3.3%
Show answer and explanation
Answer: 2.15%
The current VA table has applied this first-use tier since April 7, 2023.
5. What is the current subsequent-use purchase fee with less than 5% down?
- 1.25%
- 1.5%
- 2.15%
- 3.3%
Show answer and explanation
Answer: 3.3%
A funding-fee exemption can remove the charge, but the nonexempt tier is 3.3%.
6. Does VA require monthly mortgage insurance?
- No
- Yes, FHA MIP
- Yes, conventional PMI
- Only the assessor decides
Show answer and explanation
Answer: No
Many nonexempt borrowers pay a one-time funding fee instead.
7. What is residual income?
- Income remaining for family support after specified obligations
- The interest rate
- The appraised value
- Seller concessions
Show answer and explanation
Answer: Income remaining for family support after specified obligations
It is a dollar measure distinct from the DTI percentage.
8. Is 41% DTI an absolute VA rejection point?
- No, it is a guide analyzed with residual income and other credit factors
- Yes, without exception
- Only if the appraisal is high
- DTI never matters
Show answer and explanation
Answer: No, it is a guide analyzed with residual income and other credit factors
Higher ratios require proper scrutiny, support, and documentation under current underwriting rules.
9. Does the VA appraisal replace an independent home inspection?
- No
- Yes
- Only for condominiums
- Only for cash buyers
Show answer and explanation
Answer: No
VA tells buyers that appraisal and inspection serve different functions.
10. An approved buyer assumes a VA loan. What else must the seller examine?
- Release of liability and restoration or substitution of entitlement
- Only the property tax rate
- Nothing
- A new FHA case number
Show answer and explanation
Answer: Release of liability and restoration or substitution of entitlement
Those consequences are not automatic merely because the assumption closes.
How should you study this area?
- Session
- Session 1
- Focus
- Map benefit and lender roles
- Proof you are ready
- Classify 30 VA-backed, VA direct, conventional, and FHA scenarios and explain COE, guaranty, lender, and borrower roles.
- Session
- Session 2
- Focus
- Master entitlement
- Proof you are ready
- Solve 25 full-entitlement, remaining-entitlement, prior-use, restoration, reasonable-value, and down-payment scenarios.
- Session
- Session 3
- Focus
- Calculate funding fees
- Proof you are ready
- Reproduce the six purchase tiers and calculate 30 first-use, subsequent-use, exempt, IRRRL, cash-out, and assumption fees.
- Session
- Session 4
- Focus
- Underwrite capacity
- Proof you are ready
- Work 25 credit, income, DTI, tax-free income, family-size, region, and residual-income scenarios.
- Session
- Session 5
- Focus
- Review value and property
- Proof you are ready
- Separate contract price, reasonable value, Notice of Value, Tidewater, ROV, current MPR, repair, and inspection questions.
- Session
- Session 6
- Focus
- Run V-E-T-E-R-A-N
- Proof you are ready
- Audit two complete Illinois transactions, including one assumption, score at least 90 percent, and explain every missed distractor.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
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Questions students ask about VA Loan: Illinois Real Estate Exam Guide
What is a VA loan?
A VA-backed home loan is made by a private lender and guaranteed in part by the U.S. Department of Veterans Affairs for an eligible Veteran, service member, or qualifying surviving spouse. The guaranty protects the lender against qualifying loss. It does not make the loan free, erase the borrower's note, or guarantee lender approval.
What is a Certificate of Eligibility?
A Certificate of Eligibility, or COE, establishes that the applicant meets the service or survivor requirements for the VA home loan benefit and shows entitlement information. It is not a credit approval. The lender must still underwrite income, debts, credit, assets, occupancy, property value, and every applicable VA and lender requirement.
Does a VA purchase loan require a down payment?
Often no when the eligible borrower has sufficient entitlement, the lender approves the loan, and the purchase price does not exceed the VA reasonable value. A down payment can be required or chosen when price exceeds value, remaining entitlement is insufficient, lender or transaction conditions require it, or the borrower wants a lower funding fee or smaller balance.
Is there a VA loan limit for a borrower with full entitlement?
VA states that a borrower with full entitlement has no VA loan limit, but that does not mean unlimited borrowing. The private lender still limits the loan based on credit, income, debts, assets, and its requirements, and the property's purchase price and appraised reasonable value constrain financing. County conforming limits still matter when the borrower has only remaining entitlement.
What is VA entitlement?
Entitlement is the amount of guaranty available for use, not the amount the Veteran can borrow or receive in cash. The COE shows basic entitlement and prior charges. Full entitlement can support the applicable guaranty without a VA county cap, while remaining entitlement calculations use the current county conforming limit and entitlement already charged.
What is the VA funding fee in 2026?
The current purchase fee table, effective since April 7, 2023, charges eligible nonexempt first use at 2.15% with less than 5% down, 1.5% with at least 5% but less than 10% down, and 1.25% with at least 10% down. Subsequent use with less than 5% down is 3.3%; the 5% and 10% tiers remain 1.5% and 1.25%. Other loan types have separate rates.
Who is exempt from the VA funding fee?
VA lists exemptions including borrowers receiving or entitled to receive compensation for a service-connected disability in specified circumstances, certain surviving spouses, and active-duty service members who provide evidence of receiving the Purple Heart on or before closing. The lender must establish exemption status under the current VA rules and documentation.
Does a VA loan require monthly mortgage insurance?
No monthly PMI or FHA-style annual MIP is required by the VA guaranty program. Many nonexempt borrowers instead pay a one-time VA funding fee, which can usually be paid at closing or financed. Homeowners insurance, taxes, flood insurance where required, and other loan costs remain separate.
Does a VA appraisal replace a home inspection?
No. A VA-approved appraiser develops reasonable value and reviews the property under current VA Minimum Property Requirements. VA expressly distinguishes that appraisal from a home inspection. A buyer should consider a separate inspection and appropriate contract contingencies because the appraisal is not a warranty or comprehensive defect report.
Can a buyer assume a VA loan?
Potentially, subject to servicer or holder processing, credit qualification, VA rules, funding fee, documents, and approval. A non-Veteran can potentially assume, but that does not automatically restore the seller's entitlement. The seller also needs an approved release from personal liability, and substitution of entitlement requires a qualifying eligible assumer and proper processing.
Are these official PSI questions or VA loan advice?
No. The questions are original, and primary sources were checked through August 1, 2026, including revised VA property requirements effective May 1, 2026. This is exam education, not eligibility, underwriting, benefits, appraisal, assumption, tax, or legal advice. A live file requires a current COE, VA policy, lender underwriting, property documents, and official approval.
Primary sources
- PSI Illinois Candidate Information Booklet effective June 24, 2026
- U.S. Department of Veterans Affairs, current VA home loan eligibility and COE guidance
- U.S. Department of Veterans Affairs, current VA-backed purchase loan guide
- U.S. Department of Veterans Affairs, current home loan entitlement and loan-limit guidance
- U.S. Department of Veterans Affairs, current funding-fee rates, exemptions, and closing-cost guidance updated January 2026
- U.S. Department of Veterans Affairs, current VA Pamphlet 26-7 Lenders Handbook
- VA Pamphlet 26-7 Chapter 3, current occupancy and guaranty rules
- VA Pamphlet 26-7 Chapter 4, credit, DTI, and residual-income underwriting
- VA Pamphlet 26-7 revised Chapter 12 Minimum Property Requirements effective May 1, 2026
- VA Pamphlet 26-7 Chapter 5, current VA loan assumption processing
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.