The Department of Veterans Affairs has been helping veterans and military personnel obtain home loans for more than 50 years. Over that long history, the VA has helped upwards of 13.5 million veterans and their families secure financing for homes throughout the country.
The program was initially established as a subsection of the GI Bill in 1944. The program’s goal was to help returning military members secure housing so that they could quickly return to a normalized life.
Some of those involved with the program, including recipients, thought it should be considered a sort of repayment or bonus for service during wartime.
The program is set up so that the VA is not the lender. Rather, the agency serves as the guarantor of the mortgage.
For every eligible veteran, the VA will allow an entitlement amount, which can vary by individual. This may be used to help with the down payment requirements that a lender sets for the purchase of a home.
This guaranty amount is equivalent to up to 25 percent of the loan and will reimburse the lender against loss in the event of default by the borrower.
With this guaranty backing up the borrower’s credit, a lender feels comfortable to lend the borrower up to 100 percent of the purchase price of the home.
With the maximum guaranty amount set at a current level of $50,750, lenders effectively limit a VA-guaranteed loan to a maximum amount of $203,000. With little or no down payment required, the reduced up-front cost for the borrower is minimized, which often makes the difference as to whether or not an individual can buy a home.
In addition to the standard fixed rate programs (with terms of up to 30 years), the VA formerly would guarantee adjustable rate mortgage loans. But in 1995 Congress voted against backing such adjustable rate loans, and the program has ended.
Although there are some alternative loan programs available (i.e., graduated payment or growing equity) most veterans use the fixed rate programs. These loans may be written for home purchases or for refinancing.
In order to obtain a VA loan there are costs which are associated with the program. According to the agency, each veteran must pay a basic VA funding fee of 2 percent of the loan amount to the Department of Veterans Affairs for the use of the program.
The fee can be reduced to 1 1/2 percent with a cash down payment between 5 and 9.99 percent. It can be further reduced to 1.25 percent with a cash investment of 10 percent or more.
The VA also allows any funding fees (equivalent to closing costs) to be added to the amount of the loan provided that the total aggregate amount doesn’t exceed the maximum of $203,000.
Along with these specific VA fees, other fees may be incurred, as with any home purchase, such as the cost of surveys, credit report, appraisal, etc. However if agreed upon, some of these costs can be paid by the seller.
Mortgage insurance is not required for a VA loan because the agency’s guaranty replaces the backing that the mortgage insurance would provide. This results in savings of around $50 a month on a typical mortgage.
Another advantage of the VA loan program is the lenient debt ratios which it allows. The VA will allow up to 41 percent of the borrower’s total monthly income to be consumed by debt and housing expenses. Most lenders only allow 35 or 38 percent for non-VA loans.
The slight difference sometimes is the deciding factor for loan approval, especially for borrowers with heavy debt loads.
It is important to remember that each veteran may have only one VA loan outstanding at a time. This is to ensure that every veteran has a fair chance at receiving assistance.
Only one loan at a time is allowed in part because of the favorable interest rates and lower up-front costs associated with the VA program.
Even though the program is intended for use by veterans only, there is an option which would allow non-military individuals the ability to take advantage of at least one aspect of the program. When a VA home goes through foreclosure, the agency often holds an auction to attempt to recoup a portion of the loan’s value. (As the guarantor of the mortgage, the agency becomes responsible for paying the lender for losses incurred as a result of the borrower’s default).
Such auctions are open to the public, so both veterans and non-veterans have a chance at winning a bid to buy a property at an attractive price. VA homes sold this way are sold as is, so it is best to conduct some research into the house before buying it.
If a potential home buyer thinks that he or she is eligible for a VA loan a great place to find information is to check the VA’s home loan Web site at http://www.va.gov/vas/loan/index.htm, and to contact a local VA office. Calling 1-800-827-1000 will give the phone number of the nearest office.
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Jim DeBoth is president of Mortgage Market Information Services. Address your questions to Mortgages, c/o the Chicago Tribune, Real Estate Section, 435 N. Michigan Ave., Chicago, Ill., 60611. Sorry, we cannot accept questions over the phone and will not give personal replies.
