Understanding Buying A Home With A VA Loan

by Hank

One of the best benefits of serving in the US Armed Forces is access to the VA Loan Guarantee and Home Loan Program. Originally part of the Serviceman’s Readjustment Act of 1944, this program for current and former members of the military guarantees home loans by the federal government against default. It enables veterans to purchase homes with little or no down payment and minimal fees.

Since World War II, the Department of Veterans Affairs, also known simply as the VA, has helped millions of Americans realize the dream of home ownership. Today, the VA continues to help both former and active service-people and their families.

The VA Home Loan Guarantee Program

A VA home loan is a mortgage loan guaranteed against default by the Department of Veterans Affairs for members of the Armed Forces both past and present. The home mortgage loan is issued by qualified lenders or banks who participate with the VA.

The maximum VA loan guarantee varies by each state and regions within those states. In 2011 in most regions of the country, the maximum VA loan amount with no down payment is $625,500. Complete loan limits can be found on the VA Website.

Banks love a VA guaranteed mortgage because the loan is guaranteed or backed by the federal government. If the service member defaults on the home loan, the lender will recover its loss from the government as a result of the guarantee. Essentially, it is a risk-free loan for participating banks. Because of this risk reduction, banks are more inclined to issue a mortgage to a member of the military who otherwise might not have the down payment for a home mortgage using a traditional loan.

Are You Eligible For a VA Home Loan?

Borrowers will need to receive a VA Certificate of Eligibility, which shows lenders that the borrower qualifies for a VA home loan in advance of his or her loan application. You can apply for a VA Certificate of Eligibility online at the Veteran’s Information Portal, through a VA-approved lender, or through the mail. The “Request for a Certificate of Eligibility” is VA Form 26-1880. After you complete it, simply return the form to the VA, along with your proof of military service. You will then receive your eligibility statement, which the bank will need when processing the loan application.

Veterans, active-duty military personnel, Reservists/National Guard members, and some surviving spouses of military members are eligible to participate in the program. Below are the specific qualifications that veterans and active members of the military must meet in order to be eligible for the program.

  • Members of the military must have served at least 90 days on active duty during wartime and been discharged under other than dishonorable conditions to earn the benefit.
  • If a member of the military served for less than 90 days, he or she may be eligible if the discharge was for a service connected disability.
  • If the member of the military did not serve during wartime, he or she must have served at least 181 days of continuous active duty and been discharged under other than dishonorable conditions.
  • A National Guardsman or Reservist must have completed a total of six years in the Selected Reserves or National Guard as member of an active unit, attended required weekend drills, and complete the two-week active duty for training. National Guardsmen or Reservists must also have been discharged with an honorable discharge, placed on the retired list, transferred to the Standby Reserve, or continue to serve in the Reserves.
  • An unmarried surviving spouse of a veteran who died on active duty or as the result of a service-connected disability is eligible for the program.

Some Of The Fine Print And Benefits With The VA Home Loan Program

With the VA Home Loan Program, the interest rates are the same as any that a borrower with good credit would earn. There are no extra discounts on the loan’s interest rates, but borrowers are not required to make a down payment on the home.

A VA home mortgage allows the military member to prepay the loan without penalty, includes VA loan servicing for the life of the loan, and provides free financial counseling for veterans.

In addition to the no down payment requirement, a VA loan also waives the requirement for a borrower to purchase private mortgage insurance (PMI), which most lenders require of ordinary borrowers who purchase a home with less than a twenty percent down payment. This entitlement alone could save veterans over $100 per month in fees attached to their loan payments.

Credit Qualifications Of VA Home Loan Program

In order to qualify for the VA Home Loan Guarantee Program, the veteran must be a satisfactory credit risk to the lending bank. Like traditional loans, the income of the veteran and spouse will be verified. Their income must be stable and sufficient to meet the mortgage payments, the costs of owning a home, and other financial obligations. This is consistent with traditional home mortgage requirements.

The loan will be guaranteed against default by the federal government, but the borrower still must satisfy his or her specific bank’s income and lending expectations in order to receive a mortgage. A veteran or active member of the military cannot receive a VA Home Loan with poor credit that would normally disqualify him or her from a traditional loan.

Understanding VA Home Loan Funding Fees

A veteran will not pay closing costs associated with the completion of the home mortgage, as a typical borrower would. Despite having no closing costs, there is a small funding fee that the veteran must pay when using his or her VA loan. The funding fee for members of the military is 2.15% of the total cost of the home. For example, on the purchase of a $250,000 home, the funding fee would be $5,375 at the time of closing. A funding fee must be paid to the VA unless the veteran is exempt from such a fee because he or she receives VA disability compensation.

With bank lending becoming even tighter, the VA loan guarantee program has continued to be a popular option for veterans and active duty members of the military. Understanding the eligibility requirements, fees, and intricacies of the program can help members of the military make wise decisions with respect to buying a home. The program offers those who are eligible a low-cost way to purchase a home that they may not have otherwise qualified for, thanks to the program’s low fees, lack of PMI requirement, and zero down payment. Although times have changed, the desire to own a home persists. The VA Home Loan Program has assisted members of the military for almost seventy years, and still continues to help American service members realize their own American Dream.

{ 2 comments… read them below or add one }

Pat S. February 28, 2011 at 1:12 pm

Great article. Too many service-members don’t understand or take advantage of the benefits offered by the VA. Thanks for breaking it down and making the VA loan option understandable.
Pat

Eric Kandell February 28, 2011 at 5:25 pm

I have to correct or add some information to the part of the post that says in the event of default the lender is covered on any losses. VA loans are only guaranteed to cover 25% of the loan amt and the VA can hit the lender with a VA no bid which means the VA does NOT want to get involved and can force the lender to take the house and all the VA does is writes a check for 25% of the loan amt. This is why VA loans are a bit tougher to get lenders to take than FHA.

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