VA Loan

A Mortgage Loan Guaranteed by the U.S. Department of Veterans Affairs

A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs. The loan may be issued by qualified lenders.

The VA loan was designed to offer long-term financing to American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.

The VA loan allows veterans 100% financing without private mortgage insurance or 20% second mortgage. A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA and is allowed to be financed. In a purchase, veterans may borrow up to 100% of the sales price or reasonable value of the home, whichever is less. Since there is no monthly PMI more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment. In a refinance, veterans may borrow up to 90% of reasonable value, where allowed by state laws.

VA loans allow veterans to qualify for loans amounts larger than traditional Fannie Mae / conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills.

As of January 1, 2006, the maximum VA loan amount with no down payment is $417,000 and can be as high as $625,500 in certain high cost areas. VA also allows the seller to pay all of the veteran's closing cost as long as the cost do not exceed 4% of the sales price of the home.

The history of VA loan

The original Servicemen's Readjustment Act, passed by the United States Congress in 1944, extended a wide variety of benefits to eligible veterans. The loan guarantee program of the Veterans Administration has been especially important to veterans. Under the law, as amended, the Veterans Administration is authorized to guarantee or insure home, farm, and business loans made to veterans by lending institutions. Over the history of the program, 18 million VA Home Loans have been insured by the government. The VA can make direct loans in certain areas for the purpose of purchasing or constructing a home or farm residence, or for repair, alteration, or improvement of the dwelling. The terms and requirements of VA farm and business loans have not induced private lenders to make such loans in volume during recent years.

Real Estate Finance ArticlesThe Veterans Housing Act of 1970 removed all termination dates for applying for VA-guaranteed housing loans. This 1970 amendment also provided for VA-guaranteed loans on mobile homes.

More recently, the Veterans Housing Benefits Improvement Act of 1978 expanded and increased the benefits for millions of American veterans.

Despite a great deal of confusion and misunderstanding, the federal government generally doesn't make direct loans under the act. The government simply guarantees loans made by ordinary mortgage lenders (descriptions of which appear in subsequent sections) after veterans make their own arrangements for the loans through normal financial circles. The Veterans Administration then appraises the property in question and, if satisfied with the risk involved, guarantees the lender against loss of principal if the buyer defaults.

In association with the VA's program, the Servicemembers' Civil Relief Act protects service members from financial woes on their home loan that may occur as a result of active duty commitments, freezing their interest rates at 6%.

Funding fees

Purchase and construction loans

Note: The funding fee for regular military first time use from 1/1/04 to 9/30/04 was 2.2 percent. This figure dropped to 2.15 percent on 10/1/04. If you have a service connected disability that you are compensated for by the VA, the funding fee is waived.
Type of Veteran Down Payment First Time Use Subsequent Use for loans from 1/1/04 to 9/30/2011
Regular Military None
5% or more (up to 10%)
10% or more
2.15%
1.50%
1.25%
3.3%*
1.50%
1.25%
Reserves/National Guard None
5% or more (up to 10%)
10% or more
2.4%
1.75%
1.5%
3.3%*
1.75%
1.5%

 

The VA funding fee is financed directly into the loan amount up to $417,000. If the sales price and the financed VA funding fee total more than $417,000 the borrower or seller must pay for the fee out of pocket. All VA loans require an impound account for property taxes and homeowners insurance which makes the monthly payment of VA loans calculated as a PITI payment.**

Cash-out refinancing loans

Type of Veterans Percentage for First Time Use Percentage for Subsequent Use
Regular Military 2.15% 3.3%*
Reserves/National Guard 2.4% 3.3%*
 

The higher subsequent use fee does not apply to these types of loans if the veteranís only prior use of entitlement was for a manufactured home loan.

Other types of loans

Type of Loan Percentage for Either Type of Veteran
Whether First Time or Subsequent Use
Interest Rate Reduction
Refinancing Loans
.50%
Manufactured Home Loans 1.00%
Loan Assumptions .50%
 

The equivalents of VA loan

Private mortgage insurance

Main article: Private mortgage insurance

Private mortgage insurance (PMI) guarantees home mortgage loans that are conventional, that is, nongovernment loans. This private business loan program is equivalent to the FHA and the VA loan programs.

The PMI company insures a percentage of the consumer's loan to reduce the lender's risk; this percentage is paid to the lender if the consumer does not pay and the lender forecloses the loan.

Lenders decide if they need and want private mortgage insurance. If they so decide, it becomes a requirement of the loan. PMI companies charge a fee to insure a mortgage loan; the VA insures a loan at no cost to a veteran buyer; the FHA charges a fee to guarantee the loan.

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