The Veterans Administration (Department of Veterans Affairs) offers loan guarantees to qualified veterans. The VA, like the FHA, does not lend money except in certain areas where other financing is not generally available. Instead, the VA partially guarantees permanent long-term loans originated by VA-approved lenders on properties that meet VA standards. The VA’s guarantee enables lenders to issue loans with higher loan-to-value ratios than would otherwise be possible. The interest rate on a VA-guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing.
Characteristics of VA loans
Qualifications. VA –guaranteed loans are available veterans, their surviving spouse if not remarried, and persons on active duty.
Eligibility. Eligibility requirements vary depending on length of service and other circumstances. Prospective borrowers should consult the VA website https://www.va.gov/housing-assistance/home-loans/eligibility/ to learn how to acquire a Certificate of Eligibility to present to lenders.
Lending source. VA-approved lenders make most VA-guaranteed loans, although the VA can make direct loans where approved lenders are not available. The lender and the borrower negotiate interest rate, points, and closing costs.
Property eligibility. VA-guaranteed loans are issued for financing, refinancing, or construction of residential properties of one to four dwelling units provided the borrower resides in one of the units.
Qualifying ratios. The VA uses a debt ratio (total obligations ratio, or TOR) and calculations adjusted for regional incomes to qualify a borrower. This process is described further in a later section.
Borrower default. The VA reimburses the lender for losses up to the guaranteed amount if foreclosure sale proceeds fail to cover the loan balance.
Appraisal. The property must be appraised by a VA-approved appraiser. The VA issues a Certificate of Reasonable Value which creates a maximum value on which the VA-guaranteed portion of the loan will be based. The property must meet certain VA specifications.
Down payment requirement. The VA usually requires no down payment, although the lender may require one.
Maximum loan amount (entitlement). TheVA does not cap the loan amount, but it does limit the liability it can assume, which usually influences the amount an institution will lend. The amount a qualified veteran with full entitlement can borrow without making a downpayment determines the practical loan limits. This amount varies by county. The basic entitlement available to each eligible veteran is $36,000. Lenders will generally lend a maximum of 4 times that amount without a down payment if the veteran is fully qualified and the property appraises for the asking price.
A veteran must apply for a Certificate of Eligibility to find out how much the VA will guarantee in a particular situation.
Maximum loan term. The maximum loan term for one- to four-family residences is 30 years. For loans secured by farms, the maximum loan term is 40 years.
Prepayment privilege. The loan may be paid off early without penalty.
Assumability. VA loans are assumable with lender approval. Usually, the person assuming the loan must have VA eligibility, and the assumption may have to be approved by the VA.
Interest rate. Lender and borrower negotiate the interest rate for all VA-insured loans.
Points, fees and costs. The lender may charge discount points, origination fees, and other reasonable costs. These may be paid by seller (with some limits) or buyer, but may not be financed. The VA funding fee, however, may be included in the loan amount. The funding fee is a percentage of the loan amount which varies based on the type of loan, military category, whether the loan is a first-time loan, and whether there is a down payment.
Other VA programs. In addition to insuring loans to veterans, the VA may insure loans for lenders who set up a special account with the VA. The VA may also actually lend money directly when an eligible veteran cannot find other mortgage money locally.