I thought it would be worthwhile for both the general public and service members to share some background information on VA Loans at this time. Many of our returning service members as well as members of the General Public are often not fully aware of how this excellent program works. I have edited a portion of my New Hampshire 40 Hour pre-Licensing Course here to help everybody have a little more information about the program.
The VA is authorized to insure loans for eligible veterans. Like the FHA the VA does not normally lend money, rather it guarantees loans made by VA approved lenders. Eligible veterans may purchase: multi-family homes up to four units, new condos or construction of condos, new or used mobile homes and lots for mobile homes, finance the construction of a new home on its own land, or the eligible veteran may also refinance existing loans.
To be eligible for VA financing the subject property must be owner occupied, the Veteran Borrower must have had 180 days of active military service and have received an Honorable Discharge from the service.
There are a few special characteristics of VA financing that are specifically built into the program to protect VA borrowers as well as the VA. Here are the big ones: The subject property must be appraised by a VA approved appraiser and meet special VA Loan specifications. Loan Specifications for a VA loan include: It can be from any regular lending institution that has been approved by the VA. Maximum loan is based on fair market value as determined by the VA appraisal or MCRV, (Maximum Certificate of Reasonable Value). The VA guarantees top 25% – eliminating PMI; no down payment is required: closing costs may not be financed with the exception of the VA Funding Fee, however there is no limit on seller contributions to the VA Buyer’s closing cost expenses. Should purchase price exceed appraised value, the difference must be paid in cash by the VA Buyer, the seller can decrease their price to match the VA appraisal or the VA buyer can withdraw from the contract without penalty from the seller. VA Loans have a maximum term of thirty years; no secondary financing is allowed on VA loans and there can be no pre-payment penalty on VA Loans. Co-borrowers on VA Loans must be married to the veteran or be Veterans themselves. (The VA does not recognize same sex marriages regardless of State Statues.) The Veteran must supply their Certificate of Eligibility – DD214.
By Dick Thackston CRB, ABR, ABRM, BrokerNH, MA & VT
A Brief History of VA (Veterans Administration) Loans
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.
The 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 Service members’ 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%.
What is the VA and what do they do?
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/Freddie Mac 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.