Topic 13.5: VA Loan Guarantee Program

Learning Objective

After successfully completing this topic, you will be able to identify the guarantee feature of VA mortgage loans and the characteristics of VA loan programs.

The GI Bill of Rights

VA loan. US department of veterans affairs papers.

The GI Bill of Rights was passed by Congress and signed into law by President Franklin Roosevelt in 1944. The Act was designed to assist veterans who served in World War II, as well as their surviving spouses. The Act had several sections, including education assistance and assistance to veterans who wanted to buy a home. This section will cover the VA mortgage loan guarantee.

Characteristics of VA Mortgage Loans 

Qualifications for the program

The only persons who can apply for a VA mortgage guarantee are veterans, active duty service members, and unmarried surviving spouses. VA mortgages are available only if the veterans intends to live in the property.

Eligibility Requirements

A veteran’s first step is to apply to the VA for a certificate of eligibility, which sets the amount of entitlement available to the veteran. Specific amounts of guarantee to the veteran are based on the period of the veteran’s active duty. Licensees should rely on the VA lender to determine eligibility.

Lending source

VA-guaranteed loans are made by VA-approved lenders. The VA can make loans to veterans in areas where lenders do not make such loans.

Eligible property

A veteran can use the VA guarantee program to purchase, build, or refinance a one-to-four-unit property provided that the veteran lives in one of the units.

Discount points and Loan origination fee

Veterans may pay reasonable discount points on VA-guaranteed loans. The amount of discount points is whatever the borrower and lender agree upon, but usually not higher than two percent. The maximum loan origination fee a lender can charge is 1% of the loan amount.

Qualifying ratios 

To qualify for a VA loan, a borrower’s total monthly obligations may not exceed 41 percent of the borrower’s gross monthly income.

Loan limits 

Eligible Veterans, service members, and survivors with full entitlement no longer have loan limits. The veteran can borrow as much as the veteran qualifies for, without having to make a down payment. The VA guarantees lenders that if the borrower defaults, VA will pay them up to 25% of the loan amount. 

If the veteran no longer has full entitlement (perhaps because the veteran has a current VA loan that has not been paid off) there may be some remaining entitlement that can be used to finance a home purchase. In this case, the VA home loan limit is based on the published county loan limit where the property is located. Lenders generally will lend up to four times the remaining entitlement guarantee. The veteran must make a 25% down payment of the difference between the purchase price and the loan limit. A veteran who used his or her full eligibility cannot receive another VA loan until the existing loan is paid off.

Amount of down payment

The down payment on a VA loan can be as low as $0.

VA Appraisal

Homes purchased with a VA loan must be appraised by a VA-certified appraiser. The appraiser determines the home’s fair market value and ensures that the property meets the VA’s Minimum Property Requirements (MPRs). The appraisal is called a certificate of reasonable value. The property must
• have adequate space for living, sleeping, and cooking,
• have safe electrical and plumbing systems with some usable life remaining,
• have a heating system that can maintain the temperature above 50 degrees,
• have a safe water supply, a water heater, and a safe method of sewage disposal,
• have a roof that is in good condition with reasonable future utility,
• if there is a basement or crawl space, it must be dry, clear of debris, and properly vented,
• have safe access from the street,
• have no evidence of nuclear waste, asbestos, or radon, and
• have adequate construction, be free of lead-based paint and termites.

VA funding fee 

VA does not collect mortgage insurance premiums, but charges a funding fee to help finance the guaranty. The funding fee may be financed into the loan.  Borrowers who have obtained previous VA loans will pay a higher fee than first-time VA borrowers. The funding fee is waived for veterans who were awarded a Purple Heart.

Prepayment

VA loans can be paid off at any time without penalty.

Assumption

VA loans made after 1988 are not assumable unless the buyer qualifies financially. The buyer need not be a veteran. Upon qualification, the buyer takes responsibility for the mortgage payments, and the veteran is released from the obligation, a process called novation.

Interest rate

VA lenders, not the VA, set interest rates. The loans are amortized over a maximum of 30 years.