Should you try a VA home loan?
If you need a home loan, you might consider hitting
up your Uncle Sam.
Department of Veterans Affairs home loans -- VA loans
for short -- are a popular option with home buyers. In the past
fiscal year alone, the government has guaranteed 489,418 VA loans
totaling more than $63 billion.
And with good reason.
The loans require no down payment and are available from most lenders. In addition,
the government limits the amount of closing costs and origination fees lenders
can charge, as well as the appraisal fees. In general, the loans are available
to some veterans, active service members, reservists and members of the Public
Another big benefit to VA home loans -- no private
mortgage insurance. Not only does the VA not require PMI, it also prohibits lenders
from requiring it, says Bob Finneran, the VA's assistant director for loan policy
"We're putting a guarantee on the loan,
so we're not expecting them to get other insurance and charge the veteran for
that," he says.
On a $126,000 loan, PMI would run approximately
$40 to $64 a month for the first three to five years of a 30-year loan, says Jeff
Lubar, spokesman for the Mortgage Insurance Companies of America, an industry
trade group. Total savings: $1,440 to $3,840.
follow the market, just like any other home loan, says Keith Pedigo, the director
of loan guaranty services at the VA.
"Rates are generally
in line with conventional rates," he says. "The advantage of going VA
is that you do not have to make a down payment."
according to VA statistics, 91 percent of VA buyers skip the down payment.
is one down side. Starting in 1982 Congress levied a one-time funding fee on VA
loans, says Pedigo. Fees range from 1 1/4 percent to 3 percent, depending on the
veteran's service and whether it's a first or subsequent loan.
typical fee is 2 percent," he says.
The VA will lower
the fee if the borrower makes a down payment of at least 5 percent.
refinancing loans, the fee ranges from a half percent to 3 percent, with a half-percent
being the usual fee, says Pedigo.
Many buyers simply finance
the fee along with the home. But that can have a hidden cost. On a $129,245 mortgage
a 2-percent fee can bloom into $14,474 over the 30-year life of a 6-percent loan.
The fact that buyers can qualify for a VA loan doesn't mean
they should automatically use one, says Tim Doyle, a director in the government
affairs office of the Mortgage
Bankers Association of America.
should still shop around," says Doyle, who recommends that home buyers also
evaluate conventional and FHA options. "But if they don't have a down payment
and are offered as good an interest rate as what they would get elsewhere, it's
a good option."
borrowers tend to be the middle-class neighbor down the street. A little more
than half are first-time home buyers. The typical household has an annual income
of $50,000, with about $4,900 in ready cash, according to VA statistics. So it's
not surprising that 91 percent of borrowers forgo a down payment. The average
age of borrowers is 39. And, feminists take note, only 9 percent of VA mortgage
holders are women.
Loans are open to active and former members of the
armed forces who meet specific criteria for length and time of service, as well
as discharge conditions. Reservists and National Guard members could be eligible
if they served at least six years and received an honorable discharge. Veterans
discharged for a service-related disability are potentially eligible, as are some
members of the Public Health Service and foreign veterans who served with the
Allied forces during World War II, according to the VA's field operations office.
widow or widower may also apply for a loan, provided the spouse's death was service
related. Likewise, MIA and POW spouses could also qualify. For more details on
eligibility, visit the VA
Other than the military or public service requirement,
applying for a VA loan is just like applying for a conventional loan -- with one
extra step. The applicant must obtain a certificate of eligibility from the VA.
"They are pretty easy to get," says Pedigo, and
it's gotten even easier this year.
The certificate verifies
service and discharge. It's also important because it will spell out how much
the vet can borrow under the program. Before June of 2002, vets had to fill out
forms requesting the certificate, attach a copy of their discharge papers, send
the whole thing off to the closest VA center and wait a week or two for the results.
Now, thanks to a new automated network, many first-time borrowers
can learn the amount they are eligible to borrow while they wait. Lenders put
the vet's name and Social Security number into a computer and "have the determination
in seconds," says Pedigo.
But the actual loan process
takes about the same time as a conventional loan -- two to six weeks, says Pedigo.
where can you go to find a VA loan? Just about every lender that handles FHA or
conventional loans also makes VA loans, says Pedigo.
VA loans definitely aren't for everyone. While
the maximum guaranteed -- $240,000 -- will buy a lot of house in most parts of
the country, potential buyers in high-priced markets such as California or Manhattan
may have to go another route for their financing.
eligibility certificate indicates how large a loan the government will guarantee,
that doesn't mean the vet is automatically entitled to a loan of that amount.
Most first-time buyers will be guaranteed up to the VA maximum of $240,000, says
Pedigo. But the actual mortgage amount will be based on income, assets, debts
and credit history -- just like a conventional loan.
permission from the VA, sellers can also allow a buyer to assume their loan, making
a resale very attractive. But that also means that the veteran can't use the loan
to buy the next home. Until the loan is paid off, a veteran can only borrow the
difference between the outstanding loan and the maximum allowed by the certificate
of eligibility, Pedigo says.
If you pay off a VA loan, save
the paperwork. That way, if you ever apply for a second VA loan, you can ask for
the maximum amount you're allowed.
And it's really not any
easier to qualify for a VA loan, according to Pedigo.
we're a no-down-payment program, that's a benefit to vets," he says. "We
do try to be as flexible as we can. But that doesn't mean we approve an application
with a serious lack of credit or insufficient income."
the major distinction for a VA loan is that a buyer can get into a home without
investing a down payment, says Pedigo, "which is a huge advantage."
Dratch is a freelance writer based in Atlanta.