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 335,000 VA loans
totaling more than $44 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 Health Service.
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 and valuation.
"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.
Rates generally 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.
There 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 3.3 percent, depending on the veteran's service
and whether it's a first or subsequent loan.
The typical fee is 2.15 percent, he says.
The VA will lower
the fee if the borrower makes a down payment of at least 5 percent.
For refinancing loans, the fee ranges from a half
percent to 3.3 percent, with a half-percent being the usual fee,
Many buyers simply finance the fee along with the
home. But that can have a hidden cost. On a $131,000 mortgage --
the average amount borrowed last year -- a 2-percent fee can bloom
into $6,084 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.
"Prospective homeowners 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.
The VA loan program has made some significant changes
over the past year that can directly benefit the veteran borrower,
Doyle says. They have rolled out a hybrid ARM program that allows
veterans to take advantage of lower rates, and the amount of the
loan that VA guarantees has been raised so that veterans can now
receive no down-payment financing up to the conforming loan limit,
which is currently $359,650.
"These two changes have improved the attractiveness
of the VA program, especially in areas with high housing costs,"
Who's getting VA
On average, 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 $58,000, with about
$5,300 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.
A widow or widower may also apply for a loan, provided
the spouse's death was the result of service -connected injuries.
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 recently.
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, all 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 -- $359,650 -- 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.
While the 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 $359,650, says
Pedigo. But the actual mortgage amount will be based on income,
assets, debts and credit history -- just like a conventional loan.
With 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 use the available
balance of any entitlement, 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 while the process to obtain a VA loan is simple,
it's really not any easier to qualify for one, according to Pedigo.
"Because 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
seriously bad 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.