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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.

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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."

And, 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, says Pedigo.

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," he says.

Who's getting VA loans?
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 Web site.

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.

So 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.

Loan limits
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."

But 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."

Dana Dratch is a freelance writer based in Atlanta.

 
-- Posted: May 16, 2005
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