Should you try a VA home loan?
you need a home loan, you might consider hitting up your Uncle Sam.
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
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.
generally follow the market, just like any other home loan, says Keith Pedigo,
the director of loan guaranty services at the VA.
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 3.3 percent, depending on
the veteran's service and whether it's a first or subsequent loan.
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.
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.
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.
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
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,
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
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
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
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
And while the process to obtain a VA loan is simple,
it's really not any easier to qualify for one, 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 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.