The Ultimate Guide to VA Loans, 2nd Edition

1

What Is a VA Loan?

The VA loan is a home mortgage loan that is underwritten and approved under lending guidelines established by the Department of Veterans Affairs (VA). It is one of the most popular VA benefits in existence today. One reason for the VA home loan’s popularity is that it requires no down payment. Another reason is that credit and qualifying guidelines are more relaxed when compared to conventional mortgage programs.

What is the history of the VA loan program? In 1944, Congress passed the Servicemen’s Readjustment Act – a legislation that provided a wide breadth of benefits to our returning troops from World War II. This act was established to help reinstate our troops back into civilian life with benefits such as business loans, as well as farm and home loan guarantees.

The Servicemen’s Readjustment Act is more widely known as the G.I. Bill, which remains the term used to identify this package of benefits to this day. However, the VA mortgage loan program was only developed over the past few decades to improve and expand the program.

Congress authorized the VA to guarantee these types of loan types, should they default. When a bank makes a VA loan, the original lender making the VA loan would be reimbursed by approximately 20 percent of the original loan amount should the loan go into foreclosure, provided the lender approved the loan under VA lending guidelines and there was no indication of fraud. Notice that we mentioned it was “a bank” that approved a VA loan. It is noteworthy that the VA does not get involved in any direct way with approving or processing a VA home loan application; instead, approved VA lenders do, such as banks.

Initially, this special VA program was available only to those who returned from World War II. It had established certain cut-off or termination dates which veterans had to respect if they were to take advantage of the VA loan. This was especially attractive during that time, as many home loans from banks required 30, 40 and even 50% down payment.

Since then, the VA loan program has grown significantly and is now a staple of the mortgage industry. Initially, the VA home loan benefit was considered a temporary program to help returning veterans buy a home and establish credit. It was intended to be used only once, provided the veteran applied for their VA loan before their cutoff date. These cutoff dates were strict and required veterans to apply for a VA home loan within two years after their discharge or two years after the end of World War II.

However, because they were unaware of such cut-off dates or the program itself, many veterans were unable to take advantage of the VA mortgage program. In 1952, Congress extended the VA home loan benefits to veterans of the Korean War, as well as the cut-off date to 10 years after the end of the war or after an honorable discharge.

In 1960, Congress discovered that regardless of the additional cutoff dates, the VA home loan was still issued fewer times than in the previous 15 years. There was still work to be done to support veterans return to civilian life.

Congress found itself constantly providing legislation to accommodate veterans of both World War II and Korea and their new realities upon their return. Finally, in 1970, Congress passed the Veterans Housing Act that eliminated cut-off dates in the application of qualifying veterans for the VA home loan program as well as a host of other benefits in what is now known as the VA Home Loan Benefit.

Still, later in 1992, Congress again amended the original G.I. Bill by passing the Veterans Home Loan Program Amendments of 1992. This change expanded the VA home loan program to allow those other than world war veterans to apply, including those who served in the United States Army Reserve, Marine Forces Reserve, United Sates Navy Reserve, the Air Force Reserve Command and the United States Coast Guard. The United States National Guard, which includes the Army National Guard and the Air National Guard, can also benefit from the VA Home Loan.

It is still widely believed that the VA mortgage loan program is eligible only to veterans. However, there are so many more individuals who can avail of this benefit. Who are these groups specifically? The Department of Veterans Affairs divides those eligible into three separate categories, identified as Group A, B and C.

Group A includes veterans, those serving on Active Duty and Armed Forces Reservists, as well as National Guard Members who have served on active duty.

These veterans must have served in World War II, the Korean War or Vietnam War. They must be honorably discharged or have served during peacetime with a minimum of 181 days of active duty. As for Armed Forces Reserves and National Guard Members who have served on active duty for Active Duty personnel, they must be on regular duty after continuous service of 181 days.

Group B includes other Armed Forces Reserves and National Guard members who have not served on Active Duty, but who have served for at least six years and were honorably discharged.

Group C is reserved for the surviving spouses of veterans who died while serving or due to a service-connected disability.

There is a final category specifically for selected members of other government agencies, which includes those in service as Public Health Service Officers, cadets at the United States Military Academy, Air Force Academy, Coast Guard Academy, midshipmen at the Naval Academy, officers at the National Oceanic and Atmospheric Administration and certain merchant seamen who served during World War II.

That’s quite a list. Indeed, the VA home loan program is open to many others, although these individuals are often unaware of their eligibility.

How does the program work, and how can the VA guarantee a mortgage when conventional loans carry no such guarantee?

A borrower will first determine if he or she is eligible for the program. This is achieved by obtaining the Certificate of Eligibility (COE) from the Department of Veterans Affairs, which will be discussed further in detail in Chapter 2.

After obtaining the COE, the borrower contacts a lender who is approved to underwrite VA home loans. The borrower then gets prequalified for a loan amount and finds a home to buy that is within their budget.

A borrower is not required to make a down payment on a VA home loan. While making a down payment is not prohibited under the program, rarely does a borrower provide one on a VA home loan. A detailed comparison on various loan types will be considered in
Chapter 3.

The VA guarantee is primarily funded by what is called the VA Funding Fee, which is in essence an insurance policy for which the veteran pays that helps fund the guarantee program. If a VA home loan goes into default, the original lender may be eligible for a refund which amounts to approximately 25% of the defaulted loan. The only veteran borrowers exempt from the VA Funding Fee are those who have incurred a service-related disability.

Historically, those who take a VA home loan have the best loan performance pricing when compared to all other loan types, including mortgages underwritten to Fannie Mae and Freddie Mac (conventional) loans and FHA mortgage loans, which all require some sort of down payment. The notion that home buyers who don’t have “skin in the game” in terms of a down payment and a mortgage are more likely to default is simply false.

The funding fee can change based on a variety of factors including the type of service, down payment amount, a refinance and subsequent use of a VA home loan. It is expressed as a percentage of the loan amount and may be paid in cash; however, it is most always included into the loan amount and may be borrowed as part of the mortgage and paid out over the term of the loan.

For example, a first-time veteran borrower will find a 2.15% funding fee that is required for the loan. On a $200,000 loan, the funding fee is $4,300, with the final loan amount totaling $204,300. Costs and fees will be discussed in greater detail in Chapter 4.

The VA Home Loan has risen in popularity over the years, primarily due to the efforts of the Department of Veteran Affairs to educate lenders and individual mortgage loan officers on the program.

The Popularity of VA Loans

As previously stated, the primary and obvious reason for the program’s popularity is that it does not require a down payment. It remains the biggest advantage for veterans, but there are others.

A borrower with a VA home loan can have up to 41% or more of their gross monthly income dedicated to a housing payment, while a conventional mortgage has its standard housing income guideline at 28%.

Over the past two decades, there have been several attempts at introducing different mortgage programs to the market that required little or no money down and had reduced credit standards. These programs grew in popularity in the 2000’s but soon fell out of favor with both the public and regulatory agencies as their delinquency rates soared and were thus considered by many to be one of the main contributors to the housing crisis.

VA credit requirements are relaxed when compared to conventional fare. While the VA...