The Department of Veterans Affairs (VA) Home Loan Guaranty program has been providing assistance and other benefits to veterans, active duty service members, reservists, National Guard, and certain surviving spouses, since 1944. Approximately 20 million service members and veterans have taken out VA loans over the last seven decades and nearly 60 percent of veterans who have ever obtained a loan to purchase a home, make home improvements, or refinance a home loan, have taken advantage of a VA loan program at some point.
Under the provisions of the VA Home Loan program, the federal government guarantees loans made by conventional mortgage lenders such as banks, credit unions, etc., after borrowers make their own loan arrangements. The VA then appraises the property and, if satisfied that the borrower is a good risk, guarantees the lender against the loss of a percentage of the loan’s principal, in lieu of a down payment.
VA Home Loan Options
A VA Guaranteed Home Loan can be used to: buy or build a new home; buy a residential condominium or cooperative housing unit; buy a manufactured home and/or lot; repair, alter, or improve a residence owned and occupied by a veteran; install a solar heating or cooling system or other energy-efficient improvements.
A VA loan can cover up to 100 percent of the purchase price of a home. The VA’s maximum guarantee is 25 percent of the loan amount up to $104,250, making the maximum loan in most locations $417,000, (over $1 million in certain areas). Borrowers pay a funding fee to the VA of between 0.5 and 3 percent, with the majority of borrowers charged 2 percent. The fee may be paid in cash or included in the loan amount.
Benefits of the VA Home Loan program:
- A guarantee by the VA to repay a percentage of a loan (25-50 percent, depending on the loan amount) in the event a borrower defaults.
- The ability of a borrower to purchase a home without a down payment.
- Limitations on closing costs.
- The ability to waive private mortgage insurance (PMI).
- Competitive mortgage rates that are usually lower than prevailing market rates.
- Higher allowable debt-to-income ratios.
- No prepayment penalties.
- The option for sellers to pay all of the veteran’s closing costs as long as the costs do not exceed 6% of the sales price of the home.
- Easier credit standards to qualify for a loan.
- Special housing adaptation assistance for veterans with certain disabilities.
- VA direct home loans are available to eligible Native American veterans who want to buy or build a home on trust lands.
The VA also has several programs for veterans, and active service members and their spouses wishing to refinance a home loan.
The Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA Streamline Refinance, allows qualified veterans to:
- Refinance to a lower rate.
- Switch from an adjustable rate to a fixed rate loan, or vice versa.
- Qualify without having to document assets or income.
- Waive an appraisal.
- Pay lower, or no, out of pocket closing costs.
- Finance energy efficient improvements into the loan.
In 2008, Congress passed the Veterans Benefits Improvement Act, which allows a veteran to utilize up to 100 percent of the appraised value of a home for a VA Cash-out Refinance Loan. The veteran can use the cash for any purpose, including consolidating other debts, paying for a child’s education, taking an extended vacation, etc.