VA Loans
The more you know about our home loan program, the
more you will realize how little "red tape" there really
is in getting a VA loan. These loans are often made
without any downpayment at all, and frequently offer
lower interest rates than ordinarily available with
other kinds of loans. Aside from the veteran's
certificate of eligibility and the VA-assigned
appraisal, the application process is not much different
than any other type of mortgage loan. And if the lender
is approved for automatic processing, as more and more
lenders are now, a buyer's loan can be processed and
closed by the lender without waiting for VA's approval
of the credit application.
Additionally, if the lender is approved under VA's
Lender Appraisal Processing Program (LAPP), the lender
may review the appraisal completed by a VA-assigned
appraiser and close the loan on the basis of that
review. The LAPP process can further speed the time to
loan closing.
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- Apply for a Certificate of Eligibility.
A veteran who doesn't have a certificate can obtain
one easily by making application on VA Form 26-1880,
Request for Determination of Eligibility and
Available Loan Guaranty Entitlement, to the local VA
office.
- Decide on a home the buyer wants to buy and sign
a purchase agreement
- Order an appraisal from VA. (Usually this is
done by the lender.)
Most VA regional offices offer a "speed-up"
telephone appraisal system. Call the local VA office
for details.
- Apply to a mortgage lender for the loan.
While the appraisal is being done, the lender
(mortgage company, savings and loan, bank, etc.) can
be gathering credit and income information. If the
lender is authorized by VA to do automatic
processing, upon receipt of the VA or LAPP appraised
value determination, the loan can be approved and
closed without waiting for VA's review of the credit
application. For loans that must first be approved
by VA, the lender will send the application to the
local VA office, which will notify the lender of its
decision.
- Close the loan and the buyer moves in.
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More than 29 million veterans and service personnel
are eligible for VA financing. Even though many veterans
have already used their loan benefits, it may be
possible for them to buy homes again with VA financing
using remaining or restored loan entitlement.
Before arranging for a new mortgage to finance a home
purchase, veterans should consider some of the
advantages of VA home loans
1. Most important consideration, no downpayment is
required in most cases.
2. Loan maximum may be up to 100 percent of the
VA-established reasonable value of the property. Due to
secondary market requirements, however, loans generally
may not exceed $203,000.
3. Flexibility of negotiating interest rates with the
lender.
4. No monthly mortgage insurance premium to pay.
5. Limitation on buyer's closing costs.
6. An appraisal which informs the buyer of property
value.
7. Thirty year loans with a choice of repayment
plans:
a. Traditional fixed payment (constant principal and
interest; increases or decreases may be expected in
property taxes and homeowner's insurance coverage);
b. Graduated Payment Mortgage--GPM (low initial payments
which gradually rise to a level payment starting in the
sixth year); and
c. In some areas, Growing Equity Mortgages-GEMs
(gradually increasing payments with all of the increase
applied to principal, resulting in an early payoff of
the loan).
8. For most loans for new houses, construction is
inspected at appropriate stages to ensure compliance
with the approved plans, and a 1-year warranty is
required from the builder that the house is built in
conformity with the approved plans and specifications.
In those cases where the builder provides an acceptable
10-year warranty plan, only a final inspection may be
required.
9. An assumable mortgage, subject to VA approval of
the assumer's credit.
10. Right to prepay loan without penalty.
11. VA performs personal loan servicing and offers
financial counseling to help veterans avoid losing their
homes during temporary financial difficulties.
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These loans are made by a lender, such as a mortgage
company, savings and loan or bank. VA's guaranty on the
loan protects the lender against loss if the payments
are not made, and is intended to encourage lenders to
offer veterans loans with more favorable terms. The
amount of guaranty on the loan depends on the loan
amount and whether the veteran used some entitlement
previously. With the current maximum guaranty, a veteran
who hasn't previously used the benefit may be able to
obtain a VA loan up to $203,000 depending on the
borrower's income level and the appraised value of the
property. The local VA office can provide more details
on guaranty and entitlement amounts.
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WHAT CAN A VA LOAN BE USED FOR?
- To buy a home, including townhouse or
condominium unit in a VA-approved project.
- To build a home.
- To simultaneously purchase and improve a home.
- To improve a home by installing energy-related
features such as solar or heating/cooling systems,
water heaters, insulation, weather-stripping/
caulking, storm windows/doors or other energy
efficient improvements approved by the lender and
VA. These features may be added with the purchase of
an existing dwelling or by refinancing a home owned
and occupied by the veteran. A loan can be increased
up to $3,000 based on documented costs or up to
$6,000 if the increase in the mortgage payment is
offset by the expected reduction in utility costs. A
refinancing loan may not exceed 90 percent of the
appraised value plus the costs of the improvements.
Check with a lender or VA for details.
- To refinance an existing home loan up to 90
percent of the VA-established reasonable value or to
refinance an existing VA loan to reduce the interest
rate.
- To buy a manufactured home and/or lot.
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WHO IS ELIGIBLE?
Veterans with active duty service, that was not
dishonorable, during World War II and later periods are
eligible for VA loan benefits. World War II (September
16, 1940 to July 25, 1947), Korean conflict (June 27,
1950 to January 31, 1955), and Vietnam era (August 5,
1964 to May 7, 1975) veterans must have at least 90
days' service. Veterans with service only during
peacetime periods and active duty military personnel
must have had more than 180 days' active service.
Veterans of enlisted service which began after September
7, 1980, or officers with service beginning after
October 16, 1981, must in most cases have served at
least 2 years.
Persian Gulf Conflict. Basically, reservists
and National Guard members who were activated on or
after August 2, 1990, served at least 90 days and were
discharged honorably are eligible. VA regional office
personnel may assist with eligibility questions.
Members of the Selected Reserve, including National
Guard, who are not otherwise eligible and who have
completed 6 years of service and have been honorably
discharged or have completed 6 years of service and are
still serving may be eligible. The expanded eligibility
for Reserves and National Guard individuals will expire
October 28, 1999. Contact the local VA office to find
out what is needed to establish eligibility. Reservists
will pay a slightly higher funding fee than regular
veterans. (See paragraph entitled "Costs of Obtaining a
VA Loan").
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HAD A VA LOAN BEFORE?
Remaining Entitlement
Veterans who had a VA loan before may still have
"remaining entitlement" to use for another VA loan. The
current amount of entitlement available to each eligible
veteran is $36,000. This was much lower in years past
and has been increased over time by changes in the law.
For example, a veteran who obtained a $25,000 loan in
1974 would have used $12,500 guaranty entitlement, the
maximum then available. Even if that loan is not paid
off, the veteran could use the $23,500 difference
between the $12,500 entitlement originally used and the
current maximum of $36,000 to buy another home with VA
financing. An additional $14,750, up to a maximum
entitlement of $50,750 is available for loans above
$144,000 to purchase or construct a home.
Most lenders require that a combination of the
guaranty entitlement and any cash downpayment must equal
at least 25 percent of the reasonable value or sales
price of the property, whichever is less. Thus, in the
example, the veteran's $23,500 remaining entitlement
would probably meet a lender's minimum guaranty
requirement for a no downpayment loan to buy a property
valued at and selling for $94,000. The veteran could
also combine a downpayment with the remaining
entitlement for a larger loan amount.
Restoration of Entitlement
Veterans can have previously-used entitlement
"restored" to purchase another home with a VA loan if:
- The property purchased with the prior VA loan
has been sold and the loan paid in full, or
- A qualified veteran-transferee (buyer) agrees to
assume the VA loan and substitute his or her
entitlement for the same amount of entitlement
originally used by the veteran seller. Remaining
entitlement and restoration of entitlement can be
requested through the nearest VA office by
completing VA Form 26-1880.
- The entitlement may also be restored one time
only if the veteran has repaid the prior VA loan in
full but has not disposed of the property purchased
with the prior VA loan.
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VA Appraisal- Certificate of Reasonable Value
The CRV (certificate of reasonable value) is based on
an appraiser's estimate of the value of the property to
be purchased. Because the loan amount may not exceed the
CRV, the first step in getting a VA loan is usually to
request an appraisal. Anyone (buyer, seller, real estate
personnel or lender) can request a VA appraisal by
completing VA Form 26-1805, Request for Determination of
Reasonable Value. After completing the form, it can
either be mailed to the Loan Guaranty Division at the
nearest VA office for processing or an appraisal can be
requested by telephoning the Loan Guaranty Division for
assignment of an appraiser. The local VA office may be
contacted for information concerning its assignment
procedures. The appraiser will send a bill for his or
her services to the requester according to a fee
schedule approved by VA. To simplify things, VA and
HUD/FHA (Department of Housing and Urban
Development/Federal Housing Administration) use the same
appraisal forms. Also, if the property was recently
appraised under the HUD procedure, under certain limited
circumstances, the HUD conditional commitment can be
converted to a VA CRV. The local VA office can explain
how this is done.
It is important to recognize that while the VA
appraisal estimates the value of the property, it is not
an inspection and does not guarantee that the house is
free of defects. Homebuyers should be encouraged to
carefully inspect the property themselves, or to hire a
reputable inspection firm to help in this area. VA
guarantees the loan, not the condition of the property.
Application
The application process for VA financing is no
different from any other type of loan. In fact, the VA
application form is the same as that used for HUD/FHA
and conventional loans. The mortgage lender verifies the
applicant's income and assets, and obtains a credit
report to see that other obligations are being paid on
time. If all is well and the appraised value of the
property is enough to cover the loan needed, the lender,
in most instances, can then close the loan under VA's
automatic procedure. Only about 10 percent of VA loan
applications have to be submitted to a VA office for
approval before closing.
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REQUIREMENTS FOR LOAN APPROVAL
To obtain a VA loan, the law requires that:
- The applicant must be an eligible veteran who
has available entitlement.
- The loan must be for an eligible purpose.
- The veteran must occupy or intend to occupy the
property as a home within a reasonable period of
time after closing the loan.
- The veteran must be a satisfactory credit risk.
- The income of the veteran and spouse, if any,
must be shown to be stable and sufficient to meet
the mortgage payments, cover the costs of owning a
home, take care of other obligations and expenses,
and have enough left over for family support.
An experienced mortgage lender will be able to
discuss specific income and other qualifying
requirements.
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COSTS OF OBTAINING A VA LOAN
Funding Fee
A basic funding fee of 2.0 percent must be paid to VA
by all but certain exempt veterans. A down payment of 5
percent or more will reduce the fee to 1.5 percent and a
10 percent downpayment will reduce it to 1.25 percent.
A funding fee of 2.75 percent must be paid by all
eligible Reserve/National Guard individuals. A down
payment of 5 percent or more will reduce the fee to 2.25
percent and a 10 percent downpayment will reduce it to
2.0 percent.
The funding fee for loans to refinance an existing VA
home loan with a new VA home loan to lower the existing
interest rate is 0.5 percent.
Veterans who are using entitlement for a second or
subsequent time who do not make a downpayment of at
least 5 percent are charged a funding fee of 3 percent.
NOTE: For all VA home loans, the funding fee may
be paid in cash or it may be included in the loan.
Other Closing Costs
Reasonable closing costs may be charged by the
lender. These costs may not be included in the loan. The
following items may be paid by the veteran purchaser,
the seller, or shared. Closing costs may vary among
lenders and also throughout the nation because of
differing local laws and customs.
- VA appraisal
- Credit report
- Loan origination fee (usually 1 percent of the
loan)
- Discount points
- Title search and title insurance
- Recording fees
- State and/or local transfer taxes, if applicable
- Survey
Remember, VA-guaranteed financing is a benefit which
Congress intended eligible veterans should have. If you
are a veteran homebuyer or know of one, it makes sense
to look into the VA loan program as a good way to
finance a home purchase. |
