Mortgages: What is a VA Loan?
A VA Loan is a mortgage loan for veterans of the armed services and is one of the easiest loans to obtain. VA Loans are often made without any down payment 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.
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.
Advantages of a VA Loan
Before arranging for a new mortgage to finance a home purchase, veterans should consider some of the advantages of VA home loans:
1. 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);
- Graduated Payment Mortgage--GPM (low initial payments which gradually rise to a level payment starting in the sixth year); and
- 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).
What is a VA Guaranteed Loan?
VA Guaranteed 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.
A VA Loan can be used to buy a home, including a townhouse or condo in a VA-approved project; to build a home; to simultaneously purchase and improve a home; or 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 VA 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.
VA Loans can also be used 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 or to buy a manufactured home and/or lot.
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.
How to Apply for a VA Loan
There are basically five steps to obtaining a VA Loan:
1. 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.)
2. Decide on a home and sign a purchase agreement.
3. Order an appraisal from the Veteran's Administration (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.)
4. 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.
5. Close the loan and the buyer moves in.