VA Home Loans - A Quick Guide For Homebuyers and Real Estate Professionals (On-Line Version)
WHY A VA LOAN?
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. Aside from the veteran's certificate of
eligibility and the fact that the appraiser is
assigned by VA, the application process is not much
different than any other type of mortgage loan. And
if the lender is approved for automatic processing
and the Lender Appraisal Processing Program (LAPP),
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
or for VA to review the appraisal.
Lenders are also able to use VA recognized automated
underwriting systems, such as Loan Prospector and
Desktop Underwriter, to facilitate the underwriting
process.
FIVE EASY STEPS TO A VA LOAN
- Apply for a Certificate of Eligibility (COE).
A veteran can obtain a COE by completing VA Form 26-1880, Request for a Certificate of Eligibility, and mailing it, along with proof of military service, to the eligibility center (see office list at back of pamphlet). Also, veterans who have already begun the loan application process with a lender may request the lender obtain a COE through webLGY, which is accessed through the VA portal. More information about this online system can be found at our website which is: www.homeloans.va.gov.
- Decide on a home to buy and sign a purchase
agreement.
- Order an appraisal from VA. (Usually this is done
by the lender.)
Ordering an appraisal can be done via the Internet using TAS (The Appraisal System). This is a centralized system that allows lenders easy and quick access to order an appraisal.
- Apply to a mortgage lender for the loan.
While the appraisal is being done, the lender can be gathering credit and income information. If the lender is authorized by VA to process loans on the automatic basis (and approx. 99 percent of all VA loans are processed this way), the loan can be approved and closed upon receipt of the appraised value determination without waiting for a VA review of the credit application. VA has also approved the use of several automated underwriting systems for lenders to use in connection with VA loans. The two main systems are Loan Prospector and Desktop Underwriter. For loans that must be approved by VA, lenders send the credit package to VA. VA staff will then review it and notify the lender of the decision.
- Close the loan and move in.
VA FINANCING
-A GOOD DEAL FOR VETERANS
More than 27 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:
- Most important consideration, no downpayment is required in most cases.
- 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 $417,000 ($625,500 for loans in Hawaii, Alaska, Guam and U.S. Virgin Islands). This figure is subject to change each year.
- Flexibility of negotiating interest rates with the lender.
- No monthly mortgage insurance premium to pay.
- Limitation on buyer's closing costs.
- An appraisal, which informs the buyer of estimated property value.
- Thirty-year loans with a choice of repayment plans.
- 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). Hybrid ARMs: VA is authorized to guarantee hybrid ARM loans where the initial rate remains fixed for at least 3 years. The initial adjustment can be as much as 2 percent if the fixed rate period is 5 or more years. Annual adjustments thereafter are limited to 1 percent if the fixed rate period is less than 5 years, and 2 percent if the fixed rate period is 5 or more years. If the fixed rate period is less than 5 years, the initial adjustment is limited to 1 percent and the annual cap to 5 percentage points. Traditional ARM loans: VA can also guarantee traditional 1-year ARM loans where the rate is adjusted annually. Annual adjustments are limited to 1 percent and the maximum interest rate increase over the life of the loan is limited to 5 percentage points.
- New homes, which are appraised before or during construction, are inspected to help ensure compliance with the plans and specifications used for the appraisal and with VA minimum property requirements. All new houses, regardless of when appraised, are covered by either a 1-year builder's warranty or a 10-year insured protection plan.
- An assumable mortgage, subject to VA approval of the assumer's credit.
- Right to prepay loan without penalty.
- VA performs personal loan servicing and offers financial counseling to help veterans avoid losing their homes during temporary financial difficulties.
WHAT IS A VA-GUARANTEED LOAN?
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
$417,000 ($625,500 for loans in Hawaii, Alaska, Guam
and U.S. Virgin Islands), depending on the
borrower's income level and the appraised value of
the property. Your VA Regional Loan Center can provide more details on guaranty and
entitlement amounts.
WHAT CAN A VA LOAN BE USED FOR?
- To buy a home, a condominium unit in a VA-approved project, or to purchase a unit in a cooperative (co-op).
- 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 to 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.
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 of service. Veterans with
service only during peacetime periods and active
duty military personnel must have had more than 180
days of 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.
Gulf War. 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 can 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. Contact the VA
Eligibility Center 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.")
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. For certain loans in excess of $144,000,
the basic $36,000 entitlement can be increased to a
maximum guaranty equal to 25 percent of the Freddie
Mac conforming loan limit for a single family
residence, minus any previously used entitlement.
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. 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. Remaining entitlement and restoration of entitlement can be requested through the VA Eligibility Center by completing VA Form 26-1880.
HOW TO GET A VA LOAN
VA Appraisal
Because the loan amount may not exceed VA's estimate
of the value of the property, the first step in
getting a VA loan is usually to request an
appraisal. Although anyone (buyer, seller, real
estate personnel or lender) can request a VA
appraisal, usually this is done by the lender via
the Internet using TAS (The Appraisal System). 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) generally use the same
appraisal forms.
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 1 percent of VA loan
applications have to be submitted to a VA office for
approval before closing.
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.
COSTS OF OBTAINING A VA LOAN
Funding Fee
- A funding fee must be paid by all veterans using the VA home loan program, except those exempt due to receipt of disability compensation.
- The funding fee can range from 0.5 percent for Interest Rate Reduction Refinancing Loans (IRRRLs) to 3.3 percent for veterans who are subsequent users of the VA home loan program.
- For all VA loans, the funding fee may be paid in cash or included in the loan.
- For more information on the VA funding fee, contact your VA Regional Loan Center.
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
No commissions, brokerage fees, or
"buyer broker" fees may be charged to the veteran
buyer.
NEED MORE INFORMATION?
Veterans seeking more detailed information
concerning the VA home loan program may request VA
Pamphlet 26-4, VA-Guaranteed Home Loans for
Veterans, or VA Pamphlet 26-6, To the Home-Buying
Veteran, from VA.
Remember, VA-guaranteed financing is a benefit which
Congress intended eligible veterans should have. If
you are a veteran home buyer or know of one, it
makes sense to look into the VA loan program as a
good way to finance a home purchase.
To locate a VA facility, or to obtain more
information on the VA Loan Guaranty program, visit
www.va.gov and click on Facilities Locator.
VA Offices with Loan Activities