The VA home loan was originally introduced as part of the Servicemen’s Readjustment Act of 1944. Congress wanted to help soldiers returning from WWII to more easily assimilate back into civilian life and provide funds to start a business, go to college or to buy and finance a home. As it relates to the home loan program, for those who qualify, hands down it is very likely the greatest home loan option out there for those seeking a competitive interest rate and terms along with as little cash to close as possible.
Main Benefits of the VA Loan
First and foremost, there is no down payment requirement. In addition, the veteran is restricted from paying certain kinds of closing costs. Further still, even though there is no down payment there is no required monthly mortgage insurance as with other mortgages with very little down. There is an upfront mortgage insurance premium due at closing but this can be rolled into the loan amount. This increases the veteran’s buying power while providing some very competitive interest rates. The VA loan carries an inherent guarantee, funded by the upfront premium, which compensates the lender for 25 percent of the loss in the event default.
Can I Qualify for a VA Loan?
The VA home loan is available to active duty military personnel with at least 181 days of service, veterans of the Armed Forces as well as those who have served in National Guard or Armed Forces Reserves for at least six years. Finally, unremarried surviving spouses of those who have died while in the line of duty or as a result of a service-related injury are eligible.
VA loans have been around for decades yet there was a time when sellers might refuse an offer on a home because the buyers were using VA financing. Why? Because the VA mortgage program was managed and processed directly by the Department of Veteran’s Affairs. The bureaucracy meant these loan applications could take up to two months or even longer to get approved. This meant that a seller could accept an offer, take the home off the market and six weeks later discover the Department of Veteran’s Affairs declined the application. They took care of not only the loan application but also the appraisal and only VA approved appraisers could be used to provide the appraisal report.
Often, this meant VA appraisers assigned to a transaction weren’t familiar with the area where the property was located, often resulting in a faulty report. When you combine the time it took to approve the loan along with problems with appraisals, you can understand why sellers might have been reluctant to accept an offer with VA financing and consider another offer instead.
New Changes and Benefits for VA Loans
Initially, the VA established a rather archaic, complicated method to set the maximum VA loan amount. The VA establishes a loan limit of four times the veterans’ entitlement amount. This amount is listed on the veterans’ Certificate of Eligibility. For those who are using a VA home loan for the very first time, this entitlement amount is $36,000. Four times $36,000 = $144,000.
Yet as home values have increased over time, in most areas this amount isn’t high enough. So, they made a change to match the maximum loan amount with zero money down the same as conforming loan limits, currently at $417,000 but scheduled to increase to $424,100 and in areas deemed “high cost” the limit $636,150. VA loan limits are scheduled to make the adjustment as well. Note that this limit is the amount without any down payment. For loan amounts above current limits, the borrower can still take out a VA loan and simply come in with 25% of the amount over and above the designated limit. If the limit is $424,100 and the veteran wants to finance $500,000, the veteran would need to come in with 25 percent of the difference between $500,000 and $424,100, or $18,975 plus closing costs. In fact, in certain areas the maximum VA loan amount can be as high as $1.5 million.
How to apply for VA Loan
Today, VA home loans are entirely originated, processed and approved by mortgage lenders. As long as the lender has been approved by the Department of Veteran’s Affairs to underwrite both the loan application as well as the appraisal. The VA insures the loan but does not get involved in the approval process whatsoever. As long as the lender approved the application using proper guidelines, the loan guarantee is in force.