This mortgage guide for veterans is offered as an educational resource for those interested in understanding the home ownership possibilities available through the Veterans Affairs Mortgage Loan Programs. Not only can those presently on active duty benefit, but honorably-discharged veterans, their spouses, surviving un-remarried widows and widowers, Reservists, National Guard participants, and Public Health Service workers may also find this information to be helpful. Even the surviving spouses of those military personnel currently listed as MIA or POW may qualify for VA home loans.
This mortgage guide will examine current VA loan opportunities in the following areas:
- General Overview
- Historical Development of VA Home Loans Program
- Advantages and Disadvantages of Obtaining a VA Loan
- Specific Steps to Apply for a VA Mortgage
- Other Available Options within the VA Mortgage Program
- Important Facts Every Applicant Should Know Before Applying for a VA Loan
- Financial and Legal Aid Support
- Valuable Resources for Further Assistance
- Final Tips and Cautions before Applying for a VA Mortgage Loan
Chapter 1 – General Overview
While there are specific service requirements for those applying for a VA mortgage, dependent upon when they or their spouse joined the military and minimum length of service time, about 50% of the approved applicants today are first-time buyers with as little as $5000 in ready cash, and an average annual income of $50,000. The average age is 39, and the overwhelming majority of applicants are men. Only 9% are women. Generally speaking, to be approved, both the veteran and the desired property must be accepted as eligible. The applicant must intend to live in the home being purchased, have a satisfactory credit history, and an income that is determined to be sufficient for maintaining the mortgage, upkeep, and overall family finances.
While this government-assisted veterans’ program exists to show appreciation for the military service offered on behalf of the United States, a VA mortgage loan is not a gift; rather, it is an opportunity for those whose lives have been disrupted by their time spent serving this country to recover the right to own their own homes.
For many returning veterans, the problems of integrating once more into their families, community, and society are exacerbated by the inability to establish a permanent residence. Having the stability and security that comes with home ownership has great healing potential both emotionally and physically for those who struggle with the major readjustments facing them once they are back home.
For some, the scope of their physical injuries may make finding adequate housing and employment seem even more impossible. For others, they have missed the opportunity to establish a positive credit history and may have been set back in their otherwise normal climb up the economic ladder. This mortgage guide is designed to offer information that will make the home-buying process for veterans clearly understandable. Hopefully, it will also pose opportunities that may not have previously been considered.
Chapter 2 – Historical Development of VA Home Loans Program
As far back as the early 1600s when the first settlers arrived on the shores of what would one day grow to become the United States of America, the early Pilgrims recognized the importance of taking care of their military members. In 1636, the colony passed a resolution that entitled severely wounded or disabled soldiers to special financial and housing assistance. Since those first limited efforts, the VA housing program has grown and expanded to meet the needs of an increasing military and service population.
By 1930, the impact of WWI and the ensuing Great Depression hit returning and disabled military personnel particularly harshly. In response, the government established the first official office of the Veterans Administration with Brig. General Frank T. Hines at the helm.
In 1944, once again in response to the expansion of a huge military membership and their unique and urgent needs, Pres. Franklin D. Roosevelt signed the original GI Bill of Rights, offering, among other benefits, home loan guaranties. Eventually, over 16 million returning veterans would be offered important new educational and housing opportunities. The original VA Loan Guaranty Program protected only 50% of a mortgage up to $2000.00. It offered a 20 year loan period at a maximum 4% interest rate. Labeled the “Serviceman’s Readjustment Act,” it included waiving a down payment as well as a variety of other useful benefits for veterans of that era.
By 1950, the guaranty had been raised to 60% of the full value of the loan or a maximum of about $7500.00, and the loan period had been extended to 30 years. However, something new, called a “Funding Fee” was also introduced, applicable to certain veterans. Some protections were put in place for situations that could cause home loss or foreclosure, and the veterans’ surviving spouses who remained unmarried were added to the eligibility listings.
Over the years, in response to the increasing numbers of eligible veterans and the higher costs of living, maximum amounts were gradually raised as were the fees and the types of housing that qualified for a VA loan. For example, in 1970 Congress passed the Veterans Housing Act, Public Law 91-506 that included the opportunity to apply for mobile home, condominium, and condo refinance loans. Specially Adapted Housing Grants provided direct loans for qualified veterans, and the previous termination dates for loan eligibility were eliminated as were the delimiting dates that were assigned to veteran entitlements. This last correction restored previously unused benefits to more than 9 million military personnel from the WWII and Korean War eras.
In 1978, the Veterans Housing Benefits Improvement Act expanded and further increased mortgage benefits for veterans. Pres. Reagan officially recognized the newly created Department of Veteran Affairs in 1988 as a replacement for the outgrown Veterans Administration, but urged the continuation of the already-established goal, “to care for America’s veterans.”
By 1992, the Veterans Home Loan Program Amendment expanded coverage to members of the National Guard and to Reservists who had served honorably for at least 6 years, although they would be required to pay a slightly higher funding fee. The Service Members’ Civil Relief Act signed into effect by Pres. Bush in 2003 froze interest rates at 6%, especially in situations where going on active duty might interfere with maintaining timely mortgage payments. In 2009, the Department of Veterans Affairs came under the leadership of Gen. Eric Shinseki, a Vietnam Veteran himself and the highest-ranking Asian-American in US military history. Today, the department maintains a work force of 270,000 employees to assist with the various challenges and opportunities facing America’s military personnel.
Chapter 3 – Advantages and Disadvantages of Obtaining a VA Loan
A VA mortgage loan is a long term financial agreement available to US veterans and their un-remarried surviving spouses who do not have the usual required down payment or who live in areas where securing private financing is not feasible. It is particularly geared toward rural areas and small towns and cities some distance from larger metropolitan areas. Not every veteran is automatically qualified, and a VA loan may not be the best choice for every veteran.
- The primary benefit in receiving a VA loan is the opportunity to avoid paying a down payment. More than 90% of veterans choose this route for this very reason. The closing costs can be paid by the seller, by the purchaser, or shared, but they will not be rolled into the loan which can represent a significant savings over the years, especially since they can be as add as much as 3% to a conventional mortgage. Additionally, the VA limits the amounts that can be charged for closing costs, including origination and appraisal fees.
- Because the Department of Veteran Affairs is guaranteeing the loan at no charge, the purchaser does not need to pay for additional private mortgage insurance. This can represent a significant monthly savings and lower payment.
- A VA Loan may offer a slightly lower than conventional interest rate, although that is not guaranteed. Shopping around for the best rate is still recommended.
- VA Loans do not have pre-payment penalties. Paying off one’s home early is encouraged, not punished.
- A VA mortgage can be assumed by another party. While this improves the re-sell attractiveness of a home, especially when interest rates are higher, the veteran who is selling cannot reuse that credit until the loan is paid in full.
- VA loans require VA-licensed appraisers who follow strict guidelines. They have no interest in artificially adjusting the value of the home or overlooking serious issues that would benefit the lender or seller. They actually work to protect the Department and the veteran applying for the loan.
- VA loans are available as both fixed-rate and adjustable mortgage with some variations thrown in. Veterans can pick the program that is most suited to their immediate and long term goals.
- For veterans who are more than 10% disabled, the funding fee is automatically waived. For those with 100% permanent service-related disability, they may be eligible for a grant of up to $50,000 to adapt their home according to their recognized physical needs. For those who are disabled or unable to work and would never be able to qualify for a conventional loan, this program offers the opportunity to achieve not only home ownership but handicap adaptability.
- For the veteran who is using a VA loan to build a home, the program protects his interests by requiring frequent inspections and warranties from the builder.
- The Department of Veteran Affairs offers both personal loan servicing and extensive financial counseling for those veterans who have encountered financial difficulties and are concerned about losing or being forced to sell their homes.
- Most lenders across the country can be approved to handle VA loans. This includes banks, mortgage companies, and savings and loan businesses.
- Because the government understands how personally and financially disrupting military service can be, the requirements are slightly lower for credit history scores and slightly higher for the debt-to-income ratio. Getting approved for a VA mortgage loan is somewhat easier than for a conventional one, at least in these areas.
- Since 1982, a one-time funding fee has been added. It varies from 1.25% -3% depending upon the veteran’s service period and whether or not it is a first time loan. The fee will be lowered if at least a 5% down payment is offered. It is also required for refinancing. When rolled into a 30 year loan, this fee can represent a substantial amount.
- While adjustments have been made for areas of the country in which the real estate market is much more costly, the maximum guaranteed in a VA loan may still not be high enough for some desired properties.
- Even though a veteran may be guaranteed the maximum-allowed amount, qualifying for the loan still depends upon assets, income, debts, and credit history, similar to the requirements for a conventional loan.
- Some sellers and lenders just don’t like working with VA loans because of the past problems with “red tape” and excessive time to close the deal. In reality, most closings can happen within 2-6 weeks, similar to the time frame for a traditional mortgage, and there is usually very minimal extra work that may be necessary to buy a home with a VA mortgage.
- Because closing costs cannot be rolled into the loan, some sellers may not be willing to lower the sales price, especially if they will be picking up those extra costs including having the home inspected by a VA appraiser.
- The interest rates for a VA loan may or may not be better than possible conventional loan rates.
- Because any lender used for a VA loan must also be VA-approved, veterans may feel restricted in their choice of borrower.
- In the event that a veteran defaults on the approved mortgage loan, the VA will pay its guaranteed portion to the lender, but it will also expect and pursue recouping that amount from the veteran.
- The very strict inspections done by VA appraisers are designed to protect the buyer from buying a “lemon”. On the other hand, they may also preclude purchasing an “as is” home or a “fixer-upper.” Potentially good deals may be lost because of appraisal guidelines.
Chapter 4 – Steps to Applying for a VA Mortgage
- Acquire a Certificate of Eligibility. This document verifies the veteran’s service history and manner of discharge, if applicable. It also states how much the veteran will be qualified to borrow as a mortgage. Prior to 2002, it was necessary to fill out VA Form 26-1880, “Request for Determination of Eligibility and Available Loan Guaranty Entitlement” and mail or take it to the nearest VA office. Thanks to modern technology, a lender can simply insert the veteran’s name and social security number into the computer and obtain that same information in a matter of seconds online.
- Decide on a desired home and secure a purchase agreement from the seller. Be sure to include a clause that stipulates the agreement is dependent upon the veteran’s ability to successfully borrow the loan amount from the VA.
- Take time to search out and shortlist the best lending institution. Once the list is narrowed down, present the Certificate of Eligibility, without which potential customers may not be taken seriously. It’s time to start negotiating for the best VA mortgage rate. In fact, this needs to be satisfied before official application is made.
- Either the lender or the veteran can request a VA appraisal of the desired property. This is not the same as a building inspection and in no way protects the veteran after the purchase has been completed. For additional protection, a separate building inspection is recommended, during which the veteran accompanies the inspector to ask pertinent questions.
- While awaiting the appraisal results, the lender and the veteran can work on the VA application which is similar to the HUD or FHA conventional loan paperwork. The lender will start processing all the necessary information using a VA underwriting system.
- Once a satisfactory appraisal is accepted, the lender is responsible to review all information, underwrite the loan and choose an official closing date. Sometimes, the lender has been authorized by the VA to initiate automatic processing as soon as the VA or LAPP appraised value has been adequately determined. In such cases, the mortgage can be approved and closed without waiting for the VA to also examine the credit application. In about 10% of the mortgages, the loan application must be sent to a local VA office for review and the veteran must await results before the loan can be closed. This can take an additional 1-2 weeks.
- At the closing, the seller, the buyer, and the title company attorney or representative will gather, usually with any participant realtors as paperwork is signed, keys are handed over, and the closing becomes official.
Chapter 5 – Other Available Options within the VA Mortgage Program
For the qualifying veteran, the VA mortgage program offers a variety of opportunities that extend beyond buying just a free-standing house. Townhomes, condominiums, farmhouses, and mobile homes with or without land also are acceptable choices. VA loans can also be acquired for the veteran who wishes to buy land and build upon it. It is possible to buy a home and simultaneously improve it with money from this program as long as specific guidelines are met. Improving an existing home by adding or installing energy-efficient features is another option.
- VA Streamline Refinance: Also called an Interest Rate Reduction Refinancing Loan (IRRRL) or a “VA to VA Loan,” this program makes it possible today to refinance an already existing loan for up to 90% of its value. With much lower interest rates, this last option could be a real money-saver for those who have bought previously when rates were considerably higher. Both interest rate and length of term can be adjusted. However, only the first loan will be paid off; second mortgages are excluded. The process requires little paperwork or processing time, and the closing happens quickly. Also, it is not necessary for the veteran to be still residing in the home at the time of the new application. Again, shopping for the best rates is always paramount.
- Cash-Out Loans: This opportunity allows the veteran to borrow from the accumulated property equity for any number of reasons. A very special vacation, further schooling, consolidating other debts, and making home improvements are just a few of the reasons for, in effect, borrowing from one-self. Residing in the property against which the money is being borrowed is necessary. The same lender must be used for this second application process. Up to 90% of the property value may be accessed for this kind of equity loan.
- Joint Loan: This VA mortgage loan program allows for a veteran to purchase property with one other person who may or may not be related. The partner is not required to be a veteran. Special, non-punitive guidelines apply when both buyers are veterans.
- Construction/Permanent Home Loan: This loan is designed for the home builder and may include the purchase of the land on which the structure will be built. The loan actually closes before construction begins, and the borrower pays expenses from an account set up for this situation. Repayment is not required until after the construction is complete.
- Energy-Efficient Mortgage: This program is designed to cover the labor and costs of a variety of energy improvements to an already-existing home. Adding solar heating, cooling systems, sealing drafty areas, weather-stripping, increasing insulation, replacing windows, and upgrading furnaces are all qualified uses. However, this must be the first mortgage applied for and received by the veteran, and there is no compensation for work done by the home owner.
- Supplemental Loans/Loans for Repairs and Alterations: These loans can be drawn at the same time as purchase of the property if VA guidelines are met. However, only 30% of the loan amount can be designated for cooking, heating, or refrigeration equipment. Basically the purpose of these loans is to improve the overall habitability of the residence.
- Financial loan options: VA loans may be obtained as fixed rate mortgages for either 15 or 30 year periods. Although they usually cost more in the long term, they offer stability for those who may be concerned about the economy or their job security. The adjustable rate loan (ARM) has a few variations, but basically it starts off at a lower rate for the first few years and then increases to the market rate over time. It makes it easier to borrow more money because the initial payments are lower and works best for those who plan to stay in the home less than 5 years, before the rates increase dramatically. The VA Hybrid ARM is fixed for 3-5 years and then starts rising about 1% annually until it reaches a 5% cap. This is only available in the 30 year loan format.
Chapter 6 – Important Facts Every Applicant Should Know Before Applying for a VA Loan
First and foremost, one needs to understand that the federal government is not actually making these loans directly to veterans. The Department of Veterans Affairs guarantees a part of each mortgage but the actual acquiring of the loan is done through VA-approved lenders that may be banks, savings and loan services, or mortgage companies. All arrangements for the loan will be made through and handled by these institutions in much the same way a conventional loan is managed. That said, there are unique factors involved in a VA mortgage loan.
- All applying veterans must qualify; they are not automatically eligible for these programs.
- VA-approved appraisers with strict guidelines will be required to assess the property value of a desired purchase.
- Depending upon the amount of risk involved, the VA may guarantee the lender up to 25% against the loss of the principal which could be as much as $417,000 or higher in certain designated areas. This guaranty functions in place of the traditional down payment expected with a conventional loan.
- All VA loans must maintain an impound account for homeowner’s insurance and property tax. Because of this requirement the VA considers monthly payments under the category of PITI payments.
- The VA chooses to insure these loans at no extra cost to the buyer.
- The actual VA loan application, Form 1003, is a standardized Fannie Mae form or the Form 65 version offered by Freddie Mac. Knowingly falsifying any information on the application can result in fines, imprisonment, or both because it is a federal offense; so be absolutely honest.
- A VA-approved appraiser must positively evaluate the property before the mortgage can be approved. However, this is not an official inspection and no assurances or guarantees are in place for the homeowner after purchase. For that, a building inspection is strongly suggested.
- The funding fee can be waived in the event that a veteran is receiving disability compensation. This exemption also applies to the surviving, un-remarried spouse. Otherwise, it can be rolled into the loan amount although this can be costly in the long term.
- Terms and requirements for obtaining one of the alternative VA loans can be difficult to meet because of specificity of guidelines.
Chapter 7 – Financial and Legal Aid Support
- Armed Forces Legal Assistance Program at legalassistance.law.af.mil .Once in site, click on Legal Services Indicator
- Herocare at www.herocare.org offers legal and credit counseling for both retired and active duty military personnel.
- National Veterans Legal Services Program, www.nvlsp.org is a network of corporate lawyers and law firms that network to offer free legal representation. They are an independent and non-profit organization that the Department of Veterans Affairs recognizes for claim representation.
- veteranslegal.org has information on records, benefits, grants, and loans.
- The Military Homeowner’s Assistance Program (HAP) is in place to assist those or their surviving spouses who purchased or will purchase homes between July 1, 2006 and Sept.30, 2012, and are experiencing financial difficulties because of the current economy, relocation needs, or threat of foreclosure.
- Department of Veterans Affairs at www.homeloans.va.gov.
- Local Veterans Affairs Offices have up-to-date information about unique opportunities within each individual state as well as offering general assistance.
- Local state programs
- www.vamortgageresource.com has information to help both those on active duty and veterans find the best available financing. They are knowledgeable about both VA and conventional loan opportunities.
- www.miltary.com gives current news and information on service-related benefits and opportunities.
Chapter 8 – Final Tips and Cautions before Applying for a VA Mortgage Loan?
Thoroughly educating one-self about the requirements and benefits of using the VA mortgage loan problem is the single most important guide to a successful and satisfying business decision. Knowing exactly what is required at each step of the process will avoid frustration, embarrassment, and possible disappointment. By making use of online resources as well as local VA services, it is not difficult to understand whether or not a VA loan will be the best choice in the quest for home ownership. That said, there are a few other areas in which caution is advised.
- Make sure that the lender is VA-approved before wasting time and effort.
- Always save all paperwork. Even after a loan is paid off, having documentation can save time and effort should a veteran wish to reapply.
- Having the pre-approval letter in hand when dealing with a lender will assure being taken more seriously as a potential customer. Also gather the last 2 years of income tax statements, at least 1 month’s pay stubs for each name that will appear on the lease, and form DD214 (useful but not absolutely necessary). Other paperwork showing outstanding debt, assets, and credit history will also be necessary. The more speedily the paperwork is collected the faster the process moves along.
- Be careful of the appeal of a 15 year mortgage. It will save years of interest but can require substantially higher monthly payments that may strain the budget. Because there is no pre-payment penalty, simply paying extra on the principal as opportunity allows may be a safer approach.
Buying a home through the Veterans Mortgage Loan Program may turn a formerly impossible dream into a reality. The Department of Veterans Affairs exists to show gratitude to those who have served this country in the various military, Reservist, National Guard, and Public Service arenas. Learning about the various programs for which one might qualify will help in deciding whether this is the right time to access these currently-offered opportunities.
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