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Veterans Affairs VA Mortgage Loan Requirements Guide

Last week, I wrote an FHA loan requirement guide [3] to help folks looking to find more information about the Federal Housing Administration’s loan insurance program. In that post and in emails, many readers told me that I should take a look at the FDA and VA programs because it may be more appropriate for someone looking to purchase or refinance their existing home.

This article will cover the loan guaranty service offered by the United States Department of Veterans Affairs [4], also known as the VA home Loan program [5].

One warning, I’m not a mortgage expert, I hope that everything I’ve written is correct and accurate but I recommend you speak to a professional before making any decisions.

VA Loan Program History

The mission of the VA home loan program is to “to help veterans and active duty personnel purchase and retain homes in recognition of their service to the Nation. All veterans and other participants in the program will be treated in a courteous, responsive, and timely manner. We will endeavor to operate in the most efficient manner possible to minimize costs and ensure the best use of the taxpayer’s dollar.”

The program was created to help minimize the economic and socialogical problems of post-war readjustment following World War 2. It was created by the Servicemen’s Readjustment Act of 1944 as a loan guaranty program because it was cheaper than giving cash payments.

The logic behind the insurance program was that soldiers, especially in times of war, aren’t able to establish credit because they’re deployed in combat. The insurance would put them on even footing with their non-veteran citizen, who could build a credit history. If you’re curious about the full history of the VA program, you can read it here [6] (it’s 28 pages long).

How the VA Loan Program Works

The program is a loan guaranty, like traditional private mortgage insurance, and it’s greatest appeal is that qualified individuals can get 100% financing of the sales price as long as they satisfy certain income or credit requirements. There is no limit to the maximum loan amount but lenders generally cap them because they resell the mortgages on the secondary market.

Cost of an VA Loan

The VA does not offer the loan, just the guarantee, so the rates and points can change from lender to lender. There isn’t a mortgage insurance premium each month, like with private mortgage insurance, but the VA charges an up front VA funding fee that can be financed. If you are eligible for a VA home loan, it’s best for you to request a bunch of quotes and compare the costs of each loan to one another.

In general, the decision is based on how much of a down payment you have. If you have less than 20%, a conventional mortgage will require a monthly private mortgage insurance payment that a VA mortgage wouldn’t require. Instead, the VA loan will have a “funding fee” that increases the size of the loan.

The funding fee is a percentage of the loan amount based on this schedule:

VA Loan Eligibility Requirements

If you are active duty or honorably discharged, chances are you are eligible. The VA only gives general rules of eligibility [7] and they are:

Obtaining a Certificate of Eligibility: It is important that you obtain a Certificate of Eligibility [8] for VA home loan benefits. You do this by completing the a VA Form 26-1880 [9] and submitting it to the VA Eligibility Center with proof of service. The Certificate of Eligibility is important and you can also get it through your lender, who will use the ACE (Automated Certificate of Eligibility) system.

The Loan Process

In general, the whole process takes about five steps, outlined in greater detail at VA Home Loan Product page [10]:

  1. A veteran picks a home, the purchase and sales agreement will include a VA option clause that lets it be terminated should the veteran not be able to obtain a VA loan.
  2. Contact a lender to apply for a loan. This includes all of the processing of eligibility, loan applications, and collection of supporting documents.
  3. The lender processes the credit and income information and orders a VA appraisal of the property.
  4. Lender collects the remaining information and underwrites (or rejects) the loan.
  5. At close, if the loan satisfies VA regulations and guidelines then the transaction closes.

As you can see, the process is very much like a regular home sale process.

If anything on this page is incorrect, please let me know and I will correct it immediately!

(Photo: terren in Virginia [11])