Mortgages Part 4E: VA Loans

In 1944, as part of the GI Bill, Congress created the VA Loan Guaranty Program to reward returning veterans by providing them with loan programs that require zero money down and reduced closing costs.

The Veterans Administration does not lend money or issue your VA loan. Unlike FHA which insures a lender against loss, the VA guarantees a lender against loss. That guarantee gives VA-approved lenders greater protection when lending to military borrowers, allowing for no money down loans with highly competitive rates and terms.

Who is eligible for a VA Loan?

• Military members who have served 181 days on active duty or 90 days during war time
• People who have spent at least six years in the National Guard or Reserves
• Surviving spouses of someone who died in the line of duty

Certificate of Eligibility and VA Entitlement

If you are eligible for a VA loan, you have to obtain a Certificate of Eligibility from the VA. You will also get a VA entitlement, which is the amount of money the Veterans Administration will guarantee on a loan.

The entitlement and guarantee amount requires a little explaining: The basic entitlement a veteran gets is $36,000. In case of default, the VA promises to repay the lender up to 25% of the loan amount. From the basic entitlement, the VA promises to repay a lender $36,000, for a loan at $144,000.

There are not many homes that can be bought for $144,000 nowadays. So the VA increased the guaranteed amount based on the conforming loan limit of $417,000. Now the VA will guarantee 25% of a loan amount of up to $417,000, which is $104,250. The first $36,000 is the basic entitlement, and the remaining amount of $68,250 ($104,250 - $36,000) is called the secondary entitlement amount. For certain high cost counties in the country, the VA has higher loan limits.

In 2014, the following counties in the Hudson Valley in New York have a limit of $978,750 instead of $417,000: Westchester, Putnam, Dutchess, Rockland, and Orange County.

The limit may change every year. For the limit of other counties, read here for more information.

There is no maximum loan amount on a VA loan, but you will still need to qualify for your loan amount based on your income and credit. If you want to purchase a $500,000 home in Ulster County, where the county loan limit is $417,000, the VA lenders may be wary about lending above the county loan limit. In that case, usually some cash is required to cover the portion not backed by the government.

What are the benefits of VA Loans?

As stated before, VA loans are the best deals out there if you are looking for looking for a zero money down loan with competitive rates.

• VA loans allow higher debt-to-income ratios than for many other loans.
• When buying within the county loan limit, zero down payment is required for qualified borrowers.
• Although there is no minimum credit score for VA loans, since the individual VA lender handles the underwriting, most VA-approved lenders are looking for a credit score of at least 620, which is rather lax.
• VA loans come with no private mortgage insurance (PMI), a monthly expense that conventional borrowers are required to pay unless they put down at least 20 percent of the loan amount.
• Sellers are allowed to pay up to 6% of closing costs, which allow borrowers to buy a house with very little money upfront.

When would a VA Loan not be the best option?

• When you have excellent credit and more than 20% down payment, you may find a better deal with a conventional loan.
• You will need to pay the VA Funding Fee, a one-time fee paid directly to the Department of Veterans Affairs for every VA purchase or refinance loan. It is approximately 2% of the loan amount, depending on your down payment amount.
• VA loans may be harder to process and take longer than conventional loans
• VA loans can only be used one at a time, for your primary home.

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