VA Loan

If a borrower is looking to buy a home, and is a veteran of the United States Armed Forces who served either in war or in peacetime, and was honorably discharged, then a Veterans Affairs (VA) guaranteed loan may be the best loan.

There are five steps to obtaining a VA-guaranteed loan:

• Obtain a Certificate of Eligibility
• Decide on a home and sign an agreement of sale
• Order an appraisal through the VA
• Apply for the loan
• Close on the loan

As the table in the proceeding article shows, the VA provides a number of advantages to veterans seeking to purchase homes, such as low or no down payments, limited closing costs, and the VA's guaranty on the loans, which encourages lenders to offer mortgages to veterans.

If a borrower is looking to buy a home, and is a veteran of the United States armed forces (Army, Navy, Air Force, or Marines) then they may be eligible for a Veterans' Affairs (VA) guaranteed loan.

The VA may be able to help if a borrower:

• Is a veteran of World War II, Korea, Vietnam or the Persian Gulf War, with at least 90 consecutive days of active duty, or
• Is a veteran who served during peacetime for at least 181 consecutive days of active duty, and
• Was honorably discharged from the military

The VA provides a number of advantages to veterans seeking to purchase homes, such as low or no down payments, limited closing costs, and the VA's guaranty on the loans, which encourages lenders to offer mortgages to veterans.

This article focuses on VA loans, and enables a borrower to decide if a VA loan meets their financial needs and goals, by answering the following questions:

• What is it?
• How does it work?
• What are the pros and cons?

What is It?

First, a bit of name clarification is in order.

The VA doesn't actually provide mortgages per se. Rather, the VA guarantees loans made to veterans by private lenders. In other words, the VA pays a "guaranty" to protect the lender against loss in case the borrower defaults on the loan.

The amount of the guaranty depends on the loan amount (the current ceiling is $36,000). The VA pays this money up-front to the lender, replacing some or all of the money the borrower would normally have to come up with for a down payment. In addition, while the guaranty lessens or eliminates the obligation to make a down payment, it also eliminates the need for mortgage insurance. (With conventional loans, lenders require borrowers to pay monthly mortgage insurance if they put less than 20% down.) As noted above, the guaranty encourages lenders to offer mortgages with favorable terms to veterans. This guaranty helps veterans to become homeowners.

The borrower can use a VA loan to:

• Purchase a home, townhouse or condominium
• Refinance a home, townhouse or condominium
• Make home improvements
• Build a home

How does it work?

As is the case with conventional loans, a VA-guaranteed loan can be any fixed-rate, adjustable-rate, or hybrid instrument. As noted above, the main difference is that the VA guaranty payment.

There are five steps to obtaining a VA-guaranteed loan:

• Obtain a Certificate of Eligibility
• Decide on a home and sign an agreement of sale
• Order an appraisal through the VA
• Apply for the loan
• Close on the loan
• Obtain a Certificate of Eligibility

If the borrower wants a VA loan, the first thing they must do is apply for a Certificate of Eligibility. This certificate verifies service and discharge, proving that the borrower is a veteran who is entitled to receive VA loan benefits.

To apply, the borrower fills out VA Form 26-1880 (Request for Determination of Eligibility and Available Loan Guaranty Entitlement), and turns it in to the local VA office.

Decide on a home and sign an agreement of sale

This is self-explanatory; once the borrower receives a Certificate of Eligibility, the borrower can decide what property they would like to purchase, and sign an agreement of sale so that it is formally "under contract."

Order an appraisal through the VA

Once the borrower decides on a home and signs the agreement of sale, an appraisal order through the VA is required. While anyone (the borrower, the seller, your realtor, or the lender) can order this appraisal, usually your lender will request it. This is done by filling out VA Form 26-1805, Request for Determination of Reasonable Value.

Once the appraiser determines the "reasonable value" or estimates value of the property, the VA provides a "Certificate of Reasonable Value" (CRV). A VA loan amount can't be greater than the CRV. Currently, the VA loan amount ceiling is $240,000.00

Apply for the loan

Once the bank completes the appraisal and obtains the Certificate of Reasonable Value, then the borrower applies for the loan.

Applying for a VA loan is no different from applying for any other type of loan. The lender verifies the borrower's income and assets and checks their credit. If the appraised value of the property falls within the VA's guidelines, and the borrower has sufficient income, assets, and credit, an approval is likely and the lender will likely clear the loan to close.

Close on the loan

Here again, as with applying for the loan, closing on a VA loan is no different from closing on any other type of mortgage. The borrower attends the closing, signs the necessary papers, and pays the closing costs.

Included in the closing costs is a "funding fee" that equals 2% of the loan amount. This funding fee is the payment for the guaranty the VA is providing. (Note: if making a 5% down payment, the funding fee is reduced to 1.5%; if the borrower makes a 10% down payment, the funding fee is reduced to 1.25%.)

Although a funding fee is required, the borrower does not pay any commissions, brokerage fees, or "buyer broker" fees that are normally part of closing costs.

Once closing is complete, the lender sends the loan to the VA for the guaranty payment. The VA also annotates the Certificate of Eligibility to reflect that the borrower uses the guaranty, and returns the Certificate of Eligibility.

VA loans, while similar to conventional loans in many respects, have some important benefits. The following chart summarizes these.

What are the pros and cons?

If you are a wartime or peacetime veteran meeting the VA's eligibility requirements, a VA-guaranteed home loan may be an appropriate choice. As with any other mortgage option, it has advantages and disadvantages.