A VA loan is a type of mortgage loan guaranteed by the government in the case of default. VA loans are administered by the Department of Veterans’ Affairs, and part of the original GI Bill of rights signed into law in 1944. As confusing at that sounds, the loan itself it very easy and offers eligible veterans specialized home financing created just for them.

As attractive a loan program VA financing is, it is estimated only 18% of all veterans actually use the benefit available. As other types of mortgage lending programs evolved over the past decade, veterans were offered financing considered “faster” or “less complicated” than VA. Whereas other programs might have seemed more streamlined and less restrictive, the VA loan program is designed to protect the veteran. Any specific guidelines attached are to insure veterans are given benefits the program was originally designed for.

While VA loans are designed for eligible veterans, and in some case spouses of veterans, it offers the ability for 100% financing, meaning zero down payment. In addition, the interest rates offered are at least current market rates, and sometimes below. The program also allows a higher ratio (gross income times proposed house payment plus debts) than other type lending programs. It also allows the seller or lender to pay a portion of closing costs associated with the loan and requires no mortgage insurance. VA loans are also the only loan program that restricts what a borrower can pay in the form of costs. The benefit of this is less cash required at closing, and can often times mean no cash when you close.

While the Department of Veterans’ Affairs regulates VA lending, they delegate the process to approved lenders and banks referred to as “automatic”. A fully approved lender will also have what is called a LAPP designation. This is important when selecting the lender, as those without the actual designation are required to submit the VA loan to a company that does. It is important to understand VA only reviews a loan for credit determination under specific circumstances pertaining to delinquent refinance transactions and also requires a designated lender to submit it for review. If a loan is not approved by the lender, VA does not override that decision.

There are two main requirements in obtaining a VA loan, eligibility and primary residence. In the case of purchasing a home using VA financing, it is required the home be a veteran’s primary residence. In some cases, if a veteran is deployed overseas, home purchase may still be an option, provided it is for the use of their spouse and the veteran signs a form stating they intend to occupy it upon return.

The veteran must also have eligibility to purchase a home. As determined by the VA, eligibility varies depending on when, how and the length of service performed. Veterans that served or are currently on active duty differ from reservist and national guards that have never been called to duty. Another factor for eligibility is determined by the year in which a veteran enlisted. Eligibility includes veterans that received an honorable discharge and served on active duty from 90 days to two years, depending on when they served.

VA loan financing is a benefit bestowed to honor those that served, and continue to serve, our country and should have special guidelines just for them. For more information on purchase or refinancing your dream, contact an approved VA lender to get you started on a VA financing program.

Although there are significant advantages to a VA loan, there are drawbacks in comparison to a conventional loan as well. Carefully weighing these factors will help you determine which type of loan is best for your financial health.

• Maximum loan amount: Although there is no maximum of the value of the home you can purchase, there is a maximum VA loan amount. Without a down payment, in 2008, the maximum VA loan amount you can take is $417,000, with 25% of that value guaranteed by the VA.

• One-time funding fee: Congress enacted a one-time funding fee for VA loans, with the fee ranging from 1.25% to 3%, dependent upon the length of the veteran’s service and number of VA loans he or she already has. This fee can be lowered if you place a down payment of a minimum of 5%.

• Varying interest rates: Keep in mind that the interest rates may or may not be better than your conventional loan. Indeed, you do have the option of a fixed-interest or variable interest mortgage with a VA loan, but this does not mean that you will obtain a better interest rates. When you are considering the type of mortgage to obtain, make sure you compare your interest rates – as this value will make a significant impact on how much money you will pay in the long-term.

Remember, a VA loan guarantee does not overcome unsatisfactory credit or employment income that will not sufficiently cover your mortgage payments. A VA loan guarantee is not a gift; it is assistance from the government in the form of guaranteeing the lender that should you not repay your loan, the lender will not lose the investment.

The citizens of our nation are grateful to the service personnel who have answered the call to arms in war and in peace. The VA Home Loan Guarantee program is one way to show support for those who have put themselves in harm’s way on our behalf.

If you qualify for a VA loan, there are several significant advantages VA loans hold over the conventional mortgage.

• No down payment: Because the Department of Veterans Affairs guarantees 100% of the loan, you are not required to place a down payment on the purchase of your home. This can be a great advantage if you do not have significant savings for your down payment, or if you simply want to invest those savings elsewhere. According to statistics provided by the VA, more than 91% of buyers with a VA loan forgo the down payment.

• No closing costs: In many circumstances, the seller of the home will pay the closing costs. This is in stark contrast to a conventional loan, where you would pay for the closing costs, including processing, origination, and underwriting fees.

• No private mortgage insurance: Since the VA backs these loans, there is no need for private mortgage insurance, which traditionally protects the lender against default. This can save you $100 – $200 each month, which is often required with a conventional loan.


• More lenient qualifying terms: Obtaining a VA loan is easier than a conventional loan, as the standards for income and credit score as not as stringent. Even if you have less than perfect credit, if you have paid your bills on time for the last year, you can obtain a loan approval – as well as enjoy the same interest rate as buyers with great credit.

• No pre-payment loan penalties: Whereas most conventional loans will penalize you for paying off your loan before your agreed terms, with VA loans, you can pay off your loan at any time – without suffering from pre-payment penalties.

• VA support if you experience temporary financial distress: If you find yourself undergoing temporary financial difficulties, you can obtain support from the VA, which may avoid your home going into default or foreclosure.

• Ability to transfer your mortgage: Another great advantage is your ability to transfer your VA loan to another individual. Therefore, you can transfer your mortgage to your home’s buyer – which can make your home much more attractive in the buyer’s eyes, especially if your VA loan has a competitively low interest rate.

• Unbiased appraisals: A VA-assigned appraiser will evaluate your home for its value, and these appraisers are chosen at random. In contrast, with a conventional home loan, your lender will select the appraiser – which can lead to a biased, inflated appraisal of your home to benefit the lender.

For those veterans who already have a mortgage and are looking to refinance with the VA there are options to consider. What are you refinancing for? Do you want a lower interest rate, or cash out of the equity you have in your home?The VA offers both Interest Rate Reduction Refinancing Loans (IRRRL) and Cash Out refinancing loans. If you are considering refinancing with the VA you should know the difference between these two types of loans. Here are some difference you should consider:

• An IRRRL is used for veterans who want to refinance an already existing VA loan in order to get a lower interest rate, and a Cash Out is used to pay off any debts or take money out of equity for whatever your needs.

• With an IRRRL the interest rate must be lower than the mortgage loan you have now unless you are refinancing into an ARM or for energy efficient home improvements, and with a Cash Out you can refinance into any interest rate.
• With a Cash Out refinance there is no monthly payment minimum or maximum requirements, and with an IRRRL the new payment needs to be lower than the old payment unless you are refinancing from an ARM to a fixed interest rate or are financing the cots of energy efficient home improvements.
• With an IRRRL you can only refinance the existing loan plus fees and the cost of energy efficient home improvements, but with a Cash Out refinance you can take out cash from your equity as long as it does not go over 90% of the appraised value of the home.
• With a Cash Out refinance you are guaranteed $36,000 to be insured by the VA on your new loan, and with an IRRRL you are guaranteed 25% of your loan amount.
• An IRRRL can have points on the loan but only 2 points are allowed to be financed into the new mortgage. With a Cash Out refinance you are allowed to have any amount of negotiated points in your loan as long as you stay below the 90% home value limit.

Both of these VA refinancing options are available to veterans who have their entitlement intact. If you have a current loan that is not guaranteed by the VA then you should consider refinancing with a VA loan in order to possibly get a better interest rate and more favorable terms. Be sure to consider the attributes and guidelines of each type of refinancing option before you choose which one to use.

There are a lot of loan choices for people today.  One major problem is that people who are interested in purchasing a home often jump into a loan without knowing what type of loan it is or how the terms of the loan will affect them in the long run.  Many people are blinded by the dream of buying their dream home and will take any deal that is put on the table as long as it allows them to get the home they want.

Don’t be one of those people.  The U.S. is currently in a foreclosure crisis because of poor and predatory lending practices.  Many people are losing their homes because they were taken advantage of by lenders who allowed these people to get mortgages with terms that they knew they could not afford in the future.  Luckily for veterans, the VA offers housing counseling to avoid such problems.

To avoid this, or if you fell victim to these predatory practices in the past, you need to become educated on the different types of mortgages available and what they mean. This is not a substitute for housing counseling, which the VA requires for people who want to use the VA Home Loan Guarantee Program to purchase a home. The following is just a list of mortgage types that the VA allows and information for potential homebuyers and people wishing to refinance to become educated so that you know which mortgage is the best for your needs.

•           Adjustable rate mortgages.  These are sometimes useful, but were responsible for a lot of foreclosures recently.  ARM loans offer an introductory low fixed interest rate that is usually around three years.  Then after the three years is over the interest rate can increase a lot.  It can cause the mortgage payment to double.  This type of loan is only good for people who know they are only going to own their home for a short period of time and then sell, or for people who can definitely refinance before their adjustable rate kicks in and their monthly mortgage payment begins to increase.  Many people lost their homes due to the low introductory rate being very affordable to their budget, and then when their payments began to increase they could no longer afford their home.

•           Fixed rate mortgages.  Fixed rate mortgage account for the majority of home loans and are the safest and most reliable mortgage loans.  With a fixed rate loan your monthly mortgage payment never changes.  If your homeowner’s insurance and property taxes are included in your payment then the payment can only increase if these premiums or taxes increase, but the amount that goes towards your home itself will never change.  These loans allow people to see what they can really afford and understand that once they budget their mortgage payment into their monthly finances it will never change and this makes it easier to keep a home and avoid foreclosure.  This loan is definitely a good choice for people who are planning to purchase a home to live in for a long time.

•           Balloon mortgages.  These mortgages are becoming rare and are not good for the average homeowner.  This is when you make monthly payments for a set amount of time, like 8 years, and then at the end of that time the entire amount of the mortgage loan comes due in one large lump sum.  This is only good if you plan to sell the home before the date the balloon is due, or plan to refinance.  Otherwise, do not consider a balloon mortgage.  Also remember that things do not always go as planned, and even if you plan to sell the home, it may not sell and you should have a plan B just in case.

•           Hybrid mortgages.  A hybrid mortgage is the same as an adjustable mortgage, but has a longer fixed rate term.  Again, these loans are not good for people who plan to live in their homes for a long period of time.

•           Reverse mortgages.  For some senior citizens, reverse mortgages can be a lifesaver.  These mortgages are for people over the age of 62 who owe little to nothing on their home mortgage.  They can get a mortgage loan where they get a lump sum of cash, a monthly income, or a combination to spend on whatever they want.  They never have to make a payment and they can continue living in their home.  In return, the mortgage lender will add up all of the interest and the principal of the loan over the time you have the loan and once you die, they will take that amount out of the sale price of the home.  If you are considering a reverse mortgage, make sure you talk with your family first and consider all of your options before you make a decision.

•           Interest only mortgages.  These mortgages were also responsible for many foreclosures recently.  Interest only mortgages, like ARMs, give a teaser introductory interest rate for a set amount of time and then the interest rate rises and the monthly payments become unaffordable.  The difference is that while the homeowner is making payments during the introductory rate they are only paying the interest and not any principal on the amount of money they actually borrowed to purchase the home.  This means that when their teaser rate is over, they not only have to pay the increasing interest rate, but also the additional payment amount for the principal.  This type of mortgage payment can increase to three times the original payment amount.  This type of loan has forced a lot of families into foreclosure because they did not understand the terms of the loan they were getting.

Under certain circumstances you do not have to pay the VA funding fee or can get a discount.  The VA Home Loan Guarantee Program is great for veterans who are in the market for a new home.  One of the most important questions is: how much do you have to pay to use this benefit?  Some people can get a discount, or even have the fee waived entirely depending on your circumstances.

To qualify for a discounted funding fee you must:

•           Be a reservist who is eligible for the VA Home Loan Guarantee Program.

•           Be currently active.  Reservists pay a higher funding fee that active members, and if you are currently active you may be eligible for a          discounted fee.

•           You must have served the full amount of time that you were called to active duty unless discharged due to a service related injury or disability.

•           You can begin using your benefits and discounts after 90 days of active service.

In order to qualify for having the entire funding fee waived you must:

•           Be an eligible veteran and be receiving payments or compensation from the VA due to a service related injury or disability.

•           Be an eligible veteran who would be receiving service related disability compensation if you were not retired and receiving retirement benefits.

•           Be considered or rated as eligible to receive service related disability compensation, even if the payments have not begun yet.

•           Be the spouse of a veteran who died from service related disabilities or in active service.

It is important to know that in order to have the funding fee waived or discounted your lender must take the proper steps.  Make sure your lender knows that you qualify for the fee waiver or discount so that they can verify your status and give proof of this status to the VA.  If you have paid a funding fee to the VA and feel that it was an error and you should have been exempt, then you should contact the VA and your lender.  A correction can be made that could get you some or all of the funding fee refunded to you.

For more information on the possible discount or exemption of VA funding fees for the VA Home Loan Guarantee Program go to http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch08.doc

When veterans use the VA Home Loan Guarantee Program one of the benefits is the lower and limited closing costs. Because the Home Loan Program is regulated by the VA there are only certain fees that are allowed to be charged to borrowers. The VA has a list of approved lenders that must be used by borrowers because they know these lenders will abide by the fee rules.

Even though the fees for a VA loan are comparable to other traditional lenders, some of the fees that are not allowed by the VA include:

• Application fees

• Pre-payment penalty fees

• Processing fees

• Escrow account fees

• Fees to attain lower interest rates

• Closing costs are comparable with other financing types (and may be lower).

There may be more fees that the VA does not allow. The rules of the VA Home Loan Guarantee Program change frequently. To get the most update information on the Va home Loan allowed fees for borrowers go to http://www.homeloans.va.gov/ or consult your VA approved lender.

What exactly is a VA loan?

A VA loan is just a normal mortgage except it is guaranteed by the VA. In short, this means that you can get great financing terms because the lender can accept a lower down payment and offer a better interest rate because the government is protecting against the risk of non-payment by the borrower.

I have a down payment, why should I get a VA loan instead of a conventional mortgage?

VA mortgages are relatively easy to qualify for and generally they offer a better rate than conventional mortgages. Also, some veteran’s consider financing more of the home price and investing their cash instead of making a large down payment.

How much of my VA loan will be guaranteed?

In the lower 48 states, 25% of your loan will be insured. That amounts to a maximum of $104,250 (25% of $417,000). In Hawaii and Alaska, $156,375 can be insured which is 25% of $625,000.

How can I get a Certificate of Eligibility?

As long as you were discharged honorably, the process is very easy. Your lender will be able to help you with the process of obtaining a Certificate. If you were discharged dishonorably, the process is somewhat tougher but an experience loan officer can still help you.

Can I only get on VA loan in my life?

Your VA eligibility is good for an unlimited number of loans, assuming your credit is good and you made payment on the previous loan and you live in a different property.

Can I use a VA loan for real estate investing?

Unfortunately, VA loans are for owner occupied homes only.

How much can I afford?

The VA program accepts a debt ratio of up to 41%. This means that your monthly mortgage cannot make up more than 41% of your monthly income. Be sure to consider the ramifications of the length of your mortgage on your monthly payment.

That should answer a few of your basic VA home loan questions. Be sure to keep reading and we will continue to educate you on the ins and outs of your VA benefits.