The VA mortgage loan

August 15, 2011 – The 1944 GI Bill provided various benefits for veterans, one of which was the VA Loan Guaranty Program.

The bill was an attempt to stabilize the economy as we moved from wartime to a peacetime environment. Before the bill, veterans were offered a cash bonus after they served. In lieu of the bonus, the government chose to offer a guaranty for part of the loan amount so veterans could buy a home.

Ultimately, this program saved the nation money and increased opportunities by creating jobs in the housing construction industry and related fields. And, today, the program is just as valuable to veterans who are among the few eligible to purchase a home with minimal or no down payment.

Who is eligible?
The VA Home Loan Program is available for all veterans and surviving unmarried spouses. A veteran is one whom either served in the armed forces with an honorable discharge or is currently on active duty (including National Guard and Reservists). Minimum qualifying service time requirements do apply.

Upon discharge, the veteran is able to obtain their Certificate of Eligibility. This form, issued by the VA, indicates that the veteran is eligible for a VA loan and evidences the amount of entitlement available.

The basics
The U.S. Government assumes responsibility (guaranty) for a percentage of a loan should the veteran default. Guaranty is similar to mortgage insurance on a conventional loan and the mortgage insurance premium on FHA loans.

A veteran must have sufficient entitlement available in order to obtain a VA loan. Entitlement is defined as the amount of guaranty or insurance benefit that is available to an eligible veteran. The basic entitlement is $36,000 for most loan amounts.

How the government pays
A funding fee is collected on most VA loans similar to FHA’s mortgage insurance premium. This fee is pooled to form a reserve fund to cover losses that may occur. The funding fee differs depending on usage, veteran eligibility, and amount of down payment and whether the loan is for a purchase or refinance. The funding fee is waived for veterans who have a service-connected disability. The fee can be financed or paid in cash.

The minimum guaranty required, 25 percent, is based on the loan amount including the funding fee. In addition, the origination fee and discount points are also based on the loan amount including the funding fee.

The VA Home Loan Program has credit qualifying requirements similar to any conventional or FHA program. Unlike conventional or FHA financing, however, VA loans only require one ratio calculation based on gross income—the total debt to income ratio cannot exceed 41 percent.

VA also requires residual income to be calculated based on net income as well as number of dependents and location of the property. Residual income is a valuable tool to assess a borrower’s ability to repay the loan.

The future of VA
The demand for VA loans is increasing, as VA is one of the most affordable programs available in today’s market, and requires no downpayment. In addition, buyers are becoming more knowledgeable about the types of financing available and see the VA loan as an available alternative to traditional financing.

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