What Is a VA Mortgage Loan?

A VA mortgage is home loan guaranteed by the U.S. Veterans Administration. It is issued to eligible veterans by private lenders like banks and mortgage companies. Because the guaranty assures repayment of a portion of the loan in the event the borrower defaults, it provides an incentive for lenders to loan money to veterans at favorable terms for the purchase, construction or refinance of a home.

History

The Home Loan Guaranty Program, which administers VA loans, was created in 1944 to ease financial and social woes experienced by armed forces veterans transitioning back into civilian life. It was acknowledged that veterans' service put them at a disadvantage, compared to Americans who had not served, for establishing credit and buying homes. The loan guaranty was intended to level the playing field. More than 18 million veterans have benefited directly.

Uses

A VA mortgage may be used to buy a detached residence, a condo in a VA-approved community or a co-op. The simultaneous purchase and renovation of a home, or the renovation, via refinance, of an existing home is acceptable as well. Additionally, the loan may be used for the purchase of a manufactured home and/or lot or for the construction of a new home.

Features

No down payment is required for a VA mortgage unless the purchase price is higher than the VA-appraised value of the home. As with a conventional mortgage, the interest rate is negotiable (i.e., not set by the government). Although these loans do carry funding fees, which may be financed, there are no mortgage insurance premiums. In addition, VA mortgages are assumable (transferable) to non-veteran individuals with approved credit. There is no penalty for early repayment.

Eligibility

"VA Home Loans--A Quick Guide for Homebuyers and Real Estate Professionals" notes that eligible veterans include those who served in active duty that was not dishonorable during World War II or later. World War II, Korean War and Vietnam War veterans must have served for 90 days or longer. Veterans who served only during peacetime must have served more than 180 days. Enlisted men and women whose service began after Sept. 7, 1980, and officers whose service began after Oct. 16, 1981, must have served for at least two years in most cases. Reservists and National Guardsmen and spouses of deceased veterans may qualify.

Benefits

The primary benefit of VA mortgages is that they allow cash-strapped but credit-worthy veterans to purchase homes they otherwise might not be able to afford or for which they otherwise would not qualify. The ability to refinance existing, non-VA mortgages means that nearly any eligible veteran can take advantage of the favorable terms offered by VA-backed loans, including liberal repayment terms. In addition, the VA assists veterans who are in process of or in danger of defaulting on their guaranteed loans.

Considerations

Eligibility requirements state that the veteran must occupy the home being financed. In addition, the home must appraise for the full purchase price in order to qualify for a no-down-payment loan. If the home appraises for less than the purchase price, a down payment to cover the difference is required.

While there is no government-set maximum loan amount, according to the U.S. Department of Veterans Affairs "Fact Sheet on VA Guaranteed Loans," most lenders limit VA loans to $417,000. Lenders usually limit no-down-payment loans to $144,000 (four times the basic entitlement, which is $36,000 as of June 2009).

Resources

• U.S. Department of Veterans Affairs
• The Veterans Benefits Administration