VA loans were first established by the federal government in 1944, to help veterans returning home from World War II to resume their lives after the conflict, making one aspect of home life a little easier to achieve. The term ‘VA loan’ is actually something of a misnomer, since the government does not actually loan money or setup a mortgage to the veteran at all. The role played by the government is that of a guarantor against the actual loan taken out by the veteran for the purchase of a home. The mortgage is provided by a banking institution, and because the amount of the loan is guaranteed by the U.S. government, quite often more favorable terms can be extended to the applicant.
This service to veterans has become more important than ever in recent years, since lending by financial institutions has tightened up considerably after the recession of 2008, and applications are being viewed ever more critically. Any lender that knows a loan is guaranteed by the government will generally be less stringent about qualifying an applicant for a mortgage loan. Applicants who would normally find it very hard to qualify for a loan, or to come up with a down payment, may be entitled to a huge boost if they qualify for a VA loan.
The requirements for a VA home loan do include some of the same credit history checks that banks would normally require of applicants, although they can be somewhat more relaxed. Veterans are required to have a Certificate of Eligibility, which is a document earned by service personnel when honorably discharged.
Traditional loans vs. VA loans
It is fairly common for lending institutions to require approximately 20% of the total mortgage amount as a down payment, whereas in a VA loan it is possible for an applicant to have zero down payment, subject to certain requirements. Private mortgage insurance is also required in a convention loan, whenever as much as 80% of the loan must be financed by the lender, in order to protect their investment. Since the VA loan is backed by the government, this kind of insurance becomes unnecessary, as the government guarantee supplies the investment protection in and of itself.
In a traditional loan the lending bank assumes more risk, and that almost always results in a higher interest rate being applied in the terms of the loan. With considerably less risk in a VA loan, lower interest rates can be extended to the applicant because there is a greater safety factor for the lender. One last benefit of the VA loan is that qualification for a loan becomes much easier for an applicant with government backing, and banks can afford to be more lenient in reviewing an application.
Funding of VA loans
The Veterans Administration does not make direct loans to veterans, so the actual funding for the mortgage must come from banks and lending institutions. However, because of the crucial government guarantee, veterans can apply for loans as high as $417,000 and even higher in some areas of the country, without needing a down payment.
In return for its guarantee, the VA charges an applicant a funding fee equivalent to 2.15% of the home’s purchase price for first-time buyers and 3.3% for each subsequent application. An exception to this funding fee would be in the case of veterans who have sustained a service-connected injury – for all such cases, the funding fee is waived. This fee is used to fund the program for future veterans’ applications, without placing an additional burden on taxpayers. In this way, the program becomes self-sustaining.
Even with this funding fee though, the VA softens the blow for veterans by allowing them to roll the fee into the overall cost of the home, so that a prohibitive lump sum payment is not required at the time of purchase. VA involvement also influences closing costs in a very positive manner, resulting in significantly lower costs and in some cases, no closing costs at all. It is not uncommon for applicants of VA loans to have no money due whatsoever at the time of closing on a home.
It should be fairly obvious from the above that the benefits of VA loans represent an extraordinary opportunity for applicants to achieve their dreams of purchasing a home with little or no financial wherewithal. There is virtually no other way an applicant for a mortgage could be approved for a home loan with zero down payment, and the same is true about closing costs. Military service is a serious commitment for a person, but when it is faithfully completed, the US government does demonstrate its appreciation by providing an extremely helpful home purchasing program. In many cases, this opportunity is the only one available to ex-service personnel.