A VA loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs. The loan may be issued by qualified lenders. The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry).
The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.
The VA loan allows veterans 103.15 percent financing without private mortgage insurance or a 20 per cent second mortgage and up to $6,000 for energy efficient improvements. A VA funding fee of 0 to 3.15% of the loan amount is paid to the VA; this fee may also be financed.
In a purchase, veterans may borrow up to 103.15% of the sales price or reasonable value of the home, whichever is less. Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment.
In a refinance, where a new VA loan is created, veterans may borrow up to 90% of reasonable value, where allowed by state laws. In a refinance where the loan is a VA loan refinancing to VA loan (IRRRL Refinance), the veteran may borrow up to 100.5% of the total loan amount. The additional .5% is the funding fee for an VA Interest Rate Reduction Refinance.
VA loans allow veterans to qualify for loans amounts larger than traditional Fannie Mae/conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs.28% for a conforming loan assuming the veteran has no monthly bills. The maximum VA loan guarantee varies by county.
As of 1 January 2011, the maximum VA loan amount with no down payment is usually $417,000, although this amount may rise to as much as $1,094,625 in certain specified "high-cost counties". VA also allows the seller to pay all of the veteran's closing costs as long as the costs do not exceed 6% of the sales price of the home.
Until 1992, the VA Loan Guarantee Program was available only to veterans who served on active duty during specified periods. However, with the enactment of the Veterans Home Loan Program Amendments of 1992 (Public Law 102-547, approved 28 October 1992), program eligibility was expanded to include Reservists and National Guard personnel who served honorably for at least six years without otherwise qualifying under the previous active duty provisions. Such personnel are required to pay a slightly higher funding fee when obtaining a VA home loan.
Despite a great deal of confusion and misunderstanding, the federal government generally does not make direct loans under the act. The government simply guarantees loans made by ordinary mortgage lenders after veterans make their own arrangements for the loans through normal financial circles. The Veterans Administration then appraises the property in question and, if satisfied with the risk involved, guarantees the lender against loss of principal if the buyer defaults.
Anthony Watson (OIF Veteran)