Understanding How To Use Your VA Home Ownership Benefit Part 1
One of the benefits of military service is the VA home loan. Although this is a very good benefit, many active and non-active military personnel don’t understand how the benefit works or what steps they need to take to use the benefit. Over the next several weeks I want to explain the benefit, how it works, what the pros and cons of the VA home loan are, and how you may qualify for a home using this important program. Firs t, let’s take a look at the history of the VA Home loan program.
After World War II many soldiers returning from the war were injured while fighting over seas both physically and emotionally. This was also a time when the country was coming out of a depression. The capital markets had been in a prolonged downturn, and home ownership was stagnant. The economy needed to be stimulated. The Serviceman’s Readjustment Act of 1944 was designed to both award the returning warriors and act as a stimulus for the economy at the time.
The maximum amount of the benefit at that time was limited to 50% of the loan not to exceed $2,000.00, loans were limited to 20 years and the maximum interest rate was 4%. Wow, how times have changed. Home loans could be used for purchase, construction costs including repair or improvement of a residential property which a veteran intended to occupy as their home. The initial enactment of the law gave the veteran between 2 and five years to use the benefit.
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Immediately it was recognized there were serious shortcomings with the initial bill. These shortcomings were addressed in law one year later. The guarantee was increased to $4,000.00. The loan terms went to 25 years and 40 years for farm loans. Also the VA began to make direct loans in areas where VA loans could not be guaranteed. This practice remained until 1980 when VA revised the direct loan program to only be available in connection with specially adapted housing grants for veterans with certain severe disabilities. It should be noted that there was a time limit on how long a veteran had to use their benefits. It varied depending on the length of service and which war or conflict the veteran was involved in and if the veteran had a “severe disability” as determined by the VA.
By 1970 the laws governing the VA housing benefit had evolved a great deal. The president signed a new VA housing bill which eliminated the time limit on the use of the benefit. In essence the bill of 1970 revitalized the entire VA housing benefit program and insured it would remain a viable option for Veterans from that time forward.
One area that confuses many veterans is the idea of guarantee, entitlement, and eligibility. I had a veteran in one of my home buyer seminars. She brought her entitlement papers with her but thought that she could only get a home for $36,000.00 because that’s what the guaranteed amount stated. I want to take the last part of this article to explain how the entitlement works.
The VA program is not an insurance program like FHA. In the FHA program the loan is insured against the borrower defaulting. VA losses are not offset by insurance premiums. VA does collect a Funding Fee to offset administrative expenses. The VA only guarantees a portion of the mortgage against default. If the loss in a foreclosure process exceeds the amount of the VA mortgage guaranty, the lender is at risk for the difference. When a VA mortgage goes into default, VA has the option of taking over the problem by auctioning the house and paying off the lender, or remitting to the lender the amount of the guaranty in cash and letting the lender dispose of the property. VA lending is more risky for lenders because the lender is at risk for future losses beyond the guaranteed amount. Because of this lenders may charge higher points for VA mortgages as compared to say FHA or conventional loans. Also lenders may add qualification standards that exceed those set by VA.
So how much home can someone purchase using the VA guaranty program? Well the answer is VA does not actually set a limit on how much mortgage a beneficiary can have. It only limits the amount of the guaranty they will extend for each mortgage. This guaranty allows for no down payment loans of up to the conforming limit as of January 2005. Conforming limits are higher in some areas than in others. For instance, the conforming limits in Alaska, Hawaii, Guam and the Virgin Islands are higher than those in Maryland. Here is an example of how the VA guaranty works.
Let say the veteran wants to purchase a home for $350,000.00. If the loan amount is any amount up to $41700.00 the Veteran can purchase the home for 100% or in other words with no money down. This means the seller can pay normal closing costs origination and up to 2 discount points. (I will discuss points and fees in an upcoming article.) Let’s say the veteran wants to purchase a home above the $417,000.00 amount, would the veteran still be able to use the VA benefit in this instance. The answer is yes, however the veteran would in this case have to put a down payment. The key here is the loan amount, not the purchase price. Here’s an example:
$500,000.00 Sales price
$ 10,750.00 Funding Fee (Based on First Time use)
$510,750.00
-$417,000.00 (Conforming Loan Limit)
93,750.00 (Amount over the maximum loan)
X25% (VA Guarantee when loan amount is over conforming limit)
$ 23,437.50 (Amount of down payment needed by Veteran
As you may see from the example this can be a little complex at first glance, which is why you want to consult your mortgage professional to get your questions answered or you can email me at michaelcookdoesloans@gmail.com or call my office at 888-637-3339.
Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy. Don’t hesitate to call Michael or visit his websites: