VA mortgages are available to ex-servicemen and women, including National Guard reserves. Lenders are insured against loss by the Veterans Administration, though this protection is referred to as a "guarantee" rather than insurance.
History of the VA Program
The VA program began after World War II to help war veterans become homeowners. VA did not lend to them (except in some special cases), but rather guaranteed the lender against loss. While the details of implementation are quite different from those of FHA, the central feature is the same. Under both programs, so long as lenders follow the guidelines of the agencies, they are protected from loss in the event that the borrower defaults.
The VA program was quite a deal in the first few decades after World War II. No down payment was required, which remains the case; there was no guarantee fee, which is no longer the case; and the interest rates on both VA and FHA mortgages were subject to legal maximum interest rates, which is also no longer the case.
The maximum interest rates were designed to protect borrowers from being overcharged, and during easy money periods this worked. During tight money periods, however, which began to occur with increasing frequency, the rate ceilings resulted in the supply of VA and FHA loans drying up completely. For that reason, the ceilings were eventually eliminated.
The VA was quite paternalistic in those days. In addition to the rate ceilings, it set price ceilings on houses. A veteran receiving a VA loan was not permitted to pay more for a home than the VA said it was worth!
And so it was that in 1962 when I purchased by first house, I applied for and was approved for a 5.25% VA loan. Lenders at that time were willing to make loans at the legal maximum rate, which was a good deal for me.
All the details were presumably finalized two weeks before the scheduled closing, and I left for a vacation in Canada. But within days of my departure, I received a phone call from the savings and loan association that was making the loan. The VA, in its wisdom, had appraised the house for which I had contracted to pay $26,000, at only $25,000. The VA loan was dead and I had to accept a conventional loan at 6%!
The VA subsequently changed that rule as well. Today, a VA loan can’t be larger than the appraised value of the house, but the veteran can pay more without losing the loan. They just must pay the difference in cash.
VAs in 2010
The critical question for those eligible for VA loans is whether, given their qualifications and financial status, the terms available on a VA will be better than those available on a conventional, FHA or USDA loan? The question is best answered in terms of the down payment the veteran is capable of making. The comparisons below are based on total costs over 6 years of a borrower with excellent credit. It is based on market shopping I did in December 2009.
*At zero down on a house purchase, the only loans available are VAs and USDAs. A borrower eligible for both will do better with the USDA. However, USDA loans are not available for a refinance, or on houses not located in a rural county.
*At 5% and 10% down, the VA is the lowest-price option, though only marginally better than USDA.
*At 20% down, the conventional loan is the best, with VA and USDA tied for second.
There are two important provisos to these generalizations. One is that the comparisons are heavily impacted by mortgage insurance charges on the Federal programs, which can change. The second is that the comparisons are based on wholesale prices, which may or may not be reflected in the retail prices borrowers actually pay. Some loan providers view veterans who need no-down-payment loans, and who trust the loan provider to give them the market rate, as sheep to be fleeced.
To protect themselves, veterans should consult a Web site that prices all four types of loans. The only site I know that does this is http://www.amerisave.com/mortgageprofessor/?sourceid=2177. Note: I have a relationship with this lender that is explained in Selecting a Certified Loan Provider.
The VA web site, www.homeloans.va.gov, will tell you who is eligible, how you go about obtaining a Certificate of Eligibility, whether eligibility can be used more than once, the types of properties that can be purchased with a VA loan, the range of insurance premiums for different categories of veterans and different loan purposes, the conditions under which VA loans can be assumed by a buyer, the types of VA home loans, and more.
 |
Tweet |