What is a VA Guaranteed Loan?
Posted on: December 12, 2012
VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home. The home must be the veteran’s personal property that he or she plans to occupy. Check with us to answer any questions you have on VA loans.
To get a loan, a veteran must apply with a lender. If the loan is approved, VA will guarantee a portion of it to the lender. This guaranty protects the lender against loss up to the amount guaranteed and allows a veteran to obtain favorable financing terms.
There is no maximum VA loan but lenders may have loan amount restrictions. A veteran’s basic entitlement is $36,000 or higher on higher-priced homes. This entitlement amount allows the lender to approve a loan amount up to current VA loan limits.
VA loans offer the following important features:
- Equal opportunity for all qualified veterans to obtain a VA loan.
- No down-payment (unless required by the lender or the purchase price is more than the reasonable value of the property).
- Buyer informed of reasonable value.
- Negotiable interest rate.
- Ability to finance the VA funding fee (plus reduced funding fees with a downpayment of at least 5% and exemption for some veterans receiving VA compensation).
- Closing costs are comparable with other financing types (and may be lower).
- No mortgage insurance premiums.
- An assumable mortgage.
- Right to prepay without penalty.
- For homes inspected by VA during construction, a warranty from builder and assistance from VA to obtain cooperation of builder.
- VA assistance to veteran borrowers in default due to temporary financial difficulty.
VA loans do not offer the following:
- Guarantee that a home is free of defects. VA guarantees only the loan. It is the veteran’s responsibility to assure that he/she is satisfied with the property being purchased. The VA appraisal is not intended to be an “inspection” of the property. A veteran should seek expert advice (a qualified residential inspection service), as necessary, BEFORE legally committing to a purchase agreement.
- If you have a home built, VA cannot compel the builder to correct construction defects although VA does have the authority to suspend a builder from further participation in the home loan program.
- VA cannot guarantee that a veteran is making a good investment.
- VA cannot provide a veteran with legal services.
How does a veteran obtain a VA guaranteed loan?
- Contract to purchase: Veteran selects home and discusses purchase with seller or selling agent and signs purchase contract conditioned on approval of a VA guaranteed loan.
- Loan application: Veteran selects lender, presents their DD-214, and completes loan application. The lender will request the Certificate of Eligibility and develop all credit information. The lender will then request VA to assign a licensed appraiser to determine the reasonable value for the property. Veteran will pay for credit report and appraisal unless the seller agrees to pay. Either VA or the lender will issue a value for property for loan purposes based on the appraisal.
- Loan decision: If the established value is acceptable to all parties and the lender develops that a veteran is credit and income qualified, the loan may be approved. Most lenders are authorized to make this decision.
- Loan closing: Veteran (and spouse) attend the loan closing and sign the note, mortgage, and other related papers. The lender or closing attorney will explain the loan terms and requirements as well as where and how to make the monthly payments. When the loan is reported to VA, the Certificate of Eligibility is annotated to reflect the use of entitlement and returned to the applicant. (The loan closing procedure may vary in some states.)
Source: VA Loan Handbook