What Does ‘Guaranteed’ Really Mean?
Posted on: April 11, 2018
All eligible VA members have access to VA guaranteed loans. These loans are typically the best available option, even when including other types of mortgages.
But what does ‘guaranteed’ really mean, and why is it there? Put simply, it’s the VA’s way of protecting veterans and rewarding them for their service.
VA loans are ‘guaranteed’ by the VA, but the VA doesn’t originate or provide loans. Instead, VA eligible members need to find a lender that is willing to approve VA loans. The guarantee is what protects the home buyer and lender.
According to the VA, the purpose of the guarantee is “to encourage lenders to make VA loans by protecting loan holders and lenders against loss.” In other words, they serve as a sort of a third party that protects the two parties involved.
The lender is protected since the VA backs the loan. While loans with no downpayment are uncommon, VA loans allow this because the lender is guaranteed safety.
The home buying veteran is also protected with the guarantee. Without it, they would be unable to purchase homes with no downpayment.
Benefits of guaranteed loans
According to the VA, guaranteed loans have the following features:
- No required downpayment (unless the purchase price is too high)
- Negotiable and competitive fixed interest rates
- Information on the estimated cost of the home (through a VA appraisal)
- Long payment terms
- Limits on closing costs
- Prepayment without penalty
- Assumability, meaning the mortgage can be transferred to someone else (if they’re eligible)
- Assurance that all veterans receive an equal opportunity to buy a home
All of these features, plus others, are only available to veterans because of the guarantee. For example, one guarantee is that mortgage rates available through the VA loan must be competitive with conventional loan rates. This means that VA rates are often the best on the market.
Perhaps the best way to see the benefits of the guarantee is to compare it to other mortgage products.
VA vs. FHA
FHA loans are known for their low credit score requirements and low downpayments of as little as 3.5%. When compared to a VA loan, the benefits of the guarantee are clear.
First, the average FICO score for a closed FHA loan in February was 679, as compared to 707 for VA loans. However, these are averages; FHA loans have a minimum required FICO score while VA loans do not. Home buyers can have success with both loan programs if they have a FICO score of 620, and possible as low as 580.
Second, FHA loans had an average downpayment of four percent per loan. VA loans averaged two percent down for February, lower than the FHA accepts.
Third, VA loans rates were much lower than FHA rates on average. VA loans had an average rate of 4.24% in February, compared to 4.51% for FHA. That’s a big difference, especially when considering the life of the loan is 30 years.
The effects of the guarantee are clear when compared to FHA loans, which is a government program.
VA vs. conventional
Overall, conventional loans are the most popular loan type. According to Ellie Mae, 67% of all closed mortgages in February were conventional, compared to just 10% for VA.
However, conventional loans averaged roughly the same mortgage rates as VA loans in February, nearly 30 basis points (0.30%) higher than VA rates.
Despite the higher rate average, closed conventional loans averaged a 20% downpayment with an average FICO score of 751. These numbers are both well above VA numbers, but with a higher mortgage rate.
These trends are normal since the VA is committed to offering competitive rates.
A guaranteed loan
For the VA, ‘guaranteed,’ means that the veteran buying the home is protected. With the VA’s protection, lenders are able to offer significantly lower mortgage rates while not requiring high FICO scores or any type of downpayment.
The VA is there to help veterans make the dream of buying a home a reality, and they do what they can to make the entire process easier.