Mortgage Lending Practices...

To aid veterans in education, hospitalization, employment training, and housing congress passed far-reaching legislation in 1944. 

Popularly named the G.I. Bill of Rights empowered the comptroller general of the United States to guarantee the repayment of a portion of the first mortgage real estate VA loan made to veterans. For this guarantee, no fee would be charged to the veteran. Rather, the government itself would stand the losses. The original 1944 law provided that lenders would be guaranteed against losses up to 50% of the amount of the loan, but in no case more than $2,000.

No Down Payment For VA Loan

The objective was to make it possible for a veteran to buy a home with no cash down payment. Thus, on a house offered for sale at $5,000 (houses were much cheaper in 1944) this guarantee enabled a veteran to borrow the entire $5,000. From the lender's standpoint, having the top $2,000 of the loan guaranteed by the U.S. government offered the same asset protection as a $2,000 cash down payment. If the veteran defaulted and the property went into foreclosure, the lender had to net less than $3,000 before suffering a loss. 

In 1945, Congress increased the guarantee amount to $4,000 and 60% of the loan and turned the entire operation over to the Veterans Administration (VA). The VA was quick to honor claims and the program rapidly became popular with lenders. Furthermore, the veterans turned out to be excellent credit risks, bettering, in fact, the good record of FHA-insured home owners. (The FHA recognizes this and gives higher insurance limits to FHA borrowers who have served in the Armed Forces. The limits are 100% of the first $25,000 and 95% above that to a maximum loan of $90,000.) The program blossomed, and to date over 9 million home loans have been guaranteed by the VA, over two-thirds of them with no down payment. 

To keep up with the increased cost of homes, the guarantee has been increased several times and in the mid-1983 was at $27,500. Generally, a $27,500 guarantee means a veteran can purchase up to a $110,000 home with no down payment, provided, of course, that the veteran has enough income to support the monthly PITI payments. Some lenders will go higher if the borrower makes a down payment. Whether or not a lender will make a no-down-payment VA loan is entirely up to the lender. Some lenders feel the borrower should make at least a token down payment so as to have a sense of ownership. However, the majority of lenders, if they have the funds available, require none. 

In the original G.I. Bill of 1944, eligibility was limited to World War II veterans. However, subsequent legislation has broadened eligibility to include any veteran who served for a period of at least 90 days in the armed forces of the United States, or an ally, between September 16, 1940, and July 25, 1947, or between June 27, 1950, and January 31, 1955. Any veteran of the United States who has served 180 days or more since January 31, 1955, to the present is also eligible. If service was during the Viet Nam conflict period (August 5, 1964 to May 7, 1975) 90 days is sufficient to qualify. The veteran's discharge must be on conditions other than dishonorable and the guarantee entitlement is good until used. Spouses of veterans who died as a result of service can also obtain housing guarantees, if not remarried. Active duty personnel can also qualify. 

VA Certificates

A veteran should make application to the Veterans Administration for a certificate of eligibility, to find out what his benefits are. It is also one of the documents necessary to obtain a VA guaranteed home loan. 

The VA works diligently to protect veterans and reduce foreclosure losses. When a veteran applies for a VA guarantee, the property is appraised and the VA issues a certificate of reasonable value. Often abbreviated CRV, it informs the veteran of the appraised value of the property and the maximum VA guaranteed home loan a private lender may make. Similarly, the VA established income guidelines to make certain that the veteran can comfortably meet the proposed loan payments. It makes no sense, for the veteran or the VA, to approve a loan that the veteran will have trouble repaying.  

The VA will guarantee home loans for periods of up to 30 years on homes, and there is no prepayment penalty if the borrower wishes to pay sooner. The VA will also guarantee loans for the purchase of farms and farm equipment, farm buildings, and farm capital, to buy or establish a business, or to purchase a mobile home as a residence. A veteran wishing to refinance his existing home or farm can also obtain a VA-guaranteed loan. The VA will also make direct loans to veterans if there are no private lending institutions nearby. 

No matter what loan guarantee program is elected, the veteran should know that in the event of default and subsequent foreclosure he is required to eventually make good any losses suffered by the VA on his home loan. (This is not the case with FHA-insured loans. There the borrower pays for protection against foreclosure losses that may result from his loan.) Even if the veteran sells his property and the buyer assumes the VA loan, the veteran is still financially responsible if the buyer later defaults. To avoid this, the veteran must arrange with the VA to be released from liability. 

Legislation that took effect in 1975 permits a veteran a full new guarantee entitlement if he has completely repaid a previous VA-guaranteed loan. Even if the veteran has sold his home and let the buyer assume the VA loan, the 1975 law change is still valuable. For example, if a veteran has used $15,000 of his entitlement to date, he still has $12,500 available to him. 

As congress frequently changes eligibility and benefits, a person contemplating a VA or FHA loan should make inquiry to the field offices of these two agencies and to mortgage lenders to ascertain the current status and details of the law, as well as the availability of loan money. One should also query lenders as to the availability of state veteran benefits. A number of states offer special advantages, including mortgage loan assistance, to residents who have served in the armed forces.

VA Program To PMI