En español | Veterans in high-cost markets can now buy homes without a down payment, thanks to the elimination of federally mandated conforming loan limits within the Department of Veterans Affairs’ (VA) home loan benefit.
In the past, if veterans wanted to borrow above the local loan limit, they would be on the hook for a down payment (typically, 25 percent of the difference between the purchase price and that limit). Now, regardless of the home price, veterans can buy a residence anywhere in the country without shelling out a down payment, as long as they qualify for the loan.
"The government and taxpayers have essentially said, ‘You served your country; you sacrificed, in many cases, the ability to build savings and credit because you put your life on the line,’" says Chris Birk, director of education at Veterans United Home Loans, the top VA mortgage lender. Even for former service members who have the cash for a down payment, a VA loan is valuable. Instead of using their savings for a down payment, Birk notes, they can use that money to improve their home or build a college fund for their children.
Private mortgage lenders provide the VA loan based on their mortgage-lending guidelines, the size of the loan, and the creditworthiness of the borrowers. The VA essentially provides a form of insurance similar to other government-backed mortgage programs. If a borrower ends up defaulting, the VA usually repays the lender a quarter of the loan amount. In part because of the government guarantee, VA loans have had the lowest interest rate on the market for the past five years, says Birk.
Eligibility and placing an offer
Eligibility for VA loans is granted to veterans who were discharged or released on active duty under other than dishonorable conditions. Some surviving spouses may be eligible, as well. Borrowers need to have a VA Certificate of Eligibility, which most lenders can provide electronically in seconds.
One condition unique to the VA loan is that the borrower must pay a funding fee to help cover losses and keep the loan guaranty program running. These usually range from 1.5 to 3.6 percent of the loan amount. Borrowers usually add the fee to their loan balance. The fee can be reduced if a buyer decides to contribute a down payment. Purple Heart recipients are exempt from the fee.
Home sellers love VA borrowers. “For home sellers, an offer from a preapproved VA buyer is about as close as you can get to a sure bet,” Birk says. Still, some misperceptions about VA loans persist. “A common misconception among a lot of real estate agents and home sellers is that if a veteran wants to buy their house using the VA benefit, the seller is going to need to pay all the closing costs and deal with a bunch of hassle,” Birk says. “It's always a matter of negotiation."
A loan with integrity
For lenders, VA loans have been the safest mortgage loan on the market for nearly all of the past decade, according to data from the Mortgage Bankers Association. One reason is that VA guidelines requires the borrower to have discretionary income. “Basically, at the end of the month, after you've paid your mortgage and major monthly expenses … depending on your family size and where in the country you're buying, VA wants to see a minimum amount of money in the bank,” Birk says.
Although this program was included in part of the G.I. Bill of Rights in 1944, only a third of home-buying veterans knew about the benefit, according to a 2010 national survey by the VA. Of those who are aware of the benefit, many incorrectly believe that the program is only for first-time home buyers and can be used just once.
"It's heartbreaking in a lot of ways, because they could have used this benefit for decades; it doesn't expire,” says Birk. “It's something that they can turn to time and again.”