Part 1: Overview

The United States provides numerous benefits to those individuals who enter into service on behalf of the government. One of the major benefits afforded is home loans sponsored by the Veterans Administration (VA). The organization within the VA that administers the home loan program is the known as the VA Loan Guaranty Service.

The VA Home Loan Guaranty Program was conceived as a part of the Servicemen’s Readjustment Act of 1944. According to the VA, the mission of the program is to “help veterans and active-duty personnel to purchase and retain homes in recognition of their service to the Nation”. National Guard and Military Reserve personnel are also included in the program.

Eligibility for the Home Loan Guarantee program is determined by the VA. All applicants must complete VA Form 26-1880 Request for a Certificate of Eligibility for VA Home Loan Benefits, which can be obtained from the Veterans Administration website. It is estimated that more than 29 million veterans and current service members are eligible for VA home loans.

The Veterans Administration does not actually make loans to its applicants. Rather, it guarantees those loans so that lenders are protected against loss should the borrower default. This security encourages those lenders to offer more affordable rates to VA borrowers. The amount of guaranty on a loan depends on the amount of the loan and whether the borrower has previously used some of his or her entitlement.

There are many advantages in obtaining a VA-backed home loan. For one, the veteran’s entitlement is reusable. Entitlement can be “restored” if a previous property that was purchased with VA funds is sold and the loan paid in full, or if another qualified veteran buys the property and assumes the loan, thereby substituting his or her entitlement for the full entitlement originally used by the first borrower. Also, loan maximums may be up to 100 percent of the VA-established reasonable value of the property. In other words, loans can many times be obtained with no down payment needed from the veteran.

Other advantages of VA loans include no required Mortgage Insurance Premium payment and federal limitations on the amount of closing costs that can be charged. Lenders may also be somewhat flexible with interest rates due to the security of a government-backed loan. VA loans generally have a thirty-year term with a choice of repayment options: a traditional fixed-payment plan; a Graduated Payment Mortgage (GPM) in which the low initial payments gradually rise to a level payment in the sixth year of the mortgage; and, in some areas, a Graduated Equity Mortgage (GEM) which gradually increases payments while applying all of the increase to the principal, resulting in an early-payoff of the loan and significant savings of interest charges.

Additionally, VA home loans are assumable with the lender’s approval of the buyer’s qualifications and credit. This can be very helpful when selling a home. VA borrowers also have the right to repay the loan at any time without penalty. What’s more, the Veterans Administration performs loan servicing and counseling to help veterans who may be in financial trouble to keep their homes.

In Part 2 of this series, we’ll look more closely at the eligibility requirements needed to apply for a VA loan.

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