VA loan programs: Insuring mortgages for VA-approved lenders.

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Like FHA, the Department of Veterans Affairs (DVA) does not provide mortgage programs directly to borrowers--they insure them for VA- approved lenders. VA loans are restricted to Air Force, Army, Coast Guard, Navy, or Marine Corps veterans who meet military service requirements (these vary depending on dates of service) as well as certain citizens who served in Selected Reserves or the National Guard. To be eligible the veteran cannot have been discharged dishonorably. Those who are eligible for VA financing will need to provide a Certificate of Eligibility to their lender. Veterans can request the certificate by completing VA form 26-1880 (the form can be downloaded from the Department of Veterans Affairs Web site). In addition, many lenders are able to get the certificate directly from the DVA through the ACE (Automated Certificate of Eligibility) system.

Disadvantages:  Most of the disadvantages of VA financing don't apply to many borrowers. However, veterans considering VA and other options should be aware of potential pitfalls in financing with a VA mortgage.
  • Loan amount: Zero down loans are limited to $417,000. In higher cost areas this could prove restrictive.
  • The VA up front funding fee of about 2.2%, which covers the mortgage insurance for the life of the loan. This could prove expensive if the borrower doesn't keep the home for at least a few years. Active duty military personnel may get transferred frequently; paying 2.2% every time they buy a house might not make sense--in this case FHA or conventional financing might be a better deal.
  • Refinances are limited to 90% of the home's value, even if the refinance is a streamline from one VA to another.
Advantages: VA loans do some things better than conventional or FHA loans, so veterans should look at the pros and cons of each program before choosing. Here are the pros of VA financing:
  • The chief advantage of the VA loan is the lack of down payment required. Buyers can finance 100% of the purchase price up to $417,000. Even the funding fee of 2.2% can be financed into the loan, so borrowers need not come up with much money out-of-pocket.
  • "Super Maximum" VA mortgages of up to $1,000,000 are available, although a down payment is required for amounts exceeding $417,000. Beyond that limit, the borrowers need to come up with 25% of any amount exceeding $417,000 up to the million dollar limit. It can still be a good deal. For example, a $600,000 house would require no down payment on the first $417,000 and 25% down on the $183,000 excess. The resulting down payment of $45,750 is still only 7.63% on the entire amount--very generous terms when compared to conventional financing.
  • Underwriting guidelines are somewhat less restrictive than those for conventional mortgages. VA loans can be applied for two years after a bankruptcy discharge or a foreclosure. Income also goes further with a VA loan, as a back end ratio (total of all payments including the mortgage / gross income) of 41% is deemed acceptable. Many conventional lenders prefer not to approve loans when the back end ratio exceeds 36%.
  • VA refinances can be streamlined just like FHA loans can be, with no credit check or appraisal needed.
  • There is no monthly mortgage insurance required, and closing costs the buyer pays are limited by law.
  • VA loans are assumable, which can make it easier to sell a home.
  • VA can also provide assistance to borrowers with temporary financial problems and in danger of foreclosure.
  • In addition to traditional 30 year fixed rate mortgages, borrowers can opt for a GPM, or Graduated Payment Mortgage. This gives them low initial payments, which gradually rise to a fully-amortizing payment in the sixth year. Other options include GEMS, or Growing Equity Mortgages, which gradually increase payments and apply all of the increase to the principal. This accelerates the payoff of the mortgage.
  • VA loans can be used to build a home, improve a home, or buy a manufactured home and lot.
VA loans require lower down payments than FHA loans, and cheaper mortgage insurance if the borrower remains in the home for more than 3 years. VA super-maximum loans make it possible for borrowers to buy rather expensive homes with relatively low down payments as well--something FHA doesn't do. And the VA option of graduated payment mortgages gives those starting out an easier way to pay their loan--without the danger posed by loans with interest-only or negative-amortization provisions.
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