One of the biggest stumbling blocks many people face while traveling the road from renter to homeowner is coming up with a down payment. That s not a problem for qualifying veterans, or for men and women on active duty in the Army, Air Force, Navy, Marines, or Coast Guard.
Although there have been changes to the home-loan program from the Department of Veterans Affairs, or VA, since it was introduced after World War II, it is still a widely used no-down-payment loan. Unlike other zero-down loans, there are no hurdles to jump in terms of income, debt ratios, savings or credit scores. You will likely have to come up with closing costs, but that s a lot easier than coming up with both closing costs and a down payment. With a VA loan, a seller can pay all closing costs, but that is between the buyer and the seller.
There are currently more than 2.3 million VA-backed loans across the country worth approximately $234 billion, according to Keith Pedigo, the VA s director of loan guarantee services in Washington, D.C. The agency backed more than 165,000 loans worth more than $25 billion for veterans in fiscal 2005, their surviving family members and active duty personnel, he adds, most of them first-time buyers.
The VA does not loan money to buy homes. Instead, like the Federal Housing Administration, or FHA, it guarantees loans. Unlike FHA loans, however, VA loan limits are the same as those Fannie Mae and Freddie Mac set for conforming, conventional loans. This year the loan limit is $417,000 in the contiguous 48 states and $625,000 in Hawaii, Alaska, Guam and the U.S. Virgin Islands.
Pedigo points out, Lenders can make any size VA loan that they wish, but there are virtually no lenders who would go over the limit.
That s because VA does not guarantee the full amount of the loan. Pedigo explains that VA guarantees 25 percent of the loan up to the loan limit.
The 25 percent starts to diminish after that, reducing the amount the agency guarantees.
Here s how it works. If a homeowner with a VA-backed loan for $417,000 were to default on the loan, VA would guarantee that the lender would not lose more than 25 percent, or $104,250. For a $400,000 loan, the guarantee would be $100,000, and so on.
When a home is foreclosed on, we buy the property back from the lender and we resell it in an effort to recover our loss. The lender gets whatever the home is sold for. If it is sold for less than the amount of the loan, VA makes up the difference for up to 25 percent of the total loan. This has not been a major problem in recent years.
Foreclosures are down dramatically over previous years, Pedigo explains. The worst year was 1990, when we had almost 48,000 foreclosures. In 2005 we had 12,500 foreclosures.
There are still losses, however, and they are paid by almost everyone who has a VA loan. Instead of the private mortgage insurance many borrowers have to pay when taking out a conventional loan with less than a 20 percent down payment, VA borrowers pay a funding fee. Pedigo explains that a veteran using his VA loan for the first time pays a funding fee equal to 2.15 percent of the total amount borrowed. That s $21.50 for every thousand borrowed, which works out to $2,150 per $100,000 borrowed. On a $417,000 loan, the funding fee would be $8,965.50. If the borrower takes out a second VA loan, the funding fee would be 3.3 per cent of the amount borrowed. No one can have more than one VA loan at a time. So if you have one now, you cannot get another until the one you have is paid off.
While some buyers pay the funding fee upfront, in cash, the fee is usually rolled into the loan. Pedigo adds that in recent years, because of the economy and the growth in home values, VA has not had to ask Congress for any money to cover losses on foreclosures.
Veterans with service-related disabilities are exempt from the funding fee, Pedigo explains, adding that VA also operates an Adapted Housing Program, which offers grants to veterans with disabilities who need specially adapted housing. They have a $10,000 grant for blind veterans, for example.
We can offer up to a $50,000 grant to veterans who have lost both legs, or the use of both legs, because they need a house adapted to wheelchair use. It can be for making changes to an existing house, or to build a new one that incorporates adaptations. The grants are usually tied to mortgages, but they do not have to be tied to VA mortgages. A disabled vet who qualifies for a grant can get it with a conventional mortgage. The grant program has been in existence since 1948.
If you are a veteran, or are currently on active duty, and want to find out if you qualify for a VA loan, go online to www.homeloans.va.gov and click on Am I eligible for VA home loan benefits? If you are disabled, you can also click on Information on specially adapted housing, which is on the same page. Or you can call your local VA office. If you do qualify, the VA will provide a certificate to give to your lender showing that the VA will guarantee your loan.
Relatively few people get more than one VA loan. By the time they sell their first home they have usually built up enough equity to make a standard down payment on their next home. They can get a conventional loan and avoid paying another funding fee. With a down payment of 20 percent or more, borrowers can also avoid paying private mortgage insurance.
Millions of veterans have bought homes with VA-backed mortgages since the program was introduced more than 50 years ago. Millions more will probably do the same, each one taking advantage of the program that removes the stumbling block of a down payment from their path to homeownership.
It s a small way to say, Thank you for serving your country.