Toward the end of World War II, President Franklin D. Roosevelt signed the Servicemen's Readjustment Act into law. Also known as the G.I. Bill, Congress and the President created it to assist returning servicemen in assimilating back into civilian life and reward them for their service with sweeping benefits included educational, health, and home buying assistance. The VA home loan program is one of the bill's most popular features. In 2016 alone, more than 700,000 home loans were guaranteed by the Veterans Administration.
VA Home Loans: Establishing Eligibility
The first step in obtaining a VA home loan is establishing eligibility for the program. While the program is open to all military, military reservists, and National Guard members, each branch has varying levels of service required during active duty or peacetime for program eligibility. Additionally, the program is open to spouses and surviving spouses, who have not remarried, of service members who meet these requirements. Dependents and surviving dependents are not eligible for home loan benefits. In order to establish eligibility, a qualifying individual must obtain a Certificate of Eligibility from the VA before applying. The veteran must meet established criteria for credit and employment history and income requirements.
Additionally, the VA does not place a cap on how much much a veteran can borrow but does limit how much liability it is willing to assume. Each veteran is eligible for an amount referred to as an "entitlement". Lenders will allow a borrower to borrow up to four times the amount of the entitlement. In order to be eligible for subsequent loans, the borrower must first pay off his or her original entitlement.
Purchasing a Qualifying Property
Once eligibility has been established, the buyer must choose a qualifying property. The loan can be used for a variety of home loan purchases including
- a single-family home
- a condo in a VA-approved community
- building a new home
- purchasing and rehabbing a fixer-upper
- buying a manufactured home and lot
- making improvements to an existing home to make it more energy efficient
- refinancing existing mortgage loan debt
The home purchased through the VA loan program must serve as the veteran's primary residence. The program cannot be used to finance investment properties.
How Does the VA Home Loan Program Assist Buyers?
The VA does not make loans directly to consumers, rather much like the popular FHA loan program, it guarantees loans made to veterans by traditional lending institutions. The guarantee makes lending to veterans much more attractive to lending institutions as they know that they are guaranteed payment even if the mortgagee defaults on the loan.
Because of the guarantee, lending institutions are also willing to extend several benefits to veterans who qualify for the program including
- low or no down payment required compared to other government or conventional loan programs
- no monthly insurance premiums compared to other programs that charge mortgage insurance until 20 percent equity is reached
- limits on the buyer's closing costs
- lower average rates
- assistance from the VA to avoid foreclosure
While the VA guarantees the payback of the mortgage, the VA cannot guarantee that the home is free from defects. The buyer should arrange a home inspection of the Meadowwood property during the negotiation of the home purchase.