Federal Benefits for Veterans, Dependents and Survivors

Chapter 5 - Home Loan Guaranty

VA home loan guaranties are issued to help eligible servicemembers, veterans, reservists and unmarried surviving spouses obtain homes, condominiums, residential cooperative housing units, and manufactured homes, and to refinance loans. For additional information or to obtain VA loan guaranty forms, visit http://www.homeloans.va.gov/.

Loan Uses: A VA guaranty helps protect lenders from loss if the borrower fails to repay the loan. It can be used to obtain a loan to:

1. Buy or build a home.
2. Buy a residential condominium unit.
3. Buy a residential cooperative housing unit.
4. Repair, alter, or improve a residence owned by the veteran and occupied as a home.
5. Refinance an existing home loan.
6. Buy a manufactured home and/or lot.
7. Install a solar heating or cooling system or other energy-efficient improvements.

Eligibility: In addition to the periods of eligibility and conditions of service requirements, applicants must have a good credit rating, sufficient income, a valid Certificate of Eligibility (COE), and agree to live in the property in order to be approved by a lender for a VA home loan.

To obtain a COE, complete VA Form 26-1880 -- "Request for a Certificate of Eligibility" -- and mail to: VA Eligibility Center, P.O. Box 20729, Winston-Salem, NC 27120.

It is also possible to obtain a COE from your lender. Most lenders have access to VA’s "WebLGY" system. This Internet-based application can establish eligibility and issue an online COE in seconds. Not all cases can currently be processed online – only those for which VA has sufficient data in its records. However, veterans are encouraged to ask their lenders about this method of obtaining a COE before sending an application to the Eligibility Center. For more information, visit http://www.homeloans.va.gov/eligibility.htm.

Periods of Eligibility: World War II: (1) active duty service after Sept.15, 1940, and prior to July 26, 1947; (2) discharge under other than dishonorable conditions; and (3) at least 90 days total service unless discharged early for a service-connected disability.

Post-World War II period: (1) active duty service after July 25, 1947, and prior to June 27, 1950; (2) discharge under other than dishonorable conditions; and (3) 181 days continuous active duty service unless discharged early for a service-connected disability.

Korean War: (1) active duty after June 26, 1950, and prior to Feb. 1, 1955; (2) discharge under other than dishonorable conditions; and (3) at least 90 days total service, unless discharged early for a service-connected disability.

Post-Korean War period: (1) active duty after Jan. 31, 1955, and prior to Aug. 5, 1964; (2) discharge under other than dishonorable conditions; (3) 181 days continuous service, unless discharged early for a service-connected disability.

Vietnam War: (1) active duty after Aug. 4, 1964, and prior to May 8, 1975; (2) discharge under other than dishonorable conditions; and (3) 90 days total service, unless discharged early for a service-connected disability. For veterans who served in the Republic of Vietnam, the beginning date is Feb. 28, 1961.

Post-Vietnam period: (1) active duty after May 7, 1975, and prior to Aug. 2, 1990; (2) active duty for 181 continuous days, all of which occurred after May 7, 1975; and (3) discharge under conditions other than dishonorable or early discharge for service-connected disability.

24-Month Rule: If service was between Sept. 8, 1980, (Oct. 16, 1981, for officers) and Aug. 1, 1990, veterans must generally complete 24 months of continuous active duty service or the full period (at least 181 days) for which they were called or ordered to active duty, and be discharged under conditions other than dishonorable.

Exceptions are allowed if the veteran completed at least 181 days of active duty service but was discharged earlier than 24 months for (1) hardship, (2) the convenience of the government, (3) reduction-in-force, (4) certain medical conditions, or (5) service-connected disability.

Gulf War: Veterans of the Gulf War era -- Aug. 2, 1990, to a date to be determined -- must generally complete 24 months of continuous active duty service or the full period (at least 90 days) for which they were called to active duty, and be discharged under other than dishonorable conditions.

Exceptions are allowed if the veteran completed at least 90 days of active duty but was discharged earlier than 24 months for (1) hardship, (2) the convenience of the government, (3) reduction-in-force, (4) certain medical conditions, or (5) service-connected disability. Reservists and National Guard members are eligible if they were activated after Aug. 1, 1990, served at least 90 days, and received an honorable discharge.

Active Duty Personnel: Until the Gulf War era is ended, persons on active duty are eligible after serving 90 continuous days.

VA Guaranty Amount Varies with the size of the loan and the location of the property. Because lenders are able to obtain this guaranty from VA, borrowers do not need to make a downpayment, provided they have enough home loan entitlement.

VA will guarantee 25 percent of the principal loan amount, up to the maximum guaranty. The maximum guaranty varies depending upon the location of the property.

For all locations in the United States other than Alaska, Guam, Hawaii, and the U.S. Virgin Islands, the maximum guaranty is the greater of 25 percent of (a) $417,000 or (b) 125 percent of the area median price for a single-family residence, but in no case will the guaranty exceed 175 percent of the Freddie Mac loan limit for a single family residence in the county in which the property securing the loan is located. This translates to a maximum loan amount of $1,094,625 for 2009.

In Alaska, Guam, Hawaii, and the U.S. Virgin Islands, the maximum guaranty is the greater of 25 percent of (a) $625,500 or (b) 125 percent of the area median price for a single-family residence, but in no case will the guaranty exceed 175 percent of the Freddie Mac loan limit for a single family residence in the county in which the property securing the loan is located. This translates to a maximum loan amount of $1,641,937.50 for 2009.

A list of 2009 county loan limits can be found at the following website: http://www.homeloans.va.gov/docs/2009_county_loan_limits.pdf 

All closing costs can generally be included in the loan, including the VA funding fee and up to $6,000 of home improvements for more energy efficiency.

An eligible borrower can use a VA-guaranteed Interest Rate Reduction Refinancing Loan to borrow up to 100 percent of the home’s appraised value to refinance an existing VA loan to lower the interest rate and payment. Typically, no credit underwriting is required for this type of loan. The loan may include the entire outstanding balance of the prior loan, the costs of energy-efficient improvements, as well as closing costs, including up to two discount points.

An eligible borrower who wishes to obtain a VA-guaranteed loan to purchase a manufactured home or lot can borrow up to 95 percent of the home’s purchase price. The amount VA will guarantee on a manufactured home loan is 40 percent of the loan amount or the veteran’s available entitlement, up to a maximum amount of $20,000.

VA Appraisals: No loan can be guaranteed by VA without first being appraised by a VA-assigned fee appraiser. A buyer, seller, real estate agent, or lender can request a VA appraisal by completing VA Form 26-1805, "Request for Determination of Reasonable Value." The requester pays for the appraisal upon completion, according to a fee schedule approved by VA. This VA appraisal estimates the value of the property. It is not an inspection and does not guarantee the house is free of defects. VA guarantees the loan, not the condition of the property.

Closing Costs: For purchase home loans, payment in cash is required on all closing costs, including title search and recording fees, hazard insurance premiums and prepaid taxes. For refinancing loans, all such costs may be included in the loan, as long as the total loan does not exceed the reasonable value of the property. Interest rate reduction loans may include closing costs, including a maximum of two discount points.

All veterans, except those receiving VA disability compensation, those who are rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating, and unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability, are charged a VA funding fee. For all types of loans, the loan amount may include this funding fee.

Required Occupancy: To qualify for a VA home loan, a veteran or the spouse of an active duty servicemember must certify that he or she intends to occupy the home. When refinancing a VA-guaranteed loan solely to reduce the interest rate, a veteran need only certify to prior occupancy.

Financing, Interest Rates and Terms: Veterans obtain VA-guaranteed loans through the usual lending institutions, including banks, credit unions, and mortgage brokers. VA-guaranteed loans can have either a fixed interest rate or an adjustable rate, where the interest rate may adjust up to one percent annually and up to five percent over the life of the loan. VA does not set the interest rate. Interest rates are negotiable between the lender and borrower on all loan types.

Veterans may also choose a different type of adjustable rate mortgage called a hybrid ARM, where the initial interest rate remains fixed for three to 10 years. If the rate remains fixed for less than five years, the rate adjustment cannot be more than one percent annually and five percent over the life of the loan. For a hybrid ARM with an initial fixed period of five years or more, the initial adjustment may be up to two percent. The Secretary has the authority to determine annual adjustments thereafter. Currently annual adjustments may be up to two percentage points and six percent over the life of the loan.

If the lender charges discount points on the loan, the veteran may negotiate with the seller as to who will pay points or if they will be split between buyer and seller. Points paid by the veteran may not be included in the loan (with the exception that up to two points may be included in interest rate reduction loans). The term of the loan may be for as long as 30 years and 32 days.

Loan Assumption Requirements and Liability: VA loans made on or after March 1, 1988, are not assumable without the prior approval of VA or its authorized agent (usually the lender collecting the monthly payments). To approve the assumption, the lender must ensure that the assumer is a satisfactory credit risk and will assume all of the veteran’s liabilities on the loan. If approved, the assumer will have to pay a funding fee that the lender sends to VA, and the veteran will be released from liability to the federal government. A release of liability does not mean that a veteran’s guaranty entitlement is restored. That occurs only if the assumer is an eligible veteran who agrees to substitute his or her entitlement for that of the seller. If a veteran allows assumption of a loan without prior approval, then the lender may demand immediate and full payment of the loan, and the veteran may be liable if the loan is foreclosed and VA has to pay a claim under the loan guaranty.

Loans made prior to March 1, 1988, are generally freely assumable, but veterans should still request VA’s approval in order to be released of liability. Veterans whose loans were closed after Dec. 31, 1989, usually have no liability to the government following a foreclosure, except in cases involving fraud, misrepresentation, or bad faith, such as allowing an unapproved assumption. However, for the entitlement to be restored, any loss suffered by VA must be paid in full.

2009 VA Funding Fees

A funding fee must be paid to VA unless the veteran is exempt from such a fee because he or she receives VA disability compensation. The fee, which is 1.25 percent for loans to purchase, construct or improve a home, and 0.5 percent to reduce the interest rate on an existing VA loan, may be paid in cash or included in the loan. Closing costs such as VA appraisal, credit report, loan processing fee, title search, title insurance, recording fees, transfer taxes, survey charges, or hazard insurance may not be included in the loan.

VA Assistance to Veterans in Default: When a veteran’s home loan becomes delinquent, the veteran should contact the lender as soon as possible to explain what caused the missed payments, and discuss how they can be repaid. Depending on a veteran’s situation, the lender may offer any of the following options to avoid foreclosure:

• Repayment Plan: make a regular payment each month plus part of the late payments.
• Forbearance: lender temporarily suspends payments to allow veteran time to accumulate funds to reinstate the loan or sell the property.
• Loan Modification: lender provides a fresh start by adding delinquency to the loan balance, and establishing a new payment schedule.
• Compromise Sale/Short Sale: lender approves a sale of the home for less than what is needed to payoff the loan. The remainder is written off and/or paid by VA guaranty.
• Deed-in-Lieu of Foreclosure: lender accepts a deed to the property instead of going through a lengthy foreclosure process.

VA does not have funds to lend veterans to make delinquent payments, but can offer financial counseling to veterans with VA-guaranteed, conventional, or sub-prime loans. For veterans with VA-guaranteed loans, VA may be able to intercede with the lender to help arrange an option to foreclosure, but does not have that authority on other loans. VA’s toll-free number for the Home Loan Guaranty program is 1-877-827-3702.

VA Acquires Property Foreclosures

VA acquires properties as a result of foreclosures. Countrywide Home Loans, under contract with VA, is currently marketing the properties through listing agents using local Multiple Listing Services. A listing of "VA Properties for Sale" may be found at http://va.reotrans.com. Contact a real estate agent for information on purchasing a VA-acquired property.

Loans for Native American Veterans

Eligible Native American veterans can obtain a loan from VA to purchase, construct, or improve a home on Federal Trust Land, or to reduce the interest rate on such a VA loan. Native American Direct Loans are only available if a memorandum of understanding exists between the tribal organization and VA.

Veterans who are not Native American, but who are married to Native American non-veterans, may be eligible for a direct loan under this program. To be eligible for such a loan, the qualified non-Native American veteran and the Native American spouse must reside on Federal Trust Land, and both the veteran and spouse must have a meaningful interest in the dwelling or lot.

The following safeguards have been established to protect veterans:

1. VA may suspend from the loan program those who take unfair advantage of veterans or discriminate because of race, color, religion, sex, disability, family status, or national origin.
2. The builder of a new home (or manufactured) is required to give the purchasing veteran either a one-year warranty or a 10-year insurance-backed protection plan.
3. The borrower obtaining a loan may only be charged closing costs allowed by VA.
4. The borrower can prepay without penalty the entire loan or any part not less than one installment or $100.
5. VA encourages holders to extend forbearance if a borrower becomes temporarily unable to meet the terms of the loan.

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