A lender, such as a mortgage company, savings and loan, or bank, makes a Department of Veteran’s Affairs-guaranteed loan . The VA's stamp of approval on the loan protects the lender against loss if the payments are not made. This encourages lenders to offer veterans loans with more favorable terms.

The amount of guaranty on the loan depends on the loan amount and whether the veteran has had a previous VA loan. With the current maximum guaranty, a veteran who hasn't used the benefit may obtain a VA loan of up to $417,000 ($625,500 limit for Alaska, Hawaii, Guam and the U.S. Virgin Islands), depending on the borrower's income level and the appraised value of the property. The VA can provide additional guarantees above the $417,000 ($625,500) limit – refer to Circular 26-08-19 for more information.

Advantages of VA Financing

More than 29 million veterans and service personnel are eligible for VA financing. If you are a veteran you can get a VA loan more than once-if you didn't exhaust your loan limit or if you have had it restored.

VA Loans have advantages:

• No down payment required--reducing the origination cost of the loan.
  

• The loan maximum may be up to 100 percent of the VA-established reasonable value of the property.
  

• You have flexibility in negotiating interest rates with the lender.
  

• There is no monthly mortgage-insurance premium (private mortgage insurance, or PMI).
  

• There is a limit on the buyer's closing costs.
  

• The buyer receives an appraisal that shows the property value.
  

• 30-year loans have a choice of repayment plans:
  

• Traditional fixed-payment: constant principal and interest; increases or decreases may be expected in property taxes and homeowner's insurance coverage
  

• Graduated-payment mortgage (GPM): low initial payments that gradually rise to a level payment starting in the sixth year
  

• Growing equity mortgages (GEMs) have gradually increasing payments with all of the increase applied to the principal, resulting in an early payoff of the loan.
  

• For most loans for new houses, construction is inspected at appropriate stages to ensure compliance with the approved plans, and a one-year warranty is required from the builder that the house is built in conformity with the approved plans and specifications. In those cases where the builder provides an acceptable 10-year warranty plan, only a final inspection may be required.
  

• The mortgage is assumable, subject to VA approval of the assumer's credit.
  

• No pre-payment penalty.
  

• The VA performs personal loan servicing and offers financial counseling to help veterans avoid losing their homes during temporary financial difficulties.

The only disadvantage is that the inspection and warranty requirements are cumbersome to the realtor and seller (some sellers shy away from buyers with VA loans).

Adjustable Rate Mortgage
The VA has the authority to guarantee "traditional" Adjustable Rate Mortgages (ARMs) (only through September 30, 2012). Key features of this program are:

1. Interest rate adjustments on an annual basis;

2. Annual interest rate adjustments limited to a maximum increase or decrease of 1 percentage point;

3. Interest rate increases limited to a maximum of 5 percent points over the life of the loan;

4. This type of ARM loan MUST be underwritten at 1 percentage point above the initial rate.
   

Getting a VA Loan

Follow these steps:

1. Apply for a Certificate of Eligibility. A veteran who doesn't have a certificate can obtain one easily by completing VA Form 26-1880, Request for a Certificate of Eligibility for VA Home Loan Benefit sand submitting it to one of the Eligibility Centers with copies of your most recent discharge or separation papers covering active military duty since September 16, 1940, and showing active-duty dates and type of discharge.
   

2. Decide on a home you want to buy and sign a purchase agreement.
   

3. Order an appraisal from the VA (this is usually done by the lender). Most VA regional offices offer a "speed-up" telephone appraisal system. Call your local VA office for details.
   

4. Apply to a mortgage lender for the loan. While the appraisal is being done, the lender (mortgage company, savings and loan, bank, or other institution) can be gathering credit and income information. If the lender is authorized by VA to do automatic processing, upon receipt of the VA or LAPP appraised-value determination, the loan can be approved and closed without waiting for the VA's review of the credit application. For loans that must first be approved by the VA, the lender will send the application to the local VA office, which will notify the lender of its decision.
   

5. Close the loan and move in.

Other Closing Costs
The lender may charge reasonable closing costs. These costs may not be included in the loan. The following items may be paid by the veteran purchaser, the seller, or shared. Closing costs may vary among lenders and also throughout the nation because of differing local laws and customs.

• VA appraisal
• credit report
• loan origination fee (usually 1 percent of the loan)
• discount points
• title search and title insurance
• recording fees
• state and/or local transfer taxes, if applicable
• survey

Most lenders estimate 3 percent to 6 percent of the loan amount in closing costs. No commissions, brokerage fees, or "buyer broker" fees may be charged to the veteran buyer.

Certificate of Reasonable Value
The certificate of reasonable value (CRV) is based on an appraiser's estimate of the value of the property you want to buy. Because the loan amount may not exceed the amount shown on the CRV, the first step in getting a VA loan is to ask for an appraisal. Anyone (buyer, seller, real estate personnel, or lender) can ask for a VA appraisal. Simply complete VA Form 26-1805, Request for Determination of Reasonable Value and mail it to the Loan Guaranty Division at the nearest VA office for processing.

You can request an appraisal by telephoning the Loan Guaranty Division for assignment of an appraiser. Contact the local VA office for information concerning its assignment procedures. The appraiser will send the person making the request a bill for services. Fees are set by a schedule approved by the VA. To simplify matters, the VA and HUD/FHA (Department of Housing and Urban Development/Federal Housing Administration) use the same appraisal forms. If the property was recently appraised under the HUD procedure, under certain limited circumstances, the HUD conditional commitment can be converted to a VA CRV. The local VA office can explain how this is done.

The VA appraisal estimates the value of the property, but that I not the same as an inspection. The VA appraisal also is not a guarantee that the house is free of defects. Unless you are an engineer and know house structure, hire a reputable inspection firm to inspect the house you want to buy.

Who is Eligible for a VA Loan?
Veterans who served on active duty and were discharged under conditions other than dishonorable during World War II and after are eligible for VA loan benefits.

Veterans of World War II (September 16, 1940, to July 25, 1947), the Korean conflict (June 27, 1950, to January 31, 1955), and the Vietnam era (August 5, 1964, to May 7, 1975) must have at least 90 days of service.

Peacetime Service Veterans with service only during peacetime periods and active-duty military personnel must have had more than 180 days of active service. Veterans of enlisted service that began after September 7, 1980, or officers with service beginning after October 16, 1981, must in most cases have served for at least two years.

Persian Gulf Conflict Reservists and National Guard members who were activated on or after August 2, 1990, served at least 90 days, and were discharged honorably are eligible.

Members of the Selected Reserve, including the National Guard, who are not otherwise eligible and who have completed six years of service and have been honorably discharged or have completed six years of service and are still serving may be eligible.

Contact the local VA office to find out what is needed to establish eligibility. Reservists will pay a slightly higher funding fee than regular veterans.

Financing, Interest Rates, and Terms
If you are a veterans, your VA loan can come from most lenders and have a fixed interest rate, which you negotiate. If the lender charges discount points on the loan, you may negotiate with the seller as to who will pay points. Points paid by the veteran may not be included in the loan, but a maximum of two points may be included in Interest Rate Reduction Refinancing Loans. The loan may be for as long as 30 years and 32 days.

The VA does not require that a down payment be made, except when you borrow:

• to obtain a loan to purchase a manufactured home or lot
• to obtain a loan with graduated payment features
• to prevent the amount of a loan from exceeding the VA's determination of the property's reasonable value

If the sale price exceeds the reasonable value, you must certify that the difference is being paid in cash without supplementary borrowing. A cash down payment of 5 percent of the purchase price is required for manufactured home or lot loans.

VA Fees You Should Know About
You'll pay a basic funding fee of 2 percent to the VA unless you qualify as an exempt veteran. A down payment of 5 percent or more will reduce the fee to 1.5 percent, and a down payment of 10 percent will reduce it to 1.25 percent.

A funding fee of 2.75 percent must be paid by all eligible Reserve/National Guard members. A down payment of 5 percent or more will reduce the fee to 2.25 percent, and a down payment of 10 percent will reduce it to 2 percent.

The funding fee for loans to refinance an existing VA home loan with a new VA home loan to lower the interest rate is 0.5 percent.

Veterans who are using entitlement for a second or subsequent time who do not make a down payment of at least 5 percent are charged a funding fee of 3 percent.

The funding fee for all VA home loans may be either paid in cash or included in the loan.

Loans for Native American Veterans
VA direct home loans are available to eligible Native American veterans who want to buy, build or improve a home a home on Native American trust land or simultaneously purchase and improve a home. Direct loans also are available to reduce the interest rate on existing loans, too. VA direct loans may be obtained up to $417,000 ($625,500 limit for Alaska, Hawaii, Guam and the U.S. Virgin Islands).

The VA charges a funding fee of 1.25 percent for loans to purchase, construct, or improve a home. For loans to refinance an existing loan, the fee is 0.5 percent of the loan amount. Veterans receiving compensation for service-connected disability are not required to pay the funding fee. The funding fee may be paid in cash or included in the loan.

The following may not be included in the loan: fees for VA appraisal, credit report, loan processing, title search, title insurance, recording, transfer taxes, survey charges, or hazard insurance.

Need More Help?
Veterans seeking more detailed information concerning the VA home loan program may request VA Pamphlet 26-4, VA-Guaranteed Home Loans for Veterans, or VA Pamphlet 26-6, To the Home-Buying Veteran, from the nearest VA office.

How a VA Loan Protects You

The VA protects you with it's loan. Here's how:

• Homes completed less than a year before purchase with VA financing and inspected during construction by either the VA or HUD must meet VA requirements.
  

• The VA may suspend from the loan program those who take unfair advantage of veteran borrowers or decline to sell a new home or make a loan because of race, color, religion, gender, disability, family status, or national origin.
  

• The builder of a new home is required to give the purchasing veteran a one-year warranty that the home has been constructed to VA-approved plans and specifications. A similar warranty must be given for new manufactured homes.
  

• In cases of new construction completed under VA or HUD inspection, VA may pay or otherwise compensate a veteran borrower for correction of structural defects seriously affecting livability if assistance is requested within four years of a home-loan guaranty.
  

• The borrower obtaining a loan may be charged only the fees and other charges prescribed by the VA as allowable.
  

• The VA encourages lenders to extend forbearance if a borrower is temporarily unable to meet the terms of the loan.