The VA loan began in 1944 through the original Servicemen’s Readjustment Act, also known as the GI Bill of Rights. The GI Bill was signed into law by President Franklin D. Roosevelt and provided veterans with a federally guaranteed home with no down payment. This feature was designed to provide housing and assistance for veterans and their families, and the dream of home ownership became a reality for millions of veterans.
VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home, which must be for their own personal occupancy. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan. The guaranty replaces the protection the lender normally receives by requiring a down payment allowing you to obtain favorable financing terms.
Guide to VA Loans
VA loans offer the following important advantages over most conventional loans:
- Ensure that all veterans are given an equal opportunity to buy homes with VA assistance, without regard to their race, color, religion, sex, handicap, familial status or national origin.
- No downpayment (unless required by the lender, the purchase price is more than the reasonable value of the property as determined by VA, or the loan is made with graduated payment features);
- A negotiable fixed interest rate competitive with conventional mortgage interest rates;
- The buyer is informed of the estimated reasonable value of the property;
- Limitations on closing costs;
- An assumable mortgage. However, for loans closed on or after March 1, 1988, the assumption must be approved in advance by the lender or VA. Generally, this involves a review of the creditworthiness of the purchaser (ability and willingness to make the mortgage payments). Be sure to see the section entitled “Loan Repayment Terms”;
- Long amortization (repayment) terms:
- Right to prepay without penalty (lenders may require that any partial prepayments be in the amount of at least 1 monthly installment of principal or $100, whichever is less);
- For houses inspected by VA during construction, a warranty from the builder and VA assistance in trying to obtain the builder’s cooperation in correcting any justified construction complaint.
- Forbearance (leniency) extended to worthy VA homeowners experiencing temporary financial difficulty.
WHAT VA LOANS CANNOT DO
- GUARANTEE THAT THE HOUSE YOU BUY, WHETHER IT IS NEW OR PREVIOUSLY OCCUPIED, WILL BE FREE OF DEFECTS. The VA appraisal is NOT intended to be and “inspection” of the property. If you have any doubts about the condition of the house, it is in your best interest to seek expert advice BEFORE you legally commit yourself in a purchase agreement. Most sellers will permit you, at your expense, to arrange for an inspection by a qualified residential inspection service and negotiate with you concerning repairs to be included in the purchase agreement. Such action can prevent later problems, disagreements and disappointments. Remember, VA guarantees only the loan, NOT the condition of the property. It is your responsibility to be an informed buyer and assure yourself that what you are buying is satisfactory to you in all respects.
- If you have a home built, VA cannot compel the builder to correct construction defects or otherwise live up to the contract. VA authority is limited to suspension of the builder from participation in the VA Loan Guaranty program.
- VA cannot guarantee that you are making a good investment, or that you can resell the house at the price you paid.
- VA does not have authority to provide you with legal services.