02 Jul Financing Your Dream Home
Since 1944, the VA Home Loan Program has guaranteed more than 18 million loans to veterans to construct or purchase a home, or refinance another home loan. Eligible veterans can finance up to $417,000, (or $729,000 in high cost areas), without a down payment.
It’s Not a Loan, but Guaranteed Financing
The VA does not actually lend you money, but guarantees your loan to the lender, so you become a favorable candidate. Credit and income standards become less strict once the government guarantees your loan.
You May Use VA-Guaranteed Financing
- To buy a home
- To buy a townhouse or condominium unit in a project that has been approved by the VA
- To build a home
- To repair, alter, or improve a home
- To simultaneously purchase and improve a home
- To refinance an existing mortgage under more favorable terms
- To improve a home through installment of a solar heating and/or cooling system or other energy-efficient improvements
- To buy a manufactured (mobile) home and/or lot
- To buy and improve a lot on which to place a manufactured home that you already own and occupy
- To refinance a manufactured home loan in order to acquire a lot
There are some restrictions. While you can use the loan to buy or build a property containing more than one unit, the total number of separate units cannot be more than four if only one veteran is buying. If more than one veteran is buying, then an additional family unit can be added to the four for each veteran. One veteran can buy four units, two veterans can by six units, three veterans can buy seven units, etc.
In addition, if the veteran must depend on rental income from the property to qualify for the loan, the veteran must:
- Show that she has the background or qualifications to be successful as a landlord. For example, the VA would want to know if the veteran has been a successful landlord in the past or has experience working with a rental agency.
- Have enough cash reserves to make the loan payments for at least six months without help from the rental income.
Knowing How Much Uncle Sam Will Guarantee
Your basic entitlement is $36,000 if you meet the eligibility requirements. To the lender, this is the same as making a $36,000 down payment. The VA will guarantee $36,000 for loans of $417,000 or less. If you borrow more than $417,000, the VA guarantees 25 percent of whatever the conforming loan limit is for the county in which your new home is located. The conforming loan limit is the amount that the federal government advises banks to limit mortgage loans to for homes in specific areas. In 2008, the limit was $417,000 in the continental United States and $625,000 in Hawaii, Alaska, Guam, and the U.S. Virgin Islands. Beginning January 1, 2010, rates should be available on the FHA’s Web site at portal.hud.gov.
The VA can guarantee 25 percent of $729,000, but that is the maximum.
Before you sign up: VA Home Loan restrictions
There are several factors to consider in deciding whether or not a VA Home Loan is your best option.
You cannot default on your loan. The guarantee of the loan must be repaid, like any loan. The VA guaranty protects the lender against loss, and encourages the lender to give a loan with favorable conditions for the veteran, but if you fail to make your payments, you could lose your home to foreclosure. If the lender doesn’t take the loss, you must pay back what the VA pays to the lender.
If your loan closed on or after January 1, 1990, you only owe the government if the default involved fraud, misrepresentation, or bad faith on your part. This is a case-by-case basis determined by the VA. For example, if you’re still in the military and you knew you had change of assignment orders that would preclude you from meeting the initial occupancy requirements, the VA considers that “bad faith.”
If you do default on your loan, you cannot receive another one until you repay the VA. Once you repay the VA in full you can reestablish your eligibility to use the VA Home Loan Program if your previously financed property has been sold. You can also sell the home to another veteran, who can assume the remaining loan balance, and then you can use the VA Home Loan benefit again.
If you still own the home, and have repaid the loan, you can get another loan guaranteed by the VA.
One disadvantage of the VA Home Loan Program is that you have to pay a funding fee. This goes toward the cost of the benefit, which reduces the cost to taxpayers. This fee is often part of the amount of the loan. The fee amount depends on the down payment and your status.
You must buy a home in the US. You cannot use the loan to purchase a home outside of the United States or its territories.
You have to live on the property for a certain amount of time. You or your spouse must occupy the house within 60 days of closing. This can be extended with VA approval, but will not be extended beyond 12 months. You can rent or move out after the initial period of occupancy, but you must live there first. There is no law that says how long you must live in the home, but if you move out quickly it could be considered bad faith by the VA.