What is a VA Loan?
A VA loan is different from a conventional or FHA loan. A conventional loan is what most people think of when they think of a mortgage – you go to a lender, make a down payment, get offered an interest rate, and start making your payments. Conventional loans require at least a 20% down payment. FHA loans are a small step closer to VA loans but still a far cry. FHA loans are partially guaranteed by the Federal Housing Administration (FHA), and enable borrowers to buy a house if they can’t make a 20% down payment. FHA loans, however, require mortgage insurance, which can add hundreds of dollars each month to your monthly payment.
VA loans are better in pretty much every way. Just like the FHA guarantees FHA loans, the VA guarantees VA loans. Also, just like the FHA doesn’t actually make the loan (a normal lender does), the VA does not actually loan any money for a VA loan. A VA loan is a home loan that is guaranteed (not offered) by the Veterans Administration. VA loans are obtained through VA-approved lenders who choose to offer them. The VA will force no lender to offer VA loans, and any lender who does so has discretion as to what loan types they will offer. For example, right now it is very difficult to find a lender who is willing to offer a VA construction loan, even though the VA is perfectly willing to guarantee one. The amount of discretion given to the lender may seem odd, or even unfair, but lenders need to have the ability to make only the loans that are a safe bet for them or they’ll go out of business – or none would choose to offer VA loans.
The VA guarantees a portion of the loan amount to the lender in case of default to lessen the risk and enable them to offer veterans more favorable loan terms than they could otherwise qualify for. The VA does not guarantee the entire loan amount, and the percentage of the loan that they guarantee depends on how much the loan is being made for. The percentage is always between 20% and 50% – never more than 50% and never less than 20%. The percentage being guaranteed may affect the interest rate the lender offers you – but it may not; hybrid ARMs, for example, have their interest rates calculated differently and won’t really be affected by the percentage of the loan being guaranteed.
What’s even better, the VA does not require the borrower to make a down payment on the loan, and also does not require mortgage insurance even if the borrower does not make any down payment at all. Where the FHA loan program exists simply to make home ownership available to more people and situations, the VA loan program is intended to be a major benefit to those who choose to serve our country. As such, the VA loan program is far more concerned with making the loan as good a deal as possible for the borrower. That’s why, instead of mortgage insurance, every VA borrower pays a one-time VA funding fee. There are some who are exempt, but most borrowers are not. The funding fee gets less depending on how large of a down payment the borrower makes, and can even be rolled into the loan amount if the borrower wishes to take no money out of pocket for the loan.
In direct answer to the question at the top, a VA loan is a gateway to home ownership and thousands of saved dollars for eligible borrowers. Most veterans and surviving spouses are eligible for the VA loan program, and would be wise to utilize it if at all possible. A VA loan is guaranteed by the VA and funded by normal lenders who have gone through the application process to be approved by the VA to offer VA loans. The VA has strict requirements for approval for lenders, and does a great job at making sure that only ethical lenders are approved to offer VA loans. For more information on VA loans, visit our Frequently Asked Questions page or contact one of our representatives today.