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Office of Public and Intergovernmental Affairs

Chapter 6 Home Loan Guaranty

Federal Benefits for Veterans, Dependents and Survivors

VA home loan guaranties are issued to help eligible Servicemembers, Veterans, Reservists, National Guard members, and certain surviving spouses obtain homes, condominiums, and manufactured homes, and to refinance loans. For additional information or to obtain VA loan guaranty forms, visit www.benefits.va.gov/homeloans/.

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. Repair, alter, or improve a residence owned by the Veteran and occupied as a home.
  4. Refinance an existing home loan.
  5. Buy a manufactured home and/or lot.
  6. 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. Lenders can apply for a COE online through the Veterans Information Portal (vip.vba.va.gov/portal/VBAH/Home). Active duty Servicemembers and Veterans can also apply online at http://www.ebenefits.va.gov. Although it’s preferable to apply electronically, it is possible to apply for a COE using VA Form 26- 1880, Request for Certificate of Eligibility.

In applying for a hard-copy COE from VA Eligibility Center using VA Form 26-1880, it is typically necessary that the eligible Veteran present a copy of his/her report of discharge or DD Form 214, Certificate of Release or Discharge from Active Duty, or other adequate substitute evidence to VA. An eligible active duty Servicemember should obtain and submit a statement of service signed by an appropriate military official to the VA Eligibility Center. A completed VA Form 26-1880 and any associated documentation should be mailed to Atlanta Regional Loan Center, Attn: COE (262), P.O. Box 100034, Decatur, GA 30031.Please note that while VA’s electronic applications can establish eligibility and issue an online COE in a matter of seconds, not all cases can be processed online. The system can only process those cases for which VA has sufficient data in its records. If a COE cannot be issued immediately, users have the option of submitting an electronic application.

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.
  4. 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, and completed the full period for which they were called to active duty, served at least 90 days, and were discharged under other than dishonorable conditions.

Active Duty Personnel

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

Eligibility for Reserves and/or Guard (not activated)

Members of the Reserves and National Guard who are not otherwise eligible for loan guaranty benefits are eligible upon completing 6 years of service in the Reserves or Guard (unless released earlier due to a service-connected disability). The applicant must have received an honorable (a general or under honorable conditions is not qualifying) discharge from such service unless he or she is either in an inactive status awaiting final discharge, or still serving in the Reserves or Guard.

Surviving Spouses:

Some spouses of Veterans may have home loan eligibility. They are:

  • the unmarried surviving spouse of a Veteran who died as a result of service or service-connected causes,
  • the surviving spouse of a Veteran who dies on active duty or from service-connected causes, who remarries on or after attaining age 57 and on or after Dec. 16, 2003, an
  • d
  • the spouse of an active duty member who is listed as missing in action (MIA) or a prisoner of war (POW) for at least 90 days

Eligibility under this MIA/POW provision is limited to one-time use only.

Surviving spouses of Veterans who died from nonservice-connected causes may also be eligible if any of the following conditions are met: The Veteran was rated totally service-connected disabled for 10 years or more immediately preceding death, or was rated totally disabled for not less than five years from date of discharge or release from active duty to date of death, or was a former prisoner of war who died after Sept. 30, 1999, and was rated totally service-connected disabled for not less than one year immediately preceding death.

Under the Home Loan Guaranty Program, VA does not make loans to Veterans and Servicemembers; VA guarantees loans made by private-sector lenders. The guaranty amount is what VA could pay a lender should the loan go to foreclosure.

It is important to note that VA does not impose a maximum loan amount that a Veteran may borrow to purchase a home; instead, the law directs the maximum amount that VA may guarantee on a home loan. Because most VA loans are pooled in mortgage securities that require a 25 percent guaranty, the effective no-downpayment loan limit on VA loans tends to be four times VA’s maximum guaranty amount. Loans for more than the effective no-downpayment loan limit generally require downpayments. Then, VA’s effective no-downpayment loan limits are established annually, and vary, depending on the size of the loan and the location of the property. Are established annually, and vary, depending on the size of the loan and the location of the property.

An eligible borrower can use a VA-guaranteed Interest Rate Reduction Refinancing Loan 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.

2014 VA Funding Fee Rates

Loan Category Active Duty and Veterans Reservists and National Guard
Loans for purchase or construction with downpayments of less than 5 percent, refinancing, and home improvement 2.15 percent 2.40 percent
Loans for purchase or construction with downpayments of at least 5 percent but less than 10 percent 1.50 percent 1.75 percent
Loans for purchase or construction with downpayments of 10 percent or more 1.25 percent 1.50 percent
Loans for manufactured homes 1 percent 1 percent
Interest rate reduction refinancing loans .50 percent .50 percent
Assumption of a VA- guaranteed loan .50 percent .50 percent
Second or subsequent use of entitlement with no downpayment 3.3 percent 3.3 percent

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. These provisions apply only to a manufactured home that will not be placed on a permanent foundation.

VA Appraisals

No loan can be guaranteed by VA without first being appraised by a VA-assigned fee appraiser. A lender can request a VA appraisal through VA systems. The Veteran borrower typically pays for the appraisal upon completion, according to a fee schedule approved by VA. This VA appraisal estimates 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. A thorough inspection of the property by a reputable inspection firm may help minimize any problems that could arise after loan closing. In an existing home, particular attention should be given to plumbing, heating, electrical, and roofing components.

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.

VA Funding Fees

A funding fee must be paid to VA unless the Veteran is exempt from such a fee. The fee 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 for purchase home loans.

All Veterans, except those who are specified by law as exempt, are charged a VA funding fee (See chart above). Currently, exemptions from the funding fee are provided for those Veterans and Servicemembers 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 those who would be in receipt of compensation, but who were recalled to active duty or reenlisted and are receiving active-duty pay in lieu of compensation. Additionally, unmarried surviving spouses in receipt of Dependency and Indemnity Compensation may be exempt from the funding fee. For all types of loans, the loan amount may include this funding fee.

VA funding fee and up to $6,000 of energy-efficient improvements can be included in VA loans. However, no other fees, charges, or discount points may be included in the loan amount for regular purchase or construction loans. For refinancing loans, most closing costs may be included in the loan amount.

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. A dependent child of an active-duty Servicemember also satisfies the occupancy requirement. 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 refinancing 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 purchaser is a satisfactory credit risk and will assume all of the Veteran’s liabilities on the loan. If approved, the purchaser 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.

Loans made prior to Mar. 1, 1988, are generally freely assumable, but Veterans should still request the lender’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.

A release of liability does not mean that a Veteran’s guaranty entitlement is restored. That occurs only if the borrower 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.

VA Assistance to Veterans in Default

VA urges all Veterans who are encountering problems making their mortgage payments to speak with their servicers as soon as possible to explore options to avoid foreclosure. Contrary to popular opinion, servicers do not want to foreclose because foreclosure costs money. Depending on a Veteran’s specific situation, servicers may offer any of the following options to avoid foreclosure:

  • Repayment Plan – The borrower makes a regular installment each month plus part of the missed installments.
  • Special Forbearance – The servicer agrees not to initiate foreclosure to allow time for borrowers to repay the missed installments. An example of when this would be likely is when a borrower is waiting for a tax refund.
  • Loan Modification – Provides the borrower a fresh start by adding the delinquency to the loan balance and establishing a new payment schedule.
  • Additional time to arrange a private sale – The servicer agrees to delay foreclosure to allow a sale to close if the loan will be paid off.
  • Short Sale – When the servicer agrees to allow a borrower to sell his/her home for a lesser amount than what is currently required to pay off the loan.
  • Deed-in-Lieu of Foreclosure – The borrower voluntarily agrees to deed the property to the servicer instead of going through a lengthy foreclosure process.

Servicemembers Civil Relief Act

Veteran borrowers may be able to request relief pursuant to the Servicemembers Civil Relief Act (SCRA). In order to qualify for certain protections available under the Act, their obligation must have originated prior to their current period of active military service. SCRA may provide a lower interest rate during military service and for up to one year after service ends, provide forbearance, or prevent foreclosure or eviction up to nine months from period of military service.

Assistance to Veterans with VA-Guaranteed Home Loans When a VA-guaranteed home loan becomes delinquent, VA may provide supplemental servicing assistance to help cure the default. The servicer has the primary responsibility of servicing the loan to resolve the default.

However, in cases where the servicer is unable to help the Veteran borrower, VA has loan technicians in eight Regional Loan Centers and a special servicing center in Hawaii who take an active role in interceding with the mortgage servicer to explore all options to avoid foreclosure. Veterans with VA-guaranteed home loans can call 1-877-827-3702 to reach the nearest VA office where loan specialists are prepared to discuss potential ways to help save the loan.

VA Acquired Property Sales

VA acquires properties as a result of foreclosures of VA-guaranteed and VA-owned loans. A private contractor is currently marketing the acquired properties through listing agents using local Multiple Listing Services. A listing of “VA Properties for Sale” may be found at http:// listings.vrmco.com/. Contact a real estate agent for information on purchasing a VA-acquired property.

Preventing Veteran Homelessness

Veterans who feel they may be facing homelessness as a result of losing their home can call 1-877-4AID VET (877-424-3838) or go tohttp://www.va.gov/HOMELESS/index.asp to receive assistance from VA

.

Assistance to Veterans with Non-VA Guaranteed Home Loans

For Veterans or Servicemembers who have a non-VA-guaranteed or sub-prime loan, VA has a network of eight Regional Loan Centers and a special servicing centers in Hawaii that can offer advice and guidance. Borrowers may visit www.benefits.va.gov/homeloans/, or call toll free 1-877-827-3702 to speak with a VA loan technician. However, unlike when a Veteran has a VA-guaranteed home loan, VA does not have the authority to intervene on the borrower’s behalf. It is imperative that a borrower contact his/her servicer as quickly as possible.

VA Refinancing of a Non-VA Guaranteed Home Loan

Veterans with non-VA guaranteed home loans now have new options for refinancing to a VA-guaranteed home loan. These new options are available as a result of the Veterans’ Benefits Improvement Act of 2008. Veterans who wish to refinance their subprime or conventional mortgage may now do so for up to 100 percent of value of the property.

Additionally, Congress raised VA’s maximum loan guaranty for these types of refinancing loans. Loan limits were effectively raised from $144,000 to $417,000. High-cost counties have even higher maximum loan limits. VA county loan limits can be found at www.benefits.va.gov/homeloans/. These changes will allow more qualified Veterans to refinance through VA, allowing for savings on interest costs and avoiding foreclosure.

Other Assistance for Delinquent Veteran Borrowers

If VA is not able to help a Veteran borrower retain his/her home (whether a VA-guaranteed loan or not), the Department of Housing and Urban Development (HUD) offers assistance to homeowners by sponsoring local housing counseling agencies. To find an approved agency in your area, please search online at www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm, or call HUD’s interactive voice system at (800) 569-4287.

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, both the Veteran and spouse must have a meaningful interest in the dwelling or lot, and the tribal authority which has jurisdiction over the Trust Land must recognize the non-Native American Veteran as subject to its authority.

Safeguards

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 new manufactured home) is required to give the purchasing Veteran either a one-year warranty or a 10-year insurance-backed protection plan.
  3. The Veteran obtaining a loan may only be charged closing costs allowed by VA.
  4. The Veteran 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 Veteran becomes temporarily unable to meet the terms of the loan.

 

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