by Jessica P. Beganski 

When Brandon and Jamie Creamer decided to buy their first home, they weighed several financing options. They chose to take advantage of their military service and apply for a VA loan. Brandon, on active duty in Iraq, and Jamie, a former member of the Army National Guard, met the eligibility requirements for VA and decided it was their best option. 

The VA loan afforded the Creamers the opportunity to purchase a home at a good interest rate, put no money down, and pay no mortgage insurance premiums, but VA loans can come with additional headaches that have given these types of loans a bad name– something the Creamers experienced firsthand. Here’s what you should know about VA loans when deciding what type of loan is right for you:

What is a VA Loan?

The VA loan program has been around since the end of WWII and was designed to provide veterans with more homeownership opportunities. The Veteran’s Administration does not actually lend money; rather, the VA guarantees loans that are made by private lenders. 

There are no actual loan limits for a VA loan, but most lenders limit the amount that can be borrowed to $417,000 and no more than 100% of the VA-established reasonable value of the property (determined by the appraiser hired by the VA). Loans can be for single-family or owner-occupied multifamily homes, including new construction.

Who’s Eligible?

In addition to veterans, VA loans are accessible to active duty and reserve personnel as well as the unmarried spouse of a veteran who died in service or from a service-related disability. The VA has a very detailed list of its rules for eligibility based on status, time served, and whether service was during peacetime or war, among others. Visit its Web site at www.homeloans.va.gov for more information.

To obtain a VA loan, an applicant must get a Certificate of Eligibility, either from the VA directly or through its lender, who can apply for the certificate by using the ACE (Automated Certificate of Eligibility) system. To obtain the certificate from the VA, an applicant can fill out VA form 26-1880 and mail it along with proof of military service to a VA eligibility center (the center that serves New England and New York is located in Manchester, New Hampshire). 

Once a certificate of eligibility is acquired, an applicant must meet additional criteria, including credit and income levels. According to the VA, borrowers do not have to have a minimum credit score but do have to demonstrate between twelve and twenty-four months of good credit history (no late or delinquent payments in that period, for example). Furthermore, borrowers without any credit history at all may obtain a VA loan.

The Advantages of a VA Loan

Generally, VA loans offer homebuyers the following advantages:

• No down payment, unless the lender requires it or the purchase price is greater than the value of the property
• Interest rates are negotiable and often more attractive than other 100% financing options.
• Closing costs are limited and may even be lower.
• Closing costs may be financed by the buyer or paid by the seller.
• No mortgage insurance premiums (Usually required when borrower is financing more that 80% of a home’s purchase price)
• VA loans are assumable. 
• There is no prepayment penalty. 
• Various payment options: 
  • 30-year fixed rate–payments steady over life of loan 
  • Graduated Payment Mortgage–low initial payments that increase over life of loan 
  • Growing Equity Mortgage–gradually increasing payments with the increasing amounts going directly to principal, which results in early loan payoff 
  • Traditional and Hybrid ARMs are also available.
• New construction is covered by either a builder’s one-year warranty or a one-year insured protection plan.

For first-time home buyers who usually don’t have enough money saved for a down payment, a VA loan can be a great option, but there are some downsides to using a VA loan.
While there was no question that a VA loan offered Brandon and Jamie the best deal in comparison to other loans, they had concerns about buying a home with a VA loan. VA loans, much like other government-backed loans, have suffered from bad publicity over the years because of red-tape issues.

The VA has made terrific progress in streamlining the loan process. VA loans can close just as quickly as other loans, typically within thirty days, but two issues still detract from its use–the Funding Fee and the VA appraisal guidelines.

VA Loan Funding Fee 

Except in the case of disabled veterans, all VA loan borrowers must pay a VA loan funding fee. This fee can range from .5% to 3.3% of the total loan amount and must be paid at the time of closing, either in cash or by including the amount in the loan. For most borrowers, though, the funding fee does not outweigh the other benefits.

Rigid Appraisal Guidelines

Brandon and Jamie located a house they wanted to buy and made an offer that was accepted. Their purchase price included a seller’s contribution to pay for all of their closing costs, and the Creamers got their deposit back at closing. The seller and the seller’s agent did not even question the use of a VA loan, which is not always the case. 

Up until this point, their home purchase went as smoothly as possible–that was until the lender’s appraisal indicated that repairs had to be made to the property prior to closing. While most lenders require an appraisal for loans that are financing more than 80% of the purchase price, VA has very specific guidelines that appraisers must follow which are more stringent than other loans.
In the case of the Creamers, the appraiser was concerned about the septic system and required that 1.5 times the cost of repairs to the septic system be put in an escrow account. This requirement delayed the closing by several days and put everyone on edge. 

While the appraisal is not a property inspection, the appraiser does note items that are of a health and safety concern or could mean a major expense for homeowners, which would cause them to default on their mortgage. In a strong seller’s market, when there are more buyers than sellers, real estate agents may advise home buyers against using a VA loan because buyers are in a competitive disadvantage compared to other buyers whose loans will not require the appraiser to adhere to these stricter guidelines.

Would They Go VA Again?

Despite the delay in their closing date, Brandon and Jamie were satisfied with using a VA loan. According to Jamie, “I would absolutely use a VA loan again in the future if it was an option. It was actually easier then I expected.”

Jessica P. Beganski is a licensed Realtor ® with A Buyer’s Market, LLC. She may be reached at 860-648-9637 or jessica@buyeragentct.com.