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VA Loans: An In-Depth Guide

VA Loan Guide

WHAT ARE VA LOANS?

VA loans are mortgages guaranteed by the US Department of Veterans Affairs (VA).

It’s easy to get the impression that the VA actually lends money to veterans since “VA” is right in the name of many loan products geared toward folks who’ve served our country. But the Department does not actually shell out any money. Instead, borrowers take out mortgages from private-sector institutions like banks, credit unions and mortgage companies.

Ok, so then what the heck does the VA do?

First, they provide loan guarantees to lenders. These guarantees determine how much is paid to the lender — like a form of insurance against losses — should borrowers not pay the mortgage back (default on their loans).

Second, the VA sets the guidelines (or rules) for several mortgage products that bear the letters “VA” in the name. The rules say whom is eligible and how much guarantee backs up each loan. The VA’s guarantee is based on the total amount of the mortgage. The guidelines also determine what kind of dwellings vets can buy (house, condo, etc.) Lenders follow these VA guidelines and then issue the final “yes” or “no” regarding borrower applications. Just so you know, lenders set interest rates as well.

The VA guaranty allows lenders to loan money at favorable terms (i.e. lower interest rates) and eliminates the need for a borrower to make a down payment. It’s a zero down loan.

In plain English, the VA sets up a bunch of guidelines and oversees a program that says to lenders, “Hey, follow our rules and we’ll guarantee part of each loan you make to a veteran.” Guidelines are set up for purchases as well as refinances.

VA LOAN HISTORY

President Franklin Delano Roosevelt signed the Servicemen’s Readjustment Act in 1944. You may know that piece of legislation’s more common name, the GI Bill.

The intention of the GI Bill was to compensate veterans for wartime service. After WWI, the treatment of vets and the benefits owed to them had been a thorny political issue. During WWII, politicians thankfully decided take a proactive approach to these questions. On June 22nd, 1944 — roughly one year after D-Day and one year before the end of WWII – Congress sent the GI Bill to the President’s desk where he signed it into law.

Here’s a cool bit of trivia: The first draft of the GI Bill was literally dreamed up and written down on stationary and a cocktail napkin at a Washington D.C. Hotel. The final legislation included several benefits, including:

  • Low cost mortgages
  • Low interest business loans
  • Education tuition and living expenses
  • Unemployment compensation

The GI Bill did a lot more than just recognize service and service for their service, it massively transformed American society.

Education benefits created a post war labor force of highly-educated, technical workers that fueled the rise of the middle class. Mortgage benefits made many Americans first time homeowners. Another by product of zero-down, low interest rate VA loans was the migration of post war families from city apartments to suburban homes. So yeah, the GI Bill indirectly created suburbia.

VA LOAN ELIGIBILITY

A lot of people assume VA loans are just for veterans or only for vets who served in wartime combat roles. In fact, VA benefits are extended to a much wider pool of potential homeowners. The US Department of Veteran’s Affairs helps active military, Servicemembers, veterans, and eligible surviving spouses become homeowners.

The original 1944 version of the GI Bill defined benefit eligibility for active duty, wartime veterans. Over the years, benefits were extended to peacetime veterans. The VA expanded eligibility during each successive war (Korean, Vietnam, and Gulf Wars) as well as postwar, peacetime periods. Reservists and National Guard personnel were added in the early 1990s. Spouses of military members who died while on active duty or as a result of a service-connected disability were also brought into the fold. Not everyone knows this, but if you’re currently active duty, you may apply for a loan. It’s not just for veterans.

Here’s a high-level look at who may be eligible. Only one of the following criteria would need to be met:

  • You are active military
  • You served 90 consecutive days of active service during wartime
  • You served 181 days of active service during peacetime
  • You served more than 6 years in the National Guard or Reserves
  • You are the spouse of a servicemember who has in the line of duty or as a result of a service-related disability

Amazing fact: Over 20 million VA loan guarantees have been provided since 1944. Currently, there are 1.9 million outstanding.