Paycheck Chronicles

Why A VA Loan Isn't Really A VA Loan

In a recent Facebook post, linked to the 2015 loan limits for mortgages that are obtained through the Department of Veterans Affairs (VA) home loan program.  Several comments made me realize how confusing VA loans can be if you don't understand how they work.  One commenter stated, "It is NOT a VA loan. It is a loan guarantee, more akin to having a co-signer."

That commenter is half right, and half wrong, and I'd like to talk about both parts.

The Name

The official name of the home loan program that allows veterans to obtain low down payment loans with a guarantee from the VA is the VA Home Loan program.  It is a program, run by the VA, that encourages banks and credit unions to grant home loan mortgages to eligible veterans with different eligibility criteria than standard loans.

The VA does not make the loan, so I understand why the commenter objects to the name.  But what would be a more sensible name?  The VA-makes-the-rules-and-guarantees-the-loan Loan?  That's a little ridiculous.  If you understand everything else, the VA Home Loan Program is a perfectly reasonable name.

The Program

Here's the part that many people don't understand.  As the commenter said, the VA does not make the loan.  The bank or credit union lends their own money (well, technically someone else's money, but that is a whole different issue) based upon the rules of the VA program, and the VA guarantees a portion of the loan amount.  Because the VA is guaranteeing a portion of the loan, lenders are willing to use the less stringent rules and allow loans with no or little down payment.

However, just because the VA encourages these loans, it doesn't mean that you're guaranteed to be approved.  Borrowers have to meet both VA and lender requirements, including credit histories, debt-to-income ratios, and property values.  However, VA guidelines are more flexible than the criteria used to evaluate traditional loans.

Use of a VA loan guarantee requires that the purchasers pay a funding fee to the VA.  This funding fee, which varies based upon certain circumstances, can be rolled into the loan amount.  However, you have to consider the VA funding fee when considering the total cost of the loan.

VA guaranteed loans are a great tool to help some homebuyers who might not otherwise be able to obtain credit to purchase a home.  However, those with outstanding credit and a large down payment may find that a traditional loan that offers better rates or lower fees.

Understanding how a VA guaranteed loan works will help you to make a good decision about whether a VA loan is right for your situation, and will make the application process easier.

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