Why A VA Loan Isn’t Really A VA Loan

Veterans Affairs administration.

In a recent Facebook post, Military.com 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.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • Guest

    Actually, it is named the VA Home Loan Guaranty Program.
    Which actually means what it says, for those with financial acumen.

    • Kate

      Guest, that makes sense, but I’ve only seem it referred to that way in a few documents. Could you give me a source that explains how that is the official name? I spent hours searching the VA website, and I only see that phrase used once.

      I appreciate your help!

  • Guest

    http://www.thefreedictionary.com/guaranty
    guar·an·ty (găr′ən-tē)
    n. pl. guar·an·ties
    1. A promise to be answerable for the debt or obligation of another in the event of nonpayment or nonperformance.

  • guest

    which the VA does guaranty they will be liable for a percentage of the loan. They do not guaranty that you will be qualified for the loan in the first place. Bad credit or a high DTI ratio is on the applicant not the VA. If you cant pay your bills your certainly aren’t going to be able to afford a mortgage and all the wonderful bills that come with it.

  • Ali

    Wow, I’ve known this for YEARS!

  • Elizabeth Hardy

    Basically most Veterans will never use their VA Loan quote un quote because are credit was damaged by numerous deployments .. And the criteria to get approve for these VA Loan guarenteed are stringent…it SUCKS!!
    Especially because most of us can afford the loan payments and are paying someone else rent!!

    • Kate

      Elizabeth, why would someone’s credit be damaged by a deployment? The criteria to be approved for a VA loan are significantly lower than traditional loan, but there still have to be criteria or the program would go bankrupt.

    • chet

      Hold your horses Elizabeth. You are so wrong. There rules are NOT that stringent and if your credit score(FICO) is above 600 most probably you will qualify if your income and debt to loan ratio is not too bad.

      • Cory

        You have to have a minimum of 2 credit scores above 620 to qualify for a VA loan. There are some lenders that want you to have 2 credit scores above 640. VA doesnt set the credit score requirement, the lender does. I had to shop around for a while to find one that does 620 and up. There are some that even want you to have 660 or 680 and up. Plus your max limit for a house can vary on the lender. One lender wouldnt give me a loan over $175k while another approve me up to $350k. I had the same income but their formula they use to calculate what I can afford varies per lender. I had zero debt at the time. What really makes the difference is they cant make their program calculate tax exempt income correctly. So they have to put your income on the formula higher than what it is to make up what the program will take out for taxes.

        • MIKE

          I AM A 100%DISABLED VIETNAM VETERAN.
          I DO NOT PAY TAXES.
          I DO NOT HAVE AN INCOME,
          I HAVE BENEFITS + SS.
          YOU CANNOT BELIEVE HOW HARD IT IS TO GET
          PEOPLE TO UNDERSTAND!!!!!
          BR
          MIKE

          • WES

            I am a DAV myself of 100 percent, I dont have SS, I have a house in DC, and bills up my asss, total of about $4,000.00 a month, I have to rob peter to pay paul, but yes, that was my doing, buying car with a warranty (5,000) (dum on my part), I used my credit card to pay for the car and fpr the warranty, then pay for new tires and rims, another 4,000. so right now I am not paying them, and they went to creditors to make a deal, so out of 10,000 I made a deal to pay 3,000. great saving but my credit is SHOT!

      • not you

        Youneed a score of 640 and its a pain to get. It is like everything else government related its a pain to use and debatable weither or not it’s worth it.

        • Eileen

          We are going through the VA loan process right now and as we learned how the specific loan process works,it isnt as horrible as you make it out to be. As for your credit score, check it regularly. The are very easy ways to raise it on your own by just disputing simple things you prob didnt know was on it in the first place. Second, lenders can help you raise your score to get a better interest rate or even qualify for a loan to begin with. Yes, each lender is different on what they approve a loan amount for and what the min debt to income ratio they will accept. Best is to find a lender that deals with VA loans regularly and has a good reputation. ON a side note, deployments do not kill you credit, it is actually a way to get out of debt, if you dont have an unreliable spouse stealing it at home. The individiule has to take control of their own finances and be responsible. I built up my next egg and payed off my bills. YOU have to make a plan and stick to it before you leave.

    • James Iooss

      Find a good loan officer in the area you live and he will guide you on how to resurrect your credit. VA and the lenders will work with you to show that the multiple deployments may have contributed to your derogatory credit. They will also be able to demonstrate if you had respect for your credit when you were not deployed. Many credit challenges can be overcome in 6 to 12 months if you truly want it to happen and good things are worth working for.

  • Marine64

    Some people are not aware of the fact that the VA waivers the funding fee if the borrower has a high disability rating. I have a 70% rating and my fee was waivered (which was a substantial savings and a reason why many do not take out a VA guaranty home loan. I believe that 50% disabled is the point where the waiver applies, but not sure.

    • astonerii

      30%

    • Rob

      I have a service connected disability rating of 40% and the funding fee was also waived. I close escrow Feb 6, 2015.

      • Zelma Bussey

        I need some help with getting a VA lone

        Please contact me.

        Help

    • Kate

      I believe it is any level of disability as long as the disability is rated as service-connected, based upon the information available at the va.gov website: http://www.benefits.va.gov/homeloans/purchaseco_l

    • James Iooss

      You only need a 10% disability rating to waive the complete funding fee. Secondly, subsequent use of your VA benefit will also waive the complete funding fee if the prior VA loan is paid off or VA eligibility is transferred to another Veteran

    • Guest

      10 % or above disability s the standard

  • David H

    Nor is is necessarily a good loan ether as while I am qualify as i am a vet I also had excellent credit and a good job when i bought my house so I fond the VA loan terms terrible and got a loan on the open market with lower fixed interest rate by 4 points

  • Frieda

    What happens when the Vet dies?? What happens with the loan can the spouse continue the loan?

    • astonerii

      If you have a great loan rate you can even sell the home and have a non military/vet take over the loan as long as they have sufficient income and credit worthiness.

      So, yes, your family can continue paying the loan and keep the house.

  • Vern Clrk

    Have a question,
    Can a military disabled son with a VA loan have his dad assume the loan for a period of time while the son relocated
    s to another area and wince the son is established in new location reassume the loam

    • Kate

      Vern, the son may continue to maintain the loan and make payments with the money that he is receiving from his dad. Does that answer your question? If the son wants his father to formally assume the loan, that can be done, but it seems like a lot of paperwork and effort to meet your goals.

  • Willie C. Coleman

    What help is available from the VA when their own personnel assists a lender to foreclose on a vet’s property that is an illegal foreclosure. After foreclosure the courts reverse the action as illegal, but VA nor the lender notifies the vet that the action has been reversed. As a result, the vacated property sits un-occupied for 5 years while the vet has to suffer the financial and personal loss. The vet and his spouse are both disabled, as are their 2 sons who lived with them. After all the efforts by me to find someone to look at this situation, the property is now scheduled for foreclosure again, with me as the owner who is being foreclosed on. This is an unbelievable horror story the no on will believe, but my family has lived this story since 2001.

    • Kate

      Mr. Coleman, I am sure that people believe you. However, without knowing all the facts of the case, I don’t want to comment on it. I hope you have retained a good lawyer to help you through this situation. If you can not afford a lawyer, all jurisdictions have free legal aid societies that can help. Good luck to you.

  • William Franklin

    If you are 100% disabled, the funding fee is supposed to be waived.
    Melbourne, FL

  • Roger

    I was approved for a VA loan of $100,000 and put an offer on a house for $88,000. I was the high bidder but the bank owned property asset manager will not order a VA appraisal because he thinks the property will not pass the VA appraisal. I could not find a thing wrong with the house. The bank only wants cash or a large down payment. Is this discrimination?

    • Alice

      Roger, are you sure you have someone who specializes in VA loans? Everyone who offers VA loans are not specialists in VA loans. Be careful with that. I got my loan with Veterans United Home Loans. They were awesome and they specialize in VA loans. You can ask as many questions as you like. They take there time to make sure you have an understanding. They approved me for $300K. I didn’t use all of that and they made it so easy. You can speak with Adam Carr or Mike Mange. I think they can help you.

      • Robert Anderson

        Roger, I don’t know if you are familiar with USAA or not but I got my V A Home Loan through them. It took approximately 20 minute of my time filling out the application and I had an answer in something like 5 minutes confirming my loan. I asked for $165,000.00 and we bought the house for $161,000.00 which is what the VA appraised it for. USAA was established by some military officers to help veterans and has a large line of offerings. They are also very easy to join and one the military member or veteran is a member then our children are also eligible for membership.

  • OldSubGuy

    I’ve always heard it called a “VA guaranteed loan” or “VA guaranteed mortgage”, even the banks I’ve dealt with from the middle 1990’s until now call it that. Never heard it called a “VA loan” until recently. Sounds like someone decided to change the name just for something to do?