- The Washington Times - Thursday, November 6, 2003

Patriotic Veterans Day ceremonies aren’t the only way Americans show their gratitude to the millions of men and women who have served our country in the military. Since 1944’s Servicemen’s Readjustment Act (also known as the GI Bill of Rights), veteran soldiers, sailors, Marines, reservists and National Guard troops have been eligible for financial assistance when they want to buy a home.

The Veterans Affairs Loan Guaranty Service also traces its roots to the concluding days of World War II. Since 1944, it has provided 17.3 million home-loan guarantees, according to R. Keith Pedigo, director of the loan service. The loan guarantees are worth more than $780 billion.

Designed to provide housing and assistance to veterans and their families, the VA loan program’s central benefits include a no-down-payment provision and a federal guarantee on the loan for a minimum of 25 percent of the loan amount.

Other loan programs have been created in recent years that require no down payment. But the VA loan still offers consumers some advantages under some circumstances.

“Just in the past fiscal year, which ended Sept. 30, 2003, we generated 490,000 loans,” Mr. Pedigo says. “The total value of these loans for the past year came to over $63 billion.

“The central importance of the program is that is protects lenders against losses and allows veterans to purchase a home without making a down payment,” he says. “The program has had a huge impact on the ability of veterans to buy a home.”

While the basic structure of the VA loan program has remained the same, Congress has made some changes over the years to increase its effectiveness.

“Initially, veterans were eligible for a VA loan for a short time, … but now they have a permanent eligibility, which can be used additional times as long as the first loan has been paid off,” Mr. Pedigo says. “So veterans can use a VA loan to buy a starter home and build equity, and then move onto a larger home with another VA loan later.”

Eligibility for a VA loan varies according to when someone served in the military.

“A complex set of requirements must be met to determine eligibility,” Mr. Pedigo says.

“The simplified version is that generally a veteran must have served 90 days during wartime, which means World War II, the Korean War, Vietnam, the Gulf War and the Iraqi Freedom fight,” he says. “Essentially, from 1990 to today is considered wartime. Peacetime veterans also qualify, with varying time requirements for service. Veterans who served prior to 1980 must have completed 181 days of continuous service, while those who have served from 1980 to the present must have two years of continuous service.”

VA loans are available for new homes and existing homes of any type, and are available as fixed-rate or adjustable-rate mortgages — similar to conventional loans.

“The interest rates for VA loans are market rates which are negotiable with the lender,” says Mr. Pedigo. “We introduced a new program on October 1 called a ‘Hybrid ARM,’ which has an initial interest rate locked for from three years up to 10 years, which at today’s rates would vary from 4 percent to 5 percent. Then at the end of the period, the interest rate would adjust yearly by not more than 1 percent and not more than 5 percent over the life of the loan.”

Lenders are attracted by the VA loan guarantee because they are protected up to a certain limit if they must foreclose on a loan.

“On a $240,000 loan, the guarantee is $60,000, or 25 percent of the loan, but on smaller loans, the percentage varies and can go as high as 50 percent of the loan,” says Mr. Pedigo.

“In 2003, there were 18,500 foreclosures nationwide on VA loans, but our counselors were able to assist an additional 10,500 veterans in avoiding foreclosure,” he says. “We have a large staff at nine regional loan centers who provide counseling to veteran borrowers who have fallen behind on their loan payments.

“If a VA loan should go to foreclosure,” Mr. Pedigo says, “the VA would make up for the delinquency on the loan. For example, an original loan of $240,000 may have reached $270,000 because of the lack of payments and lawyers’ fees incurred by the lender. If that property was sold for $240,000, then the VA would pay the lender $30,000 so they would not have lost any money.”

Veterans interested in applying for a VA loan should first determine their eligibility, then go to their local lender.

Most lenders handle VA loans and often are a good source of information about the program. In the past, some consumers have been concerned that a VA loan would be subject to more red tape or take longer for approval.

“This is a misconception,” Mr. Pedigo says. “We’ve made lots of changes to streamline the process and have delegated as much as possible to the lending community. At the present time, VA loans are processed as quickly as other loans. The speed of the process is up to the lender.”

Although local lenders agree that the VA loan-approval process is not significantly slower than conventional loan approvals, VA loans have certain restrictions that may make them less popular in the Washington area.

First, the maximum loan amount is $240,000 — much lower than the $322,700 ceiling for conventional loans.

Second, the VA loan program requires a funding fee paid by the borrower — usually 2 or 3 percent, depending on eligibility requirements.

Third, there are restrictions on the amount of closing costs to be paid by the buyer, which can force the seller to pay additional fees.

Finally, VA loans require a VA-approved appraiser to certify the value of the home.

“In this particular market, the loan limit has hurt VA loans,” says Glen Lazovick, vice president and area manager for Guaranty Residential Lending. “Even town homes go for $250,000 and up in this area.

“The VA loan limit is the lowest, with even FHA [Federal Housing Administration] loans available up to $269,800 [for a single-family home]. Fannie Mae and Freddie Mac [the Federal Home Mortgage Corp.] have developed 100 percent financing programs up to $322,700,” he says, “but both the Fannie Mae and Freddie Mac 100 percent loans have slightly higher credit standards, so people with bruised credit or too little established credit might be better off with a VA loan.”

According to Robert Gill, a lender with First Horizon Home Loans, “When people come in who don’t have a lot of money plus a credit score which isn’t that great, the first thing I ask them is if they have ever served in the military. In our company, we’ll do VA loans for people with credit scores as low as 585.”

Mr. Gill’s customers are still choosing VA loans because they appreciate the zero-down-payment feature.

“Plus, the buyers don’t have to pay PMI [private mortgage insurance], which helps keep their monthly payments lower,” says Mr. Gill.

Borrowers who choose VA loans must pay the funding fee, but this can be financed into the loan. The funding fee supports the loan-guarantee program, reducing the burden on taxpayers.

“Financing the 2 percent funding fee into the loan means that the real maximum loan amount without a down payment is $235,700,” Mr. Gill says.

In the Washington area’s sellers’ market of the past few years, some concerns have been raised about the willingness of sellers to accept an offer with a VA loan when they have multiple offers.

“In a sellers’ market, a VA loan can be a detriment when going up against someone with a conventional loan,” Mr. Lazovick says.

“First of all, sellers and their Realtors know that the VA-approved appraisers are often tougher and will require more repairs to be made to a property, since it is going to be guaranteed by the government,” he says.

“Second, the VA doesn’t allow certain fees to be paid by the borrower, which works out to be about $500 in junk fees,” Mr. Lazovick says. “Having to pay that extra money at closing can be a deterrent to sellers choosing a buyer with a VA loan.”

According to Mr. Gill, “Technically, it’s illegal for a seller not to accept an FHA or VA loan, but in this sellers’ market, some people have turned them down because they don’t want to spend the extra $400 or $500 in fees.

“Sometimes buyers can just add that little bit of extra to the price of the house and get around it that way,” he says.

A concern some Realtors and lenders share about VA-approved appraisers is that they can be overly conservative on both repairs and the value of a home.

“In a rising market, sellers may be afraid that the price of the home may come in too low,” says Mr. Lazovick. “I’m sure this is a rare example, but a few years ago, a VA appraiser for a home loan of $213,000 came in with a value of $212,500 for the house, so the whole deal had to be redone. The VA appraisers have a reputation of being pickier and generally more conservative on price, which is tough in this market.”

Mr. Gill agrees. “The VA appraisers become quasi-home-inspectors because they are supposed to protect the VA buyers from purchasing a home that will need a lot of money spent on repairs,” he says. “When they find anything wrong with a house during an appraisal, they will expect the seller to make the necessary repairs. If a house is in great shape, then it’s not a problem.”

Although some Washington-area veterans might be concerned about the acceptance of their VA loan by sellers, they can be reassured that the home they eventually buy will be in good condition. In addition, there are other benefits to the VA loan program.

“VA loans are assumable by anyone, whether they are a veteran or not,” Mr. Lazovick says. “That’s an advantage when someone wants to sell their home.”

Another positive feature of the VA Loan Guaranty Program is the availability of streamlined refinancing.

“Once someone has a VA loan, if the interest rate goes down, VA will do the refinancing under our interest-rate-reduction refinancing program,” Mr. Pedigo says. “The process is streamlined so that there’s no appraisal required and no credit underwriting.

“In fiscal 2003, 328,000 veterans got interest-rate-reduction loans, with an average rate reduction of 1 percent,” he says. “These veterans saved a total of approximately $468 million on mortgage payments for the first year of their refinance.”

In addition to servicemen and -women, National Guard members, reservists and surviving spouses of veterans also are eligible for VA loans, with some specific restrictions. Veterans can call 800/827-1000 to determine eligibility for a VA loan and for other details about the program, or they can visit the Web site, www.homeloans.va.gov.

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