The VA Loan Guarantee
There are two primary types of mortgages available today, conventional and government-backed. Conventional loans are underwritten to lending guidelines established by Fannie Mae and Freddie Mac. Government-backed home loans are loans using FHA, USDA and VA guidelines and are “guaranteed” by the federal government.
First, it does not mean that the government will guarantee you, the veteran or qualified service member, a VA loan. When a veteran is eligible for a VA home loan, an accompanying VA Certificate of Eligibility must be included with a VA loan application. If a borrower has that certificate, then VA home loan eligibility is verified.
But that does not mean the borrower is automatically guaranteed to get a VA home loan. Borrowers must still qualify based upon sufficient income, established credit and other qualifying factors.
The VA guarantee is a guarantee to the VA lender who issues the initial VA loan. The guarantee is equal to 25 percent of the home loan issued. If the VA loan approved is $400,000, the VA will guarantee one-fourth of that, or $100,000, to the lender should the loan go into default.
This doesn’t happen very often as VA mortgages outperform all other home loans in the marketplace and have the lowest default rate. But this is the VA guarantee. As long as the VA lender approved the VA loan application using established VA lending guidelines the lender is eligible to be compensated should the loan ultimately be foreclosed upon.
This guarantee is mostly funded by the VA funding fee that is included with all VA home loans with the exception of VA mortgages issued to borrowers receiving disability payments from the VA. The funding fee amounts to 0.5 percent to 3.30 percent of the loan amount, depending upon the status of the VA loan.
VA lenders love making VA home loans due to not only their quality but the backing they receive from the federal government. That’s the real guarantee.