What is a VA Loan?
As part of our nation’s gratitude to its service members after World War II, the federal government enacted the Servicemens Readjustment Act in 1944. This comprehensive benefits program included new benefits such as guaranteeing funds to start a business, build a home and other new programs. Perhaps the most significant of all these new benefits is the VA home loan program.
This special loan program is available for both purchases and refinance loans with the added benefit of requiring zero money down. There are no other loan programs that offer such an advantage of no money down along with reduced closing costs and easier qualifying when compared to other low down payment mortgages.
In reality, the VA doesn’t actually make the loan yet guarantees part of the mortgage loan to a qualified lender authorized to issue a VA loan. As long as a lender underwrites a mortgage using the VA’s specific underwriting guidelines, the lender is insured up to 25 percent of the mortgage should the loan go into default. For example, if a lender makes a $400,000 loan and the mortgage is foreclosed upon then the lender that issued the original VA loan will be refunded $100,000.
It’s important to understand that a lender who issues a VA-guaranteed mortgage must adhere to the VA lending guidelines and if they don’t then the lender doesn’t get the guaranteed refund. However, even with no money down and relaxed approval guidelines the VA mortgage has historically been the best-performing loan program in the market including loans underwritten to FHA, Fannie Mae and Freddie Mac. These guidelines include things such as being employed, having established credit and exhibiting the ability to afford the monthly payment among others.
For those who qualify and have restricted access to funds to close on a mortgage, the VA loan program is the absolute best choice for financing a home.