What is a VA loan guaranteed mean?
They say that there are certain guarantees in life that everyone can expect; death and taxes. But in the world of lending there are other guarantees that are provided by the federal government. One of these guarantees is issued by the Department of Veteran’s Affairs, the VA, and helps lenders feel better about approving a VA loan application.
There are two types of mortgage loans available today, conventional loans underwritten to Fannie Mae and Freddie Mac standards and government-backed loans such as VA, FHA and USDA programs. Conventional loans receive no guarantee but conform to previously established lending guidelines set forth by both Fannie and Freddie.
Government-guaranteed loans are also underwritten to established guidelines but the VA takes it one step further. As long as a lender underwrites and approves a VA loan application using current VA guidelines, the VA will guarantee 25 percent of the loan to the lender should the loan ever go into default.
For example, a borrower takes out a VA loan for $200,000. Later, the loan goes into default and the lender must foreclose. The lender will receive from the VA 25 percent of the loan amount, or approximately $25,000 as compensation. As long as proper VA lending protocol was followed and there was no fraud involved, the VA lender is eligible to receive their guarantee.
A guarantee however does not mean that a borrower is guaranteed to get a loan approval. A VA borrower must go through similar loan approval procedures as other mortgage programs do. VA borrowers must have established a good credit history, full time employment and demonstrate they can afford the new monthly payments.
However, the VA loan guarantee is rarely needed, as VA loans historically have the lowest default rate of any loan program in the market today. But let’s be clear, the loan guarantee is a guarantee to the lender, not the borrower.