The U.S. Department of Veterans Affairs (VA)-guaranteed mortgage guarantee program is specially designed to assist qualified veterans to buy a home with zero down payment.
To qualify for a VA-guaranteed mortgage program, the veteran homebuyer needs to have:
- served at least 90 days on active duty during World War II, the Korean Conflict, the Vietnam era or the Persian Gulf War;
- been discharged or released from active duty for a service-connected disability after September 15, 1940; or
- served on active duty for more than 180 days, after July 25, 1947. [38 United States Code §3702(a)(2)]
Reservists who have completed a total of six years in the Selected Reserves or National Guard are also eligible if:
- they are a member of an active unit, attended required weekend drills and two-week active duty for training; AND
- were honorably discharged;
- were placed on the retired list;
- were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable service; or
- continue to serve in the Selected Reserves. [38 USC §3701(b)(5)]
Individuals who completed less than six years may be eligible if discharged for a service-connected disability.
Others eligible for the VA mortgage guaranty program include:
- the surviving spouses of veterans who died from service-related injuries; and
- spouses of service members who are listed as missing in action or have been prisoners of war for more than 90 days. [38 USC §3701(b)]
An honorable discharge certificate is the veteran’s certificate of eligibility for the program. A veteran without a discharge certificate, or whose discharge was other than honorable, may apply to the Secretary of the VA for a certificate of eligibility. [38 USC §3702(c)]
A VA-guaranteed mortgage is originated and funded by an institutional lender or mortgage banker. The VA merely guarantees payment of a portion of the mortgage if the veteran defaults and the lender suffers a loss on the mortgage.
The amount guaranteed by the VA varies according to the amount of the mortgage as follows:
- for a mortgage of $45,000 or less, 50% of the mortgage;
- for a mortgage over $45,000 and up to $56,250, $22,500;
- for a mortgage over $56,250 and up to $144,000, 40% of the mortgage, limited to $36,000; and
- for mortgages exceeding $144,000, the lesser of 25% of the mortgage amount and 25% of the applicable Freddie Mac conforming mortgage limit for an SFR. [38 USC §3703(a)(1)(A)]
The VA-guaranteed portion of the mortgage varies over the life of the mortgage based on the outstanding mortgage amount.
For example, a veteran borrows $250,000. The Freddie Mac mortgage limit is $417,000. Thus, on origination, the VA-guaranteed repayment is 25% of the mortgage amount, or $62,500. Over time, the veteran makes mortgage payments and the outstanding mortgage balance decreases. Years later, the mortgage balance is $200,000. The VA guaranty now is only $50,000, being 25% of the $200,000 remaining balance. [38 USC §3703(b)]
The portion of a mortgage guaranteed by the VA is the amount of the guaranty entitlement the veteran homebuyer is eligible to receive from the VA.
The maximum dollar amount of entitlement per veteran applies to all VA-guaranteed mortgages made to the same veteran.
For example, a veteran borrows $10,000 on a VA-guaranteed mortgage. The VA guarantees 50% of the mortgage, or $5,000. The veteran still has $31,000 of guaranty entitlement left which they may apply toward future VA-guaranteed mortgages of less than $144,000.
The maximum guaranty entitlement available to each veteran has increased several times since the inception of the VA mortgage guaranty program. With each increase, a veteran who previously obtained a VA-guaranteed mortgage receives an additional guaranty entitlement.
Additionally, if two or more individuals (such as spouses) are each eligible veterans, they may combine their guaranty entitlements to qualify for a larger mortgage on one-to-four unit residential property. However, the property needs to be the primary residence of both veterans. [38 Code of Federal Regulations §36.4308(b)]
Further, even though a veteran may have used their maximum guaranty entitlement to obtain a VA-guaranteed mortgage, they may obtain another VA-guaranteed mortgage in the future.
However, before another mortgage is guaranteed by the VA for the maximum entitlement, the veteran’s guaranty entitlement needs to be restored through a process called reinstatement of eligibility.
Reinstatement of eligibility occurs when the veteran disposes of the property and:
- the previously guaranteed mortgage is paid in full;
- the VA is reimbursed for amounts it paid to a lender for losses on a guaranteed mortgage originated by the veteran; or
- another veteran assumes the VA-guaranteed mortgage and replaces the guaranty entitlement with their own entitlement. [38 USC §3702(b)]
Consider a veteran who bought a house in the early 1970s, and used their maximum guaranty entitlement of $12,500. The maximum guaranty entitlement now available has increased since the early 1970s to $36,000. Thus, the veteran has $23,500 left in entitlement eligibility they may use for future home mortgages of less than $144,000.
If the veteran’s eligibility has been fully reinstated by the veteran paying off the mortgage, the veteran has the full entitlement available to them — up to the lesser of 25% of the mortgage amount and 25% of the applicable Freddie Mac conforming mortgage limit for a single family residence, for a mortgage amount exceeding $144,000.
Financial institutions subject to governmental supervision and mortgage bankers in compliance with VA lender guidelines are allowed to certify mortgages conforming to VA regulations, called VA automatics.
These lenders are allowed to issue certificates of reasonable value (CRVs) which set the maximum mortgage amount and the value of the real estate securing the mortgage, collect fees and deposits and certify the real estate meets the VA’s requirements. Use of a VA automatic lender greatly speeds up the process of obtaining a VA-guaranteed mortgage.
The VA has set credit history standards and income criteria veterans meet to qualify for a VA-guaranteed mortgage.
In determining a veteran’s ability to pay – creditworthiness – the VA uses two income criteria:
- debt-to-income ratio (DTI); and
- residual income, defined as the income remaining to cover family living expenses (e.g. food, gasoline) after subtracting monthly shelter expense. [VA Pamphlet 26-7 Chapter 4.9.e]
To qualify for a VA-guaranteed mortgage, the veteran who does not possess compensating factors needs to meet the income guidelines of:
- a debt-to-income ratioof less than 41% [VA Pamphlet 26-7 Chapter 4.10.b];
- residual incomegreater than the guidelines, which vary based on region and family size; and
- the VA’s minimum requirements for estimated living expenses — for active duty veterans receiving the benefits of living near a base, the minimum residual income requirement is reduced by 5%. [VA Pamphlet 26-7 Chapter 4.9.e]
The debt-to-income ratio is determined by comparing the veteran’s total monthly obligations for housing expenses and any long-term debt to their gross monthly income.
Residual income is an entirely different analysis of gross income from conventional mortgage lending. It is determined by subtracting the veteran’s monthly obligations for estimated income taxes, shelter and other debts from their gross monthly income. The purpose of a residual income review is to ensure the veteran is able to meet minimum living expenses set by the VA residual income guidelines. [VA Pamphlet 26-7 Chapter 4.9.e]
Veterans who fail to meet the income requirements and/or one of the credit requirements are not automatically prohibited from obtaining a VA-guaranteed mortgage. The VA does not limit its creditworthiness evaluation to the published guidelines. Special circumstances may exist which cause the VA to approve a mortgage to a veteran who does not otherwise qualify. [38 USC §3710(g)(5)]
Positive compensating factors possessed by the veteran are considered if their residual income is below VA guidelines or their debt-to-income ratio is above 41%. Positive compensating factors include:
- significant residual income;
- conservative use of consumer credit;
- long-term employment;
- significant liquid assets;
- a large down payment;
- little to no increase in living expenses due to the purchase;
- military benefits; and
- tax benefits of homeownership. [See firsttuesday Form 320-4; VA Pamphlet 26-7 Chapter 4.10.d]
The three basic categories of mortgages which qualify for a VA mortgage guaranty are:
- fixed rate mortgages (FRMs);
- adjustable rate mortgages (ARMs); and
- graduated payment mortgages (GPMs).
The VA imposes separate restrictions on each type of mortgage offered. For FRMs, the VA requires:
- a term of no more than 30 years and 32 days;
- full amortization if the mortgage term exceeds five years; and
- an interest rate mutually agreed to by both the lender and the veteran homebuyer. [38 USC §3703(c), (d)]
For an ARM to be eligible for a VA guaranty, the mortgage adjustment provisions needs to:
- correspond to a specified national interest rate;
- provide for the monthly payments to be adjusted annually on the anniversary of the mortgage’s closing;
- limit interest rate adjustments up or down to one percent per year; and
- establish a life-of-mortgage interest rate cap not to exceed the initial (teaser) interest rate on origination by more than five percentage points. [38 USC §3707(b)]
Further, the VA requires the lender to fully explain the features of the ARM to the veteran homebuyer. Disclosures include a hypothetical payment schedule showing the maximum potential payment increases for the first five years of the mortgage term. [38 USC §3707(d)]
GPMs are also eligible to be VA-guaranteed mortgages, provided:
- the period of deferred interest, called negative amortization, does not exceed five years;
- the total amount of outstanding principal and interest owed on the mortgage will never exceed the value of the property at the time of origination;
- the monthly payments are increased annually on the mortgage’s anniversary date;
- the increase in monthly payments is limited to 7.5% annually; and
- the payments made after the five-year deferred interest period are approximately equal and are sufficient to fully amortize the mortgage over the term remaining on the mortgage. [38 CFR §36.4310(e)]
A GPM will allow a veteran homebuyer to qualify for a larger mortgage than available under a fixed rate mortgage.
Like all mortgage insurers, the VA requires an appraisal of the real estate securing the VA-guaranteed mortgage. The appraisal is prepared and submitted by an appraiser who meets the VA’s criteria. Generally, the VA will approve an appraiser who has at least five years of appraisal experience. [38 CFR §36.4342]
The VA, on receipt of a copy of the appraisal, determines and sets what it believes to be a reasonable value of the property. The VA prepares and sends a CRV to the lender. VA automatic lenders may issue a CRV without sending the appraisal to the VA. [38 USC §3731]
The veteran may agree to pay a purchase price which exceeds the reasonable value set by the VA. However, the VA will only guaranty financing based on the findings of the CRV. The excess in the actual purchase price over the CRV is paid by the veteran or financed separately.
Conversely, the veteran will not be required to make a down payment if the CRV is greater than the agreed to purchase price, since the VA lender will finance an amount equal to the CRV. [38 USC §3710(b)(5)]
VA-guaranteed mortgages are only made on property to be occupied by the veteran or their spouse as their primary residence, or for veterans currently on active duty. [38 USC §3704(c)] This includes:
- the purchase or construction of residential improvements consisting of one-to-four units;
- the purchase of a farm with an existing residence;
- the construction of a residence on a farm owned by the veteran;
- the purchase of a single family residence (SFR) unit in a condominium project;
- the purchase of a manufactured home which is permanently affixed to a lot, or which is to be affixed to a lot owned by the veteran;
- the additional improvements to an existing residence;
- the installation of energy-efficient improvements on an existing residence; or
- the refinance of an existing VA mortgage. [38 USC §3710(a)]
The VA will only guarantee mortgages which are a first trust deed lien on the property, except for home improvement mortgages which may be a second trust deed lien. [38 USC §3703(d)(3)]
Property securing a home construction mortgage, or a home constructed within one year before recording the veteran’s guaranteed mortgage, needs to meet minimum property requirements for planning, construction and general acceptability prescribed by the VA. [38 USC §3704(a)]
Further, a residence constructed after the enactment of the energy efficiency standards in 1992 needs to comply with the VA standards to qualify for a guaranty. [38 USC §3704(f)]
For construction mortgages, the builder, seller or another person designated by the VA needs to warrant the construction will conform to the specifications submitted to the VA for valuation of the property. The construction warranty also protects the veteran homebuyer if the condition of the improvements is misrepresented. [38 USC §3705(a)]
The VA is paid a mortgage funding fee when the VA issues a guaranty. The amount of the funding fee depends on the:
- amount of down payment made by the veteran;
- type of military service performed by the veteran; and
- purpose of the mortgage.
The funding fee, sometimes called a guaranty fee, is often added to the mortgage balance. However, all other closing costs are paid as out-of-pocket expenses of the veteran homebuyer, or paid by the seller. [38 CFR §36.4313]
For a veteran or reservist using their VA entitlement on a purchase-assist or construction mortgage, the funding fees are:
- 2.15% for regular military or 2.4% for veterans of the Reserves or National Guard with a down payment of less than 5%;
- 1.5% for regular military or 1.75% for veterans of the Reserves or National Guard with a 5%-9.99% down payment; and
- 1.25% for regular military or 1.5% for veterans of the Reserves or National Guard with a down payment of 10% or more. [38 USC §3729(b)]
A fee of 0.5% is charged on a no-cash-out refinance which pays off an existing mortgage (VA-guaranteed or conventional) when the refinancing is sought to reduce the interest rate on an existing mortgage. [38 USC §3729(b); VA Pamphlet 26-7 Chapter 8.8.h]
If the mortgage assists in the purchase of a manufactured home, the funding fee is limited to 1% of the mortgage for all veteran homebuyers. [38 USC §3729(b)(2)(G)]
A fee of 0.5% applies to mortgage assumptions.
Veterans who receive compensation from the VA for a service-connected disability are exempt from paying a funding fee. Also, a surviving spouse of a veteran who died while on active duty from a service-connected incident is exempt from paying a funding fee. [38 USC §3729(c)]
These fees are in place through September 30, 2017.
Yes. The VA-guaranteed Interest Rate Reduction Refinance Loan (IRRRL) was created to refinance an existing VA-guaranteed home mortgage, at a lower interest rate. It’s the VA’s version of a rate-and-term refinance. [VA Pamphlet 26-7 Chapter 6.1.a]
IRRRLs may not be used to cash out equity. IRRRL proceeds may only be applied towards:
- paying off the existing VA mortgage and paying closing costs; or
- energy-efficient improvements. [VA Pamphlet 26-7 Chapter 6.1.f]
An IRRRL may not be used to pay off liens other than the existing VA mortgage.
Additionally, IRRRLs need to replace the existing VA mortgage as the first lien on the same property. Second lien holders need to subordinate. [VA Pamphlet 26-7 Chapter 6.1.j]
IRRRLs can be either:
- fixed rate mortgages (FRMs); or
- hybrid adjustable rate mortgages (ARMs).
The IRRRL needs to have a lower interest rate and principal and interest payment than the VA mortgage it is refinancing, unless:
- the IRRRL is refinancing an ARM;
- the term of the IRRRL is shorter than the term of the existing VA mortgage; or
- energy-efficient improvements are included in the IRRRL. [VA Pamphlet 26-7 Chapter 6.1.c]
In any of these cases, the veteran’s monthly payment may increase. If the PITI payment increases by 20% or more, the lender is to:
- determine the veteran qualifies for the new payment; and
- include a certification that the veteran qualifies for the new monthly payment. [VA Pamphlet 26-7 Chapter 6.1.c]
VA Form 26-8923, the IRRRL Worksheet, is used to calculate the maximum mortgage amount available on an IRRRL. The maximum mortgage amount is the existing VA mortgage balance, plus:
- late fees and late charges, if the mortgage is past due;
- allowable fees and charges, up to two discount points;
- the costs of any energy efficient improvements; and
- the VA funding fee. [VA Pamphlet 26-7 Chapter 6.1.e, g]
IRRRLs do not impact the veteran’s use of their entitlement, though the amount of the IRRRL impacts the guaranty on the mortgage.
Yes, IRRRLs may be used to refinance past-due mortgages. However, if delinquent payments are included, the mortgage amount is to be submitted to the VA for approval, even if the lender has automatic authority to make the VA mortgage. [VA Pamphlet 26-7 Chapter 6.1.g]
Before submitting the mortgage to the VA for approval, the veteran needs to provide evidence that:
- the cause of the delinquency has been resolved; and
- the veteran is willing and able to make the proposed mortgage payments. [VA Pamphlet 26-7 Chapter 6.2.a]
The veteran, or surviving co-homebuyer spouse needs to own the property, but they are not required to occupy the property as their primary residence. Thus, the IRRRL can refinance a prior home which is now an investment or second home. [VA Pamphlet 26-7 Chapter 6.1.m]
The VA does not require credit/income documentation or re-underwriting of IRRRLs when the borrower is not the original homebuyer. However, lenders may check payment history, or obtain statements regarding the new borrower’s ability to repay the mortgage. [VA Pamphlet 26-7 Chapter 6.1.l]
| Parties Obligated on Old VA Loan | Parties to be Obligated on new IRRRL | Is an IRRRL Possible? | |
| 1 | Unmarried veteran | Veteran and new spouse | Yes |
| 2 | Veteran and spouse | Divorced veteran alone | Yes |
| 3 | Veteran and spouse | Veteran and different spouse | Yes |
| 4 | Veteran alone | Different veteran who has substituted entitlement | Yes |
| 5 | Veteran and spouse | Spouse alone (veteran died) | Yes |
| 6 | Veteran and nonveteran joint loan obligors | Veteran alone | Yes |
| 7 | Veteran and spouse | Divorced spouse alone | No |
| 8 | Unmarried veteran | Spouse alone (veteran died) | No |
| 9 | Veteran and spouse | Different spouse alone (veteran died) | No |
| 10 | Veteran and nonveteran joint loan obligors | Nonveteran alone | No |
Yes, the California Department of Veterans Affairs (CalVet) mortgage program offers variable rate mortgages to qualified veterans for:
- the purchase of farms, homes, condominiums or mobilehomes; and
- the construction of a home. [Calif. Military and Veterans Code §987.53(a), (b)]
A CalVet mortgage provides a veteran with a variable interest rate which is generally below market interest rates, low monthly payments and flexible credit standards, as compared to conventional financing, or mortgages insured by the Federal Housing Administration (FHA) or VA-guaranteed mortgages.
Mortgage companies certified by CalVet originate CalVet mortgages directly with veterans. Money for the CalVet mortgage program is raised by the sale of California state general obligation bonds.
CalVet mortgages are available to qualified veterans, whether or not the veteran lived in California at the time the veteran entered active duty. [M & V C §980]
When negotiating the purchase of a home, a veteran seeking a CalVet mortgage submits an application to CalVet or a direct mortgage lender certified by CalVet.
California residents who may qualify for a CalVet mortgage include those who:
- served and were honorably discharged, or honorably released from active duty during World Wars I and II, the Korean Conflict and the Vietnam War; and
- citizens on active duty during Desert Storm and Operation Desert Shield or Operation Restore Hope in Somalia. [M & V C §980]
An unremarried surviving spouse of a veteran who lived in California for six months prior to entering active military duty may qualify for a CalVet mortgage if the veteran:
- was killed in the line of duty;
- died after discharge from injuries incurred in the line of duty;
- is being held as a prisoner of war; or
- is designated as missing in action. [M & V C §987.58(b)-(c)]
Once CalVet determines the veteran is eligible for a mortgage, CalVet needs to approve the farm or home the veteran is purchasing, or plans for any proposed residence to be constructed by the veteran. [M & V C §987.59]
If the veteran qualifies for a CalVet mortgage, and the property and the price the veteran agreed to pay for the property are approved, CalVet intervenes in the sales transaction by becoming the purchaser of the property in lieu of the veteran, an archaic mortgage financing documentation often also used to avoid the appearance of charging interest.
CalVet, in a legally fictitious transaction, “resells” the property to the veteran by entering into a CalVet mortgage agreement with the veteran for the amount advanced by CalVet as purchase-assist financing. [M & V C §987.60]
CalVet holds legal title to the property as security for repayment of the loan. The veteran is the actual owner of the property, with equitable ownership. It is a title arrangement similar to a loan secured by a motor vehicle, or a sale of real estate on a land sales contract, or leasing arrangement with title conveyed to the homebuyer on expiration of the lease without further monies due. [M & V C §987.60(a)(3)(A)]
CalVet mortgages are structured as archaic land sales contracts with title vested in the name of CalVet, not the veteran buyer.
CalVet loans are more stringent and restrictive against the veteran-borrower ‘s rights of possession and equity financing arrangements than a mortgage insured by the VA or the FHA.
They are also peculiarly all variable interest rate loans, which should not be the staple of any stable mortgage program sold to anyone and especially not of one that is run by the state government. Along with its more flexible borrower requirements, CalVet mortgages have a higher potential for default than VA-guaranteed mortgages.
To read more about IRRRLs, see the firsttuesday article: The interest rate reduction refinance loan (IRRRL) for VA mortgages.
To read a full comparison of VA, FHA and conventional mortgages, see the firsttuesday article: The most mortgage for your money: VA, FHA or conventional?
To find out more about the CalVet program, go to the program’s website: http://www.calvet.ca.gov.
You can visit the VA-guaranteed mortgage program website, and learn about other veteran benefits, here: http://www.benefits.va.gov/homeloans.
