New-and-Improved VA Mortgages Look Better in a Difficult Market

By Elizabeth Razzi
Sunday, November 11, 2007

Veterans Day presents an opportunity to take a look at an important benefit available to military veterans and active-duty personnel, the zero-down payment VA mortgage.

Thanks to some needed modernization to the Department of Veterans Affairs program, combined with buyers' growing leverage in the real estate market, VA mortgages have become much more useful than they were only a few years ago. They're even relevant in an expensive housing market like the Washington area.

Considering what some real estate agents have told me recently, though, that news hasn't reached everyone. Some agents remember the VA program of old, which was shunned by home sellers -- and even some eligible buyers -- because it involved red tape, delays, extra expenses for the seller and a low cap on the amount of money a veteran could borrow.

If you are a veteran or active-duty member of the military thinking about buying a home, keep searching for agents and mortgage lenders until you find some who are up to speed with the modern VA program.

"We've been doing a lot of VA recently, especially the last year or so," said Brett Steiner, a manager with Weichert Financial Services in Burke.

Judy Caden, director the Department of Veterans Affairs Loan Guaranty Service, said the program guaranteed 133,000 loans nationwide during the fiscal year that ended Sept. 30. That's down nearly 73 percent from the 2003 peak, when many veterans refinanced to get lower interest rates. "We are thinking we'll get an uptick," she said, citing the credit tightening in the overall mortgage market.

David Billups, an associate broker with Long & Foster's Lorton office, said sellers are much more willing to accommodate extra expenses associated with a buyer using a VA mortgage. "The market is getting more difficult, so sellers are happy to get a bona fide offer on the property," Billups said.

"It is a tool that is probably going to be used more now that some of the no-money down mortgages have dried up," he said.

VA mortgages were practically mothballed during the real estate boom. Many buyers who qualified for the VA guarantee instead found it easier to take a subprime loan that required no down payment and little documentation of income or assets. Lenders were offering easy terms such as interest-only payments, which are not available through the VA program.

Sellers shunned offers from buyers who intended to use a VA loan because the program's rules prohibit buyers from paying some closing costs, such as the home inspector's fee. Sellers can expect to pay such expenses if their buyer is using a VA loan. The program also had a well-earned reputation for delays and red tape, which caused closings to drag on weeks longer than with a non-VA loan. If a seller was holding two or three competing offers for a home, why bother with the one that required a little extra time or expense? Oh, but how a buyers' market changes that attitude.

The government does not lend the money for VA mortgages. Properly, they are called VA-guaranteed mortgages because the government provides lenders a guarantee in lieu of the veteran's cash down payment. If the veteran fails to pay back the loan, the lender can collect on that guarantee.

With that government assurance, participating lenders are willing to give borrowers loans for the full price of their homes. VA mortgages do not require the private mortgage insurance that is usually necessary for loans with little or no down payment. The absence of PMI saves borrowers hundreds of dollars each month.

Qualified veterans and active-duty military personnel can buy a home for as much as $417,000 without a down payment or private mortgage insurance. Borrowers can add some down payment money to the mix and use the VA program for homes that cost more than $417,000.

Larger VA loans may become more common now that the Government National Mortgage Association, known as Ginnie Mae, which packages VA loans for the secondary market, has changed its rules to allow larger VA loans if the borrower makes a down payment for at least a 25 percent of the portion of the home's price that exceeds $417,000.

"Chase will actually lend up to $1 million for VA, not that anyone is lining up for that. What this is doing is opening up that $500,000 to $600,000 price range to VA mortgages," said Dave Morton, a senior loan officer with Chase Mortgage in Fredericksburg.

If a veteran were to buy a $500,000 home, for example, the first $417,000 would require no down payment. For the remaining $83,000, the veteran would need to make down payment of 25 percent, or $20,750. All together, the veteran would be making a 4.15 percent down payment on a $500,000 home, without owing PMI.

Borrowers do have to pay a funding fee at closing that ranges from 1.5 percent to 3.3 percent of the loan amount, depending on whether it's the first time they have used the program and whether they make a down payment. For a veteran of the Army, Navy, Air Force or Marines, buying for the first time with zero down payment, the fee would be 2.15 percent of the home's price. For veterans of the reserves or National Guard, it would be 2.4 percent. The fee is waived for veterans with service-connected disabilities.

The fee can be rolled into the loan balance and paid over time. But, considering buyers' extra leverage in negotiations these days, some sellers might be persuaded to pick up that fee along with other closing costs.

The hassle factor long associated with VA mortgages is greatly diminished now, according to people who have worked with the program. Steiner from Weichert Financial Services said lenders can order appraisals by computer and get a quick turnaround. "They've really sped up the process and eliminated a lot of the headache involved with going with VA," he said.

Caden said her department has been streamlining and automating its procedures since the mid-'90s. "We're telling Realtors and lenders that if they haven't made a VA loan in many years, it's quite different."

Veterans and active-duty personnel can go to for more information and to apply for a certificate of eligibility, which they need to start the VA mortgage application process.

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