By their nature, programs developed by the federal government tend to be large, and the VA mortgage program is no exception. Not only are there 4 million VA-backed loans outstanding, but millions of nonveterans have benefited from this program as well.

What makes VA financing unique? There are several major factors:

The VA is not a lender. Instead, it acts as a co-signer to assist qualified individuals who need home mortgages.

Unlike conventional loans that require a 20 percent cash down payment, there is no VA requirement for a down payment unless the purchase price of the property is greater than the VA's estimate of reasonable value or if a lender requires a cash down payment as a condition of the loan. Many VA buyers, however, elect to make a down payment even when one is not required in order to reduce their monthly payments.

There is no VA limitation on the size of a mortgage. Lenders, however, may elect to limit the size of VA financing they will process.

Historically, the VA mortgage program has been seen as a loan "guarantee" rather than insurance on which individuals pay premiums. However, in 1983 the VA began to charge a one-time "funding fee" equal to 0.5 percent of the face value of the loan, money which is paid to the agency at settlement. Whether a "funding fee" is different from an "insurance premium" in anything other than name is difficult to determine.

VA loans are assumable at their original rate and terms, except for a small percentage of loans made through state and local housing agencies that may be assumed only by individuals otherwise qualified to participate in such programs.

VA financing is self-amortizing over a long term, thus there is no balloon payment.

VA-backed loans may be prepaid in whole or in part without penalty.

VA loans are available to those in the service today as well as most veterans with active duty experience since World War II, generally individuals with 90 days of continuous active duty service during war time or 181 days of such service in peaceful periods. In addition, certain other individuals, such as officers in the Public Health Service, also qualify for VA benefits.

The VA mortgage program embodies a guarantee on which lenders rely to reduce their risk. The VA promises to repay up to 60 percent of a loan or a maximum today of $27,500, a figure that represents each veteran's "entitlement."

When the VA program was established during World War II, the initial entitlement was $2,000. By the end of the war, the entitlement figure was raised to $4,000, and it has risen gradually ever since. For VA-qualified buyers, the rise of entitlements means that it is possible to have purchased a home many years ago and still have some entitlement remaining. A purchaser who bought a home for $25,000 in 1960 when the entitlement level was $12,500, for instance, would have a remaining entitlement balance of $15,000, essentially an unused line of credit from Uncle Sam.

It may be possible for a vet to have his or her entitlement reinstated in certain circumstances. A veteran's entitlement could be restored to the full current level when a previous VA-backed loan has been repaid as part of a sale or when a VA-qualified purchaser assumes a VA mortgage and substitutes his or her entitlement to obtain new VA financing. The size of the new mortgage, however, can be no greater than the value of the old loan balance plus any settlement fees required to obtain the new mortgage.

The size of an entitlement becomes important when one considers that lenders usually seek a four-to-one ratio of mortgage debt to equity when making a conventional loan. With a $27,500 guarantee, a lender generally will loan $110,000 to a financially qualified buyer.

To qualify for VA financing, one must possess DD Form 214, a document that is given to veterans at the time of separation from the service, and VA Form 26-1800, "Request for Certificate of Eligibility." These forms, in turn, are used to get a "Certificate of Eligibility" from regional VA offices.

This certificate, which is evidence of the VA's willingness to guarantee a loan, then is given to a lender as part of the loan application process. Veteran buyers should contact the VA before entering the real estate market to be certain that all requisite papers are in order, a process which may take several weeks.

VA loan rates are established by the federal government and are not always equal to prevailing interest levels for conventional financing, a situation that can cause problems. Suppose, for example, that a lender receives two $100,000 loan applications, one from a VA applicant seeking a loan at, say, 12 percent and a second applicant looking for conventional financing at 13 percent interest.

Clearly the lender would prefer to loan money at the higher rate, but rather than not make a loan to the veteran, the lender instead will require more up-front charges for VA financing to raise his yield. The lender, for instance, may charge both the veteran and the conventional applicant a 1 percent loan origination fee. In addition, the lender may want one "point" for the conventional loan but four or five points for VA-backed financing.

The catch here is that, while VA rules will allow the veteran borrower to pay a loan-origination fee, a charge that is not considered interest, the VA will not approve a loan that shows the veteran paying points, a fee the VA does regard as interest. This means that all points for VA financing must be paid by sellers.

While VA mortgages would seem to be in the domain of veterans alone, the VA program actually benefits a far broader scope of the population. Nonveteran purchasers, for example, can assume VA mortgages at their original rates and terms, a significant financial advantage in many cases.

Nonveteran sellers can participate in the program by offering their homes to VA-qualified purchasers. To get VA financing, a home must be evaluated by the VA to determine its economic worth. This means that sellers must obtain a "Certificate of Reasonable Value," an appraisal that may be ordered directly from VA offices by mail.

The VA points out that its economic evaluation is for financial purposes only and is not intended to be a structural inspection. It is therefore possible to buy a VA-financed house that is in something less than pristine physical condition.

The question of when to order a VA appraisal should be of some importance to sellers. Clearly an appraisal will be required to get VA financing, but should an appraisal be sought earlier in the marketing process, before there is a purchaser with whom to deal?

By getting an appraisal just before a home is offered for sale, sellers will at least have the VA's view of what their property is worth. This can be a valuable selling tool if the appraisal meets the expectations of the seller, because property advertising then can be directed toward VA buyers. But what happens if the appraisal is low? Sellers in such situations have spent money for an appraisal that they are not likely to publicize.

If it should happen that the VA appraisal is less than the sales value of the property, the VA will guarantee a loan only equal to the estimated worth of the home. When an appraisal is below the sales value, the VA requires that purchasers have the option to withdraw from the deal, in which case their deposit must be returned in full.

In the event of a low appraisal, two other strategies can be employed. First, a buyer can pay the difference betweem the sales price and the estimated value in cash. Second, the seller can reduce the sales price to the appraised value. As a matter of negotiation, buyer and seller may meet somewhere between these two choices.

In the Washington area, those desiring Form 26-1880 can request copies by dialing 872-1150. Certificates of Reasonable Value can be ordered in writing from the Appraisal Section, Veterans Administration Regional Office, 941 North Capitol Street, Washington, D.C. 20421. This office is open from 8 a.m. to 4 p.m., Monday through Friday. For general information call 275-1400. NEXT WEEK: FHA loans