Marcus Marion, CMA™ The Department of Veterans Affairs publishes a policy guide called the “Pamphlet 26-7” that serves as the official VA loan handbook for mortgage lenders. But despite its “pamphlet” name, this guide actually weighs in at well over 600 pages.
But they also publish a slimmer, 52-page handbook that’s specifically geared toward home buyers. It’s called the “VA Home Loan Guaranty Buyer’s Guide,” and you can find it online by searching the title.
Below, we’ve collected 10 important quotes from the VA’s buyer guide, with an explanation of why they matter to you as a borrower.
1. Describing the VA Loan Guarantee
VA loans are a type of government-backed mortgage. Lenders that offer these loans receive extra protection from the federal government, in the form of a partial guarantee.
In short, if a borrower defaults on their loan, the lender can be reimbursed for some of their losses. But this guarantee directly benefits borrowers as well.
Here’s what the VA buyer’s guide says about it:
“The VA home loan guaranty is an agreement that VA will reimburse a lender (such as banks, credit unions, mortgage companies, etc.) in the event of loss due to foreclosure. This guaranty takes the place of your down payment.”
2. Zero Down Payment Option
Elsewhere, the buyer’s guide reiterates the benefits mentioned in the previous quote:
“Remember, the VA-guaranteed home loan features a no down payment option…”
If you use a conventional loan to buy a home, the mortgage lender will require you to make a down payment. The minimum down payment typically ranges from 3% to 5%. For a median-priced ($354,000) home in the U.S., this could add up to nearly $20,000.
But with the VA loan, eligible borrowers can buy a house with no down payment whatsoever. As the above quote explains, it’s the government guarantee that makes this possible.
3. Avoiding Private Mortgage Insurance
“Not having to pay PMI could save a borrower on their monthly mortgage payment.”
This quote highlights another important benefit offered by VA home loans. With a regular mortgage loan, borrowers who make low down payments typically have to pay for mortgage insurance to offset the higher risk.
But the VA loan program does not require mortgage insurance, even if you finance 100% of the home purchase price. This is a major benefit, considering that PMI can add hundreds of dollars onto a homeowner’s monthly payments.
4. Meeting the Lender’s Requirements
This next quote explains how borrowers also have to meet the mortgage lender’s requirements, in addition to the minimum guidelines issued by the Department of Veterans Affairs.
As the buyer’s guide states:
“You must meet your lender’s minimum or standards of credit, income, and any other requirements to approve a loan. VA does NOT require a minimum credit score, but most lenders will use a credit score to help determine your interest rate and to lower risk.”
When you apply for a VA loan, you’ll be working with a bank or mortgage lender in the private sector. The VA does not lend money directly to borrowers, but instead insures the loans made by private lenders.
5. The Mortgage Term Length
You might be surprised to learn there’s not just one type of VA loan. The Department of Veterans Affairs will guarantee a variety of mortgage types, as long as they meet certain underwriting guidelines.
For example, borrowers who use VA loans can choose between a 15- or 30-year repayment period. And there are pros and cons with both of these choices.
As the home buyer’s explains:
“VA loans can be issued for 30 years or 15 years. Shorter-term loans typically have a lower interest rate and lower total cost; however, they also have higher monthly payments.”
The choice here comes down to a matter of priorities. Borrowers who are mainly focused on minimizing the size of their monthly payments typically choose a 30-year fixed VA loan.
On the other hand, borrowers who want to reduce their total interest costs over time might opt for the 15-year VA loan.
6. Fixed-Rate vs. Adjustable VA Loans
“VA loans can be a fixed-rate or adjustable rate mortgage (ARM).”
As this quote indicates, borrowers can also choose between a fixed or adjustable-rate mortgage. And here again, they both have their pros and cons.
A fixed-rate VA loan carries the same interest rate for the full term, even if it’s for 30 years. This option provides the most stability and predictability over the long term, but typically requires a higher interest rate.
An adjustable-rate mortgage (ARM) loan starts off with a fixed interest rate for the first few years, and will then adjust annually after that. So the rate could actually rise over time.
Some borrowers use an adjustable VA loan to secure a better interest rate for the first few years, and then either sell or refinance prior to the adjustment phase.
7. Having Enough Cash for Closing
As mentioned above, you can finance 100% of the purchase price when using a VA loan to buy a house. This removes one of the biggest obstacles to homeownership.
But you’ll still need to save up enough money to cover your closing costs, and those can add up to thousands of dollars. Your mortgage lender will have to verify that you have these funds prior to closing.
As the VA home buyer’s guide states:
“VA requires you to have enough cash assets to cover: closing costs, pre-paid costs, or discount points which are the borrower’s responsibility and are not financed into the loan.”
8. Home Appraisal Requirements
Nearly all mortgage loans require a home appraisal to determine the current market value of the property. This applies to the VA loan program as well.
Mortgage lenders use appraisals to ensure they are not lending more money for a house than it’s currently worth.
When it comes to VA loans, the appraiser will review the property along with comparable home sales in the area. He or she will then issue a Notice of Value (NOV), which goes into the loan file.
As the buyer’s guide explains:
“A VA-approved appraiser will determine a reasonable value of the home. VA can then determine how much, if not all, of your loan to guarantee.”
9. The VA Loan Escape Clause
VA loans require an appraisal. We covered that above. But what happens if the appraiser determines that the house is worth less than the buyer has agreed to pay for it?
In this scenario, a home buyer has several options. They can ask the seller to reduce the purchase price, pay the difference out of their own pocket, or use their “escape clause” to back out of the deal.
All VA home loans require an escape clause. This clause gives you the right to exit the transaction if the appraisal comes in below the purchase price. More importantly, it protects your earnest money deposit, so you don’t lose it.
Here’s what the VA buyer’s guide says about it:
“This clause states that you have the option not to purchase a home when the appraisal’s Notice of Value (NOV) is below the sales contract price.”
10. Minimum Property Requirements
In addition to estimating the value, the appraiser must also make sure that the home meets the minimum property requirements for a VA home loan.
These requirements help ensure that the home is safe, sound, and sanitary. They cover everything from peeling paint to holes in the wall to exposed electrical outlets.
Well-maintained homes in good overall condition typically have no trouble meeting these requirements. But a house that needs serious repair work just to be livable probably won’t qualify for the VA loan program.
Which brings us to our final quote from the buyer’s guide:
“The appraisal provides an appraiser’s opinion of value of the home and whether it meets VA’s minimum property requirements.”
