The VA Loan Guaranty is something that works to your benefit as a veteran because it gives lenders more confidence in the loans they provide. A truth about VA loans that you might not know is that the VA does not fund the loans – the lender does this part. So the VA has a say in what you need in order to qualify for the VA loan, but the lender has the final say after you meet those requirements. That being said, the VA also has a lot at risk because they guarantee the loan; this means that they pay the lender a portion of the money they lost should a veteran default on their loan.
How Much Does the VA Guarantee?
Typically, the VA guarantees 25% of the loan amount you take out for your home. This is all based on the amount of the entitlement you have. Most veterans are entitled to at the very least, basic entitlement. This equals $144,000. Of this $144,000, the VA guarantees $36,000.
Generally, $144,000 is not enough to purchase a home. If you live in an area where you could never touch a home for that amount of money, there is a bonus entitlement available. Every county has a maximum bonus entitlement that borrowers are entitled to and it is based on the average cost of living in the area. Many counties meet the conforming limit of $417,000, which means the entitlement equals an addition $68,250.
The total entitlement allowed in this situation would equal $104,250. That is how much money the lender would be eligible to receive should the veteran default on his loan. Of course, different counties have different maximums, so the amount of the guarantee would differ in those areas.
Low Foreclosure Rates
Something that most lenders rely on is the fact that VA loans have the lowest foreclosure rate out of any type of loans. Their foreclosure rate hovers around the 2 percent mark, which is unheard of in any other mortgage program. This is why many banks will allow veterans to have the zero down payment loan without too much worry.
Even if a borrower were to get into financial trouble despite the efforts of the VA to ensure that there is ample disposable income in the monthly budget, there are many efforts the VA takes to help get a borrower back on track. Some of these tactics include:
- Negotiating with the lender to create a repayment plan
- Modifications to the mortgage/note
- Miscellaneous alternatives
The VA will work on the behalf of the veteran to help him work out a solution with the servicing lender so that the borrower does not lose his house and so that the VA does not have to bail the bank out.
The VA Loan Guaranty has no Impact on You
The good news is that the VA Loan Guaranty does not make it more difficult to secure a loan. In fact, it is easier to obtain a VA loan that most other loan programs because of the guarantee the VA provides to the lender. Generally, the lender will look at the following:
- You must have enough service time in order to qualify; this typically means at least 90 consecutive days during wartime and 181 days during peacetime
- Proof of stable income
- Meet the disposable income requirements for your area
- Credit score over 620 in most cases, however, the VA does not enforce this
- No more than one 30-day late payment in the last 12 months
- No outstanding collections
- 2 years must pass from a bankruptcy discharged
- No federal debt liens
- 3 years must pass from a foreclosure
- All child support payments must be current
If you can meet the above requirements and have the entitlement to a VA loan, the rest of the process is fairly simple. As stated above, however, the lender might have additional stipulations in place if your loan application looks risky to them.
The VA Loan Guaranty is a positive thing as it helps you to get approved for VA funding. Without the backing of the VA, most banks would probably not provide the 100% financing that they provide to borrowers that are eligible for this loan program. Inquire about the maximum loan guarantees in your area to determine the size loan you might be eligible to receive.