VA guidelines VA loans

How the VA Loan Guaranty Works

February 7, 2011


How the VA Loan Guaranty Works

First time borrowers and newcomers to the VA home loans program learn a lot about the VA loans process when starting the process. Certain myths have to be dispelled–the most popular one being that the VA itself is the source of home loans.

Another area that often needs explaining is how the VA loan program makes military borrowers more attractive to a lender. Consider this blog post a primer for first-time borrowers. Real estate agents and lenders know this information already, but it makes a handy introduction to the world of VA mortgages.

The VA loan program is a benefit for those who have served in the military.

Once a veteran has served the minimum required time on duty they become eligible to apply for the program, where the Department of Veterans Affairs agrees to insure a home loan for qualified borrowers. That insurance is basically a promise to the lender to pay if the veteran defaults on the loan and the home goes into foreclosure.

The next level of detail is where some borrowers get a bit lost. The VA does not insure the entire loan amount. Instead, it offers a maximum guaranty equal to 25% of the total loan amount to qualified borrowers in the right circumstances.

That’s one reason why the borrower must still apply to the lender for credit and submit background information the same as with a conventional home loan. The lender still takes a risk, however offset by the VA loan guaranty, and must exercise due diligence to make sure the borrower is able to repay the loan.

In the event the borrower does default on the VA loan and go into foreclosure, the lender files a claim with the VA. In such cases the buyer is not off the hook–if the VA paid a claim on their behalf, the buyer owes money to the government. if the veteran wants to apply for another VA home loan they must first clear up any indebtedness to the VA for the first loan before entitlement can be restored.

  1. David F. Hancock

    I am a Vet. from the Korean conflect/war. In 1961, we took a GI loan on a house. We sold the house in 2005. Now,after six(6)years and renting,we wish would like to purchase another home. Can I apply for a VA loan? Thanks, David F. Hancock

    • Joe Wallace

      Hi David, thanks for your question. The short answer is yes--you can apply for another VA loan but you'll need to have your VA eligibility restored. The VA doesn't automatically restore eligibility in these cases, you'll need to show proof that the original loan was paid off in full, apply to have eligibility restored, and then once you get a new VA certificate of eligibility you can apply for a new VA home loan. From the VA: "...the veteran must send a completed VA Form 26-1880 to our Winston-Salem Eligibility Center. To prevent delays in processing, it is also advisable to include evidence that the prior loan has been paid in full and, if applicable, the property disposed of. This evidence can be in the form of a paid-in-full statement from the former lender, or a copy of the HUD-1 settlement statement completed in connection with a sale of the property or refinance of the prior loan."

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