February 18, 2010
By Molly Blake

Susan Petersen laughs when she talks about her first house.  “We bought in 1992 and it literally cost $40,000,” says the Marine spouse smiling. “It doesn’t sound like a lot but we couldn’t have bought it without the VA loan.”

It’s been almost 20 years since Petersen and her husband Jon, a KC-130 pilot, bought that Havelock, NC home and despite a vast difference in rank and pay, when they recently upgraded to a four-bedroom Colonial walk-up in Northern Virginia, “The VA loan fit what we needed this time around too,” said Petersen. 

Made available in the years following WWII, the VA loan is largely credited with hatching middle-class America and is still a beneficial tool. Today’s market is similar to post-WWII and ripe for VA loans: vets don’t have a ton of cash to put down, interest rates are low, it’s a buyer’s market and scores of homes are up for grabs. Despite its significant history, it’s still a misunderstood and widely underused program - less than 10% of eligible military take advantage of the VA loan.

Ed Sexton, a real estate agent in Yuma, AZ and former Marine, says he’s seeing an increase in the number of VA loans – a far cry from just four years ago when military clients could easily score a cheap conventional loan.  Today, however, many would-be buyers, both military and civilian, wash out when lenders demand healthy credit scores and hefty down payments.

“If we didn't have both VA and FHA (Federal Housing Administration) loans right now the real estate market would certainly be a lot tougher than it is,” said Sexton. 

How It Works

The VA loan works similarly to a conventional loan:

1. The buyer finds a house
2. The buyer secures a lender (i.e.; USAA, Navy Federal or other bank, savings and loan or mortgage company)
3. The buyer is certified as eligible for the VA loan  (typically the lender has access to the web-based system to certify eligibility)
4. The buyer completes the loan application and closes

The difference between the VA and a conventional loan is simple, and yet very powerful says Terry Jemison of the Veteran’s Administration.

“What the government is doing is reducing the lender’s risk by promising the full faith and credit of the United States government behind a portion of the loan, which may make the loan more attractive to lenders.”

The amount of the loan the government will guarantee is called entitlement and is basically a form of insurance for the lender should a buyer default on the loan. 

Both Petersen and Mike Roberts, another recent VA loan patron, say the government-run program is surprisingly devoid of red tape, fees, and bureaucratic delays.  Both say the process is streamlined, simple and most importantly, saved them money.  

“We still had to pay the VA funding fee but since we only had 5% available to put down, it was still cheaper than paying PMI (private mortgage insurance),” said Roberts. 

The funding fee, which reduces the program’s cost to taxpayers, is 2.15% for first-time users who don’t put any money down.  That fee drops if, like Roberts, you put even some money down. 

How the Numbers Crunch

Roberts spent time crunching numbers before settling on the VA loan for his Crofton, MD house. For example:

VA Loan with zero down payment
$200,000 house
6 % interest rate on 30-year fixed mortgage
$4,300.00 funding fee (spread out over the course of the loan)
Monthly mortgage payment (with tax, insurance etc.) = $1,474.88

Conventional Loan with zero down payment
$200,000 house
6 % interest rate on 30-year fixed mortgage
Zero down so PMI is required
Monthly mortgage payment (with tax, insurance etc.) = $1,615.00

Conventional Loan with 20% down payment
$200,000 house
6 % interest rate on 30-year fixed mortgage
20% down on the house to avoid PMI
Monthly mortgage payment (with tax, insurance etc.) = $1,209.00

Besides doing the math to determine the best financial option for the individual buyer, JJ Montanaro, a Certified Financial Planner with USAA, reminds veterans not to buy a house just to wind up ‘mortgage poor’ every month.

“Make sure you have a cash cushion and an emergency fund,” said Montanaro.  “Buyers need to be prepared with all the potential financial issues that come with owning a house.”

Vets can also take advantage of a VA refinancing option in order to reduce monthly mortgage payments with a better interest rate.

As for eligibility, see a detailed list of qualifications at http://www.homeloans.va.gov/elig2.htm.

History of the VA Loan

When World War II ended, Congress saw its chance to make amends for its disastrous treatment of vets in the years following WWI.  The VA loan falls under The Serviceman’s Readjustment Act of 1944, more commonly called the GI Bill. It was drafted in an effort to stem a potential onslaught of unemployable and undereducated veterans returning from WWII. While civilians were attending universities, working and establishing credit, soldiers were fighting in Pacific and European battlefields. The Veteran’s Administration was tasked with ensuring the returning vets had ample opportunities to catch up to their civilian counterparts.

The bill, signed into law by President Franklin D. Roosevelt in 1944, is widely viewed as one of the most valuable piece of legislation ever passed by Congress. He stated that it gave “emphatic notice to the men and women in our armed forces that the American people do not intend to let them down.”  The Obama administration recently announced an increase in the VA budget, the largest in 30 years.