Updated: May 3, 2013 12:14PM
It's tough to get a mortgage today -- but that's not news. Every financial institution is tightening lending standards and requiring a higher down payment and raising interest rates. Well, almost every lender is doing that. But if you're a veteran who has been honorably discharged from the military, you can get a great deal on a home loan.
The Veterans Administration has a mortgage guarantee program that is available to the more than 23.8 million U.S. veterans who were honorably discharged from service. But fewer than 2.1 million have taken advantage of VA loans. And they're missing out on a very good deal.
No money down
With a VA loan, veterans can get 100 percent financing without private mortgage insurance (PMI) and a 30-year fixed rate of 6.5 percent. There is a small origination fee paid to the VA, typically 2.4 percent, which is rolled into the mortgage itself.
The mechanics of the loan are relatively simple. Essentially, the federal government guarantees 25 percent of a veteran's loan for a lender. So from the lender's point of view, the borrower is putting up a 25 percent down payment at the time of purchase. Thus, the borrower needs no cash to get the mortgage!
Very few mortgage brokers know about this type of loan, or work for companies that are registered to make them. I'm indebted to Daniel Chookaszian, vice president of sales at American Street Mortgage Company (www.americanstreet mortgage.com) for bringing this program to my attention. He specializes in making these VA loans to veterans, as well as FHA loans to other home buyers.
Chookaszian, who in addition to being a mortgage broker has a master of divinity degree from Moody Bible Institute and serves as a volunteer chaplain at a VA nursing home, says the program is a true benefit for our veterans. In fact, he teaches other mortgage brokers how to help vets apply.
Getting a VA mortgage starts, he explains, with making a call to the VA's Certificate of Eligibility Center at (888) 244-6711 to secure the certificate authorizing the mortgage. The center keeps track of whether the veteran used all or part of his or her eligibility in the past.
Previously used eligibility must be deducted from total lifetime eligibility. Those limits might have expanded since a veteran's previous use of the program, which has been in effect since World War II, so that even older vets who previously used the program may be eligible for another loan guarantee.
Up to $104,250 guaranteed
The government will guarantee as much as $104,250 toward an owner-occupied purchase. That is 25 percent of the government-sponsored enterprises' (GSE) loan limit of $417,000. Under the recently passed Housing Bill, from July 30 to Dec. 31, 2008, some areas qualify for even higher government guarantee limits. Go to www.fha.com/lending_limits.cfm to check for the limits in your state. The VA uses the same limits as FHA loans.
There are additional benefits to using a VA loan, if you qualify. Veterans may pay for the following fees: credit report, origination, discount points, the Funding Fee, recording, and title insurance -- all of which are typically rolled into the loan. But veterans cannot pay for the inspection, document preparation, underwriting, processing, attorney, tax service, or escrow. These costs can be paid either by the seller or the lender. This might save the veteran about $1,000 to $1,300 in closing costs!
After qualifying a prospective borrower, Chookaszian funds the loan through a bank. And he assures me that most banks are still more than willing to make these loans because of the government guarantee. Plus, VA loans are made with more lenient income and credit standards than banks are currently demanding of conventional borrowers.
He points out that these VA loans are not as beneficial for those seeking to refinance because in a refi, the loan-to-value ratio is not 100 percent, but only 90 percent. And there is a slightly larger up-front VA fee than with a purchase.
For more information about VA mortgage loans, you can speak to the VA Loan Center at (800) 827-0611, although they are not brokers and do not make loans. Or contact Chookaszian at (312) 376-3760 or dchooks@americanstreetmortgage .com.
Don't forget FHA
Even if you're not a vet, Chookaszian says there might be an FHA solution to your mortgage problem. He has helped homeowners refinance out of adjustable rate mortgages and into fixed-rate FHA loans, currently fixed for 30 years at 6.5 percent, plus private mortgage insurance (PMI), which is part of the monthly payment. There is also a requirement that property taxes and insurance be escrowed every month as part of the payment.
Despite falling home prices, the FHA mortgage might be available to many homeowners, since it requires only a 97 percent loan to value ratio (3 percent equity) to make the loan. Because of the government guarantee on these mortgages, some lenders will make loans to those with credit scores as low as 500.
These FHA loans fell out of favor in recent years when banks started offering low-rate, no-money-down subprime loans. But in today's market, a 30-year fixed-rate mortgage at 6.5 percent looks like a real bargain, even with the private mortgage insurance payment.
So, while many complain that the government isn't doing "enough" to alleviate the mortgage crisis, the smart money is taking advantage of some relatively good deals that still remain. And that's The Savage Truth!
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.