Q&A: How veterans can take advantage of VA loan program to buy a home

Jeff Larson recently decided to cash in on a 12-year-old government promise and use a Veterans Affairs loan to purchase his first home.

All of the conditions seemed ideal: Home values and mortgage-interest rates had plummeted, there was a wide selection of properties in his price range on the market and the pot was sweetened with the $8,000 first-time homebuyer federal tax credit.

Larson, 40, a software engineer, put an offer on a home during the last week of May.

A little more than three weeks later, he was signing closing documents and calling on family members to help move boxes and furniture into his newly built 2,400-square-foot, three-bedroom home in Graham, Pierce County.

"Everything just lined itself up perfectly," said Larson, who bought his home for $324,000 with the help of Seattle-based online real-estate brokerage Redfin. "I was surprised at how simple it was. I thought it was going to take a lot longer."

The VA loan was created by Congress in 1944 as part of the Servicemen's Readjustment Act to provide veterans with federally guaranteed home, farm and business loans that didn't require a down payment. At the time, veterans could apply for loans up to $2,000 with 50 percent guaranteed by the government. Since then, the VA issued more than 18 million home-loan guarantees, with a total value of $892 billion, according to the U.S. Department of Veterans Affairs.

Here are some questions and answers about the program.

Q: Most home deals are taking longer to close these days due to stricter loan and appraisal requirements. What can buyers do to help speed up the closing rate for a VA loan?

A: Before house hunting, would-be buyers should get their paperwork in order and contact a lender to get preapproved for a home loan, said Nancy Whitaker, an area manager of Response Mortgage Together with the Bank of America office in Poulsbo. Her program specializes in VA loans.

"Dig out the DD-214. If they're a veteran, they'll know exactly what that means," she said, referring to the paperwork that denotes an honorable discharge. "If they're active, they'll need to get a statement of service from their command."

Lenders also are going to want to see two years of tax returns, pay stubs for a month and two months of bank statements for their loan application, Whitaker added.

Larson credits his fast funding turnaround to plenty advance homework.

"Financing was easy because I put myself into a good position," he said. "I didn't start looking around until I was at a point where I was financially ready. My car was paid off. My credit cards were paid down to basically nothing."

Q: What are the benefits of using a VA Loan?

A: VA loans don't require a down payment. They also don't require private mortgage insurance (PMI), which can add hundreds of dollars a month on the payment of a conventional loan.

Instead, borrowers are charged a funding fee, which can start at 2.15 percent of the loan for first-time borrowers.

Because they are government-backed, VA loans are easier to qualify for than conventional loans, even if the applicant has a few bumps on his or her credit.

Research shows that more than 80 percent of veterans and active-duty military members could not qualify for a conventional loan due to the clampdown in lenders' requirements, according to Kris Maple, a VA loan officer who blogs for www.army.com, a nongovernment Web site that specializes in military news and resources.

VA loans also are one of the few types of loans that can be transferred to other buyers, Whitaker said.

"They don't have to be a veteran to assume them," she said, noting that advantage comes in handy when the veteran wants to sell at a time of high interest rates. "There's no liability to the veteran. A non-veteran will tie up their entitlement until it is sold."

In addition, there are no penalties for loan prepayments. Veterans can use their benefit numerous times.

"They can use it over and over as long as that loan has been paid off or assumed by an eligible veteran, then their entitlement gets restored," Whitaker said. "They can use it multiple times. But the funding fee goes up, unless they're a disabled veteran."

Q: What are the downsides of a VA Loan?

A: Like many government perks, VA loans are filled with restrictions. For example, the loans can only be used to buy primary residences. Unmarried couples aren't allowed to purchase a home together using the VA loan, unless both are veterans. In addition, VA loans are chock-full of "non-allowables," which are fees that veterans are not allowed to pay for at closing, such as fees for escrow, tax registration, processing, administration and underwriting, which can vary from $400 to $1,000, Whitaker said.

Larson said he found the loan application somewhat cumbersome. "You have to do all of your paperwork by hand," he said. "You can't fill out your loan application on the computer."

Lastly, the VA counts child-care costs as debt in the debt-to-income ratio.

"So if husband and wife both work, and they're paying $1,000 a month in day care, they'll be better off using a conventional loan because that day care is going to count as a debt," Whitaker added.

Q: Are there instances when a veteran wouldn't want to use their VA loan benefit?

A: Yes. The VA loan was designed to help veterans get into a home with little or no down payment.

"If they've got great credit and they're putting 20 percent down, there's no reason to use a VA loan," Whitaker said. "The VA charges a funding fee, and the veteran pays that. It's added to their mortgage amount."

Q: What are the maximum VA loan amounts?

A: During 2009, the VA will guarantee home loans up to $550,000 in King, Pierce and Snohomish counties, according to the U.S. Department of Veterans Affairs.

However, there is some wiggle room in that amount if buyers bring cash to the table, Whitaker said. For example, in some areas, buyers can qualify for $650,000 with a $25,000 down payment in 2009, she said.

Q: Where can veterans and service members learn more about using their VA loan benefit?

A: Military bases often offer homebuying classes for service members.

Larson took one shortly after he was discharged from the Army.

Additionally, the Department of Veterans Affairs posts VA loan information — including the rules of eligibility — on its Web site, www.homeloans.va.gov.