What Is the VA Home Loan Guaranty?

How VA-Guaranteed Loans Have Been Helping Veterans Since 1944

Most people are familiar with VA loans that allow veterans and others affiliated with the armed forces to purchase or refinance a home as a hard-earned benefit of their service. But something that's often less understood is the VA home loan guaranty that makes these loans possible.

In this article, we'll explore the origins of the VA loan guaranty, how it works, and why it's so valuable to veterans, other groups affiliated with the armed forces, and lenders.

The VA Loan Guaranty Explained

The Department of Veterans Affairs (VA) doesn't provide direct loans in most cases. Instead, it guarantees a portion of the loan, which is offered through top VA-approved lenders like Freedom Mortgage for eligible VA loan applicants. The VA home loan program helps reduce lenders' risk by guaranteeing part of the loan if the borrower defaults or stops making payments.

The VA home loan guaranty is typically 25% of the loan amount and can enable lenders to offer better interest rates and terms compared to mortgages not backed by the government. For example, veterans are able to secure a mortgage with no down payment requirement with a VA loan.

History of the VA Home Loan Guaranty

The origins of the VA home loan guaranty trace back to World War II and the Servicemen's Readjustment Act of 1944, more commonly known as the G.I. Bill. It was signed into law by President Franklin D. Roosevelt to combat the harsh economic conditions that often follow wars and help returning veterans (or surviving spouses) ease back into civilian life.

The program provided a government guaranty to mortgage lenders to reduce lending risk. More importantly, the program helps veterans and others affiliated with the military have access to mortgages with favorable terms and, in most cases, no down payment.

At its inception, the guaranty was maxed out at 50% of the loan but couldn't exceed $2,000. However, some of the initial loan program limits were flawed, including the fact that the guaranty maximum wasn't high enough to keep pace with rising real estate prices. So, amendments and improvements have been made over the years:

• 1945: The maximum guaranty amount increased to $4,000.
• 1948-49: The maximum guaranty amount increased to 60% of the loan amount, with a $7,500 cap.
• 1952: The program expanded to include Korean War veterans.
• 1970: Expiration dates for the VA home loan program were removed.
• 1992: The program expanded to include National Guard and other Selected Reserve members.

The ongoing updates to the program have transformed the VA home loan guaranty program from a wartime aid to a longstanding benefit of military service.

How the VA Loan Guaranty Works

As mentioned, when buying or refinancing a home with a VA loan, the VA doesn't directly lend money to eligible borrowers. It guarantees a portion of the loan if you default and fail to make your monthly mortgage payments.

The amount of the VA guaranty depends on your VA entitlement, which you can find on your Certificate of Eligibility (COE). If you're using your VA loan benefit for the first time and have full entitlement, the VA will guarantee up to 25% of the loan amount, and there are no loan limits (other than what your income qualifies you for). If you have partial (remaining) entitlement, your guaranty amount may be restricted based on your county's conforming loan limits. However, you may still be able to make a down payment that makes up the difference between your limit and the total loan amount you want.

VA Home Loan Guaranty Benefits and Limits

Wondering how the VA loan guaranty can directly impact your homebuying or refinancing journey? Understanding the benefits and limitations is a good starting point.

Benefits of the VA Guaranty

Here are some of the potential advantages available to U.S. veterans, thanks to the VA home loan guaranty:

• No down payment required in most cases
• No private mortgage insurance (PMI)
• Better interest rates typically than conventional loans
• More flexible approval requirements compared to conventional loans
• Reduced closing costs and seller concessions allowed to cover part or all of costs

The VA home loan guaranty makes it possible for you to potentially save hundreds of dollars a month compared to other types of mortgage or refinance loans.

Limits of the VA Guaranty

The VA doesn't guarantee that your home can't go into foreclosure, and it doesn't cover loans for investment properties. So, it's important to ensure you can comfortably afford your new mortgage, even if it has favorable terms. Keep in mind that you're responsible for making mortgage payments, paying property taxes, and paying any homeowners insurance.

And as previously mentioned, there are limits to how much the VA will guaranty. Instead of backing your entire home loan amount, it will only guaranty a certain percentage, which is usually 25%.

A Summary of the VA Loan Guaranty

The VA guaranty is the foundation of the VA home loan, which is one of the most valuable and popular benefits available to eligible veterans, active-duty service members, Reserve and National Guard service members, and surviving spouses. If you're considering buying a home or refinancing, a VA loan could be the ticket to saving a lot of money and achieving your homeownership dreams.

At Freedom Mortgage, we're one of the nation's largest VA loan lenders and we're here to help you determine if you're eligible to save money with a VA home loan, understand the VA home loan guaranty, and get started with your application.