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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2008

Branch Out with VA Loans

Military veterans present a strong opportunity for mortgage brokers

In a market where qualified borrowers are becoming rare, many mortgage professionals are beginning to realize the potential of loans guaranteed by the U.S. Department of Veterans Affairs (VA).

According to VA data, there are 23.8 million U.S. veterans. Less than 10 percent of them -- 2.1 million -- have VA loans. With the ongoing military presence in Afghanistan and Iraq, more veterans will return home and will likely want to buy homes.

VA Loan Resources
To qualify your client for a VA loan, you first must have a certificate of eligibility from the U.S. Department of Veterans Affairs. You can obtain one through the automated certificate of eligibility (ACE) system online at

For more on VA loans, visit

This presents a great opportunity for mortgage brokers who can offer this product to veterans. Brokers who wish to do so must first understand how these loans work, how veterans qualify and where they can find prospects.

The ins and outs

VA loans have looser underwriting standards than conventional and even Federal Housing Administration (FHA) loans. With a VA loan, veterans can get 100-percent financing without private mortgage insurance (PMI) and interest rates around 6 percent.

In addition, sellers are allowed to cover all closing costs, prepaid items and discounts. This lets borrowers essentially walk into their new home with no downpayment, no closing costs and a 30-year fixed rate of 6.25 percent with no mortgage insurance. In this market, for veterans who cannot put down 20 percent toward their home purchase, a better loan simply does not exist.

Eligible veterans are entitled to a governmental guaranty of as much as $104,250 toward an owner-occupied purchase. This equals 25 percent of government-sponsored enterprises’ conforming loan limit of $417,000. The 25-percent guaranty, therefore, can change with conforming-loan-limit changes.

Essentially, the U.S. government guarantees 25 percent of a veteran’s loan for a lender. From a lender’s perspective, the borrower is paying a 25-percent downpayment at the time of purchase. This is why lenders likely are willing to lend at 100 percent for VA loans.

When it comes to underwriting, you can run VA loans through your automated underwriting system (AUS). If the AUS gives you a “refer/eligible” finding, you can send the loan in to be manually underwritten.

Underwriters don’t have to look at borrowers’ housing ratio for VA loans. Also, the total VA debt-to-income ratio is 41 percent. Underwriting tends to be slightly more lenient with VA loans than for FHA loans, but from the lender’s standpoint, underwriting a VA loan is comparable to an FHA loan.

Also, assets are not required, but understanding how to calculate residual income is crucial.

Rules and restrictions

Determining a veteran’s eligibility must always be the first step of the loan process.

The best way to determine if a veteran is eligible for a VA loan is through the certificate of eligibility. You can obtain the form on the VA’s Web site (see sidebar).

This form specifies the total amount of eligibility a veteran has remaining, which is determined by three factors:

  1. Whether the veteran was honorably discharged;
  2. Whether the veteran used eligibility in the past; and
  3. Whether the VA is still guaranteeing a previous loan for the veteran.

Veterans who were dishonorably discharged are automatically disqualified from receiving VA loans. In addition to their certificate of eligibility, honorably discharged veterans must also provide proof of their honorable military status.

Some veterans may have used a portion of their eligibility in the past. Because VA loans are assumable, veterans may have a previous loan that is still being guaranteed by the VA. Previously used eligibility must be deducted from total lifetime eligibility.

These loans were designed initially to get veterans coming back from war into homes. As such, they are geared to purchases. For refinances, VA loans’ loan-to-value restriction is 90 percent. This makes many refinances less beneficial, especially when coupled with the fact that the upfront mortgage-insurance premium for a refinance is higher than a purchase.

Connecting with veterans

The best place to find clients who may be eligible for VA loans is your existing database. Because you may not have mentioned VA-loan options to your clients in the past, you may be surprised at how many contacts in your database have served in the military.

Other resources include local military bases, which have newspapers and other publications to which you can submit information and articles regarding the benefits of VA loans. Also consider contacting your state’s VA office for ideas. Local AMVETS offices offer another opportunity.

Although state-sponsored facilities do not promote particular brokers or lenders, they often provide lists of resources for veterans.

•  •  •

Wise mortgage brokers are constantly surveying the market for opportunities and threats. Fannie Mae and Freddie Mac have been tightening their lending guidelines, which makes it increasingly difficult to approve borrowers who otherwise would qualify for loans.

This trend is prompting many mortgage brokers to steer away from the conventional-loan market and toward governmental loans such as VA, FHA and reverse mortgages. This shift in the market is not something to fear, but rather an opportunity.

If you take the time to further educate yourself about VA loans, you will discover why the market is turning their way -- and why you should, too.


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