Are VA Loans a Good Deal?

I'm not sure why I have shied away from writing about the VA program, but it may be my personal history and my long memory.

The VA home loan guarantee program began after World War II to help war veterans become homeowners. VA did not lend to them (except in some special cases), but rather guaranteed the lender against loss. While the details of implementation are quite different from those of FHA, the central feature is the same. Under both programs, so long as lenders follow the guidelines of the agencies, they are protected from loss in the event that the borrower defaults.

The VA program was quite a deal in the first few decades after World War II. No down payment was required, which remains the case; there was no guarantee fee, which is no longer the case; and the interest rates on both VA and FHA mortgages were subject to legal maximum interest rates, which is also no longer the case.

The maximum interest rates were designed to protect borrowers from being overcharged, and during easy money periods this worked. During tight money periods, however, which began to occur with increasing frequency, the rate ceilings resulted in the supply of VA and FHA loans drying up completely. For that reason, the ceilings were eventually eliminated.

The VA was quite paternalistic in those days. In addition to the rate ceilings, it set price ceilings on houses. A veteran receiving a VA loan was not permitted to pay more for a home than the VA said it was worth!

And so it was that in 1962 when I purchased by first house, I applied for and was approved for a 5.25% VA loan. Lenders at that time were willing to make loans at the legal maximum rate, which was a good deal for me.

All the details were presumably finalized two weeks before the scheduled closing, and I left for a vacation in Canada. But within days of my departure, I received a phone call from the savings and loan association that was making the loan. The VA, in its wisdom, had appraised the house for which I had contracted to pay $26,000, at only $25,000. The VA loan was dead and I had to accept a conventional loan at 6%!

The VA subsequently changed that rule as well. Today, a VA loan can't be larger than the appraised value of the house, but the veteran can pay more without losing the loan. They just must pay the difference in cash.

Answers to all the easy questions about VA loans are readily available from the VA. Its web site, www.homeloans.va.gov, will tell you who is eligible, how you go about obtaining a Certificate of Eligibility, whether eligibility can be used more than once, the types of properties that can be purchased with a VA loan, the range of insurance premiums for different categories of veterans and different loan purposes, the conditions under which VA loans can be assumed by a buyer, the types of VA home loans, and more.

The tough question is how VA loans stack up today against other options? In general, they are not the deal they were in 1962 when I almost had one, but, subject to a proviso, they remain advantageous for veterans who need a no-down payment loan. VA loans can run up to $240,000 today, whereas on FHA loans the maximum is lower in most areas, ranging from $144,000 to $261,000. FHA also requires at least 1% down, and the insurance premium is higher than on VAs. Conventional loans with no down payment carry rates .75% higher and up, depending on the borrower's credit score.

The proviso is that VA borrowers may pay a higher price (rate or points) than is available on either FHAs or conventionals. They shouldn't -- in the competitive wholesale market where lenders quote prices to mortgage brokers, the prices are much the same. But the retail market is something else. Some loan providers view veterans who need no-down payment loans, and who trust the loan provider to give them the market rate, as sheep to be fleeced.

To protect herself, the veteran should consult a web site that prices all three types of loans. There aren't many sites that price VAs, but one that does it well is www.countrywide.com. It shows about the same rate and points for VA, FHA, and conventional loans. Use it to shop.