Does a Bank Have to Accept a Veterans Affairs Mortgage

By David Rouse

The U.S. Department of Veterans Affairs (VA) approves mortgage lenders who offer these loans to eligible veterans. VA does not usually lend directly to veterans, it only insures eligible lenders against losses who lend to veterans. This program does not provide carte blanche approval for a mortgage loan to every veteran who wishes to buy a home. It also does not require lenders to approve every single loan requested by the veteran under this program. Lenders are encouraged to make wise lending choices before extending credit under this program.

Every mortgage lender must apply for and receive approval from VA prior to offering any VA home loan program. Even mortgage brokers who lend their own money must receive approval from the VA before brokering any VA mortgage loan. Larger lenders may apply for Nonsupervised Automatic Authority through the VA if they meet the lender and underwriter experience guidelines. To receive this authority, the lender must have previous experience with VA loans, at least a $1 million unrestricted credit line and meet the minimum working capital or net worth requirements set forth by VA. If a lender has not received approval from the VA, then he is not obligated or even allowed to accept any VA home loans.

The VA publishes its guidelines and the VA lender handbook. This handbook outlines all of the requirements a borrower and the property must meet prior to approval under the VA home loan guarantee program. The person working for the lender who approves the loan must receive underwriting authority from VA in addition to the lender receiving approval.

VA allows lenders to add their own underwriting conditions on top of VA's lending guidelines. Each lender may make qualification for a VA loan as easier or as hard as they wish, as long as they meet VA's minimum guidelines. Since the lender provides the actual funds at closing instead of the VA, the agency allows wide discretion on approval. Even if the loan meets all of VA's underwriting requirements, if it does not meet all of the lender's requirements, the lender may decline the mortgage loan. VA recommends homeowners who receive a mortgage decline from one bank apply with a different bank for a mortgage since the underwriting guidelines may vary.

If a bank approves a mortgage loan guaranteed by VA they must also collect the VA funding fee at closing. The borrower may finance this funding fee or pay for it out of pocket. The bank forwards the funding fee to the VA, which uses it to fund the VA home loan program and reimburse lenders any losses experienced on eligible VA home loans. This funding fee works as a type of insurance and is deductible from the borrower's taxes as mortgage insurance.

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