Underwriting Guidelines for VA Mortgage Refinancing

By David Rouse

Americans started providing benefits for veterans before the U.S. was even a country. The Pilgrims passed laws requiring the colony to take care of soldiers hurt or disabled during the Pequot Indian war. Post-WWII, the government decided to give housing benefits to soldiers. Today, Veterans Affairs (VA) does not give loans directly to veterans but encourages lenders to give $0 down payment loans to veterans by guaranteeing the loans against losses.

The VA guarantees up to 25 percent of a veteran's loan amount. If a home with a $100,000 mortgage is foreclosed upon, the VA will pay for up to $25,000 in losses to the lender if the home does not sell for enough to recoup the mortgage balance and foreclosure fees. The standard loan limit is $417,000 for a VA loan, but in certain high balance counties the limit may be as high as $1,094,625 as of 2011. These limits are subject to change; check with your lender for the limits in your county. VA loans allow $0 down payment and can even include loan balances that exceed the purchase price if the funding fee or energy-efficient items are included in the loan amount.

The VA only offers loan guarantees for eligible veterans and their spouses or widows. Each applicant must provide a copy of his DD214 discharge paperwork and provide a certificate of eligibility from the VA. This information is included in the loan application, along with all of the other qualifying documentation required. Veterans must provide proof of income and employment, along with proof of the funds to close if required.

VA loans require the borrower to pay a funding fee. The funding fee varies, depending on the type of loan and how many times the benefit has been used previously. If the benefit has not been used before, then the funding fee is 2 percent of the loan balance when the down payment 5 percent or less of the purchase price. If the veteran used the benefit to purchase a prior home, then the funding fee is 3 percent of the purchase price. If the veteran did not serve on active duty but was a reservist or national guardsman, then the first time use funding fee is 2.75 percent.

Only a VA-approved appraiser may provide an appraisal for a VA-guaranteed loan. Mortgage lenders must also have an underwriter that has successfully completed the Lender Appraisal Processing Program (LAPP) and has received a Staff Appraisal Reviews (SARS) approval from the VA to examine the appraisal. Many VA loans require very little equity in the home, so the lender must diligently examine the appraisals for fraud or excessive values.

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