The United States Department of Veterans Affairs (VA) helps service members, veterans, surviving spouses and other eligible beneficiaries (collectively “Veterans”) become homeowners. The VA provides a home loan guaranty and other housing-related programs to assist with the purchase, repair, retention or adaptation of a home. VA home loans are provided by private lenders, such as banks and mortgage companies. The VA guarantees a portion of the loan, enabling the lender to provide more favorable terms. If something goes wrong and a veteran can't make his or her payments, the lender can come to the VA to cover any losses they might incur. The VA loan guaranty is the “insurance” that the VA provides to the lender.

VA home loans

The VA loan guaranty enables favorable loan terms, including:

• No down payment as long as the purchase price doesn't exceed the appraised value.
• No private mortgage insurance premium requirement.
• Limits on the amount charged for closing costs.
• Closing costs may be paid by the seller.
• No prepayment penalty fee if the loan is paid off early. 
• VA assistance if a veteran has difficulty making payments.

A veteran doesn’t have to be a first-time homebuyer to qualify for a VA home loan; the VA home loan benefit can be reused and the VA-backed loans are assumable, as long as the person assuming the loan qualifies.

Eligibility

The veteran must have suitable credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan. The home must be for the veteran’s own personal occupancy. For further eligibility information and requirements, see www.benefits.va.gov/HOMELOANS/purchaseco_eligibility.asp. 

As far as loan limits, the VA does not limit how much a veteran can borrow, but there are limits on the amount of liability the VA can assume, which usually affects the amount of money a lender will consider. The loan limits are the amount a qualified veteran with full entitlement may be able to borrow without making a down payment. The 2015 loan limit in Wisconsin is $417,000. See www.benefits.va.gov/HOMELOANS/purchaseco_loan_limits.asp for more information. 

Lenders generally will not charge a down payment if they receive at least a 25 percent VA guaranty on a loan. The basic entitlement available to each eligible veteran is $36,000, which would be the VA’s maximum guarantee for loans up to $144,000. Many veterans also have additional entitlement to use for loans over $144,000. This “bonus” entitlement is up to an additional $68,250, sometimes referred to as Tier 2 or Additional Entitlement, and is only used for VA loans between $144,000 and the $417,000 limit. When added to basic entitlement, bonus entitlement gives eligible veterans enough VA backing for a loan of up to $417,000. Lenders will generally loan up to four times a veteran's available entitlement without a down payment, provided the veteran is income- and credit-qualified and the property appraises for the asking price.

Role of the real estate professional

The VA recommends the veteran work with a real estate professional who can help the veteran find local lenders who participate in the VA program. As a real estate agent, you can also suggest the veteran shop around for favorable interest rates and become pre-qualified for a mortgage. For detailed information regarding the VA loan process, watch the Veterans Benefits Administration VA-Guaranteed Home Loan Webinar at www.youtube.com/watch?v=URCH5vGDWak.

When drafting an offer to purchase for a VA loan, be sure to include the VA Option Clause:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs.”

Be aware that many veterans may have to pay a VA funding fee at closing along with traditional closing costs. The seller can pay for some closing costs up to 4 percent of the loan, including payment of prepaid closing costs, the VA funding fee, payoff of credit balances or judgments for the veteran, and funds for temporary buy-downs. Find more loan fee information at www.benefits.va.gov/homeloans/purchaseco_loan_fee.asp. 

In addition, no commissions, brokerage fees or buyer’s broker fees may be charged to the veteran buyer. Accordingly be sure that the transaction is structured such that any commissions or fees come from the listing broker or the seller if you are in a buyer agency agreement with the veteran. See “Getting Paid as the Buyer's Agent: Who, When and How,” in the February 2008 Wisconsin Real Estate Magazine at www.wra.org/WREM/Feb08/PaidAsBuyerAgent, pages 7-12 of the September 2005 Legal Update, “Buyer Agency Practice,” at www.wra.org/LU0509, and pages 2-3 of the June 2012 Legal Update, “REEB 24 Regulatory Revisions,” at www.wra.org/LU1206.

Buying a condominium unit with a VA Loan

What if the property the veteran is interested in is a condominium unit? This may or may not make the transaction more complicated depending on whether the condominium project has already been approved by the VA. 

The condominium must be approved by the VA before any units in the project are eligible for a VA loan guarantee. First see if the condominium development has already been approved by entering the condominium name and location into the database of VA-approved condominiums at vip.vba.va.gov/portal/VBAH/VBAHome/condopudsearch, or you can contact a local VA lender. VA Approval does not expire once obtained. 

If the condominium is not on the list, it may be wise to reach out to the condominium association or manager to gauge the feasibility of having the condominium approved by the VA. The condominium will need to go through the VA approval process, which will add some extra time and work. If the condominium association or the unit seller is unwilling to provide needed documents and information, the veteran may have to choose a different loan program or a different condominium.

The primary documents the condominium association will need to provide to the lender when requesting VA approval include:

• Condominium declaration
• Bylaws
• Articles of incorporation
• Condominium plat and unit plans
• Expansion plans
• Management agreement (if any)
• Budget
• Current financial statements (income statement and balance sheet) including reserves
• Special assessments/litigation statement
• Minutes for the last two association meetings
• Any leases or service contracts
• Architect or engineer statement if a conversion
• An attorney opinion letter (not required, but strongly suggested because it is believed this will reduce the processing time; however it may be expensive to obtain. The suggested contents of this letter are in Chapter 16 of the VA Lenders Handbook.

See the full list of required submissions in Chapter 16 of the VA Lenders Handbook at portal.hud.gov/hudportal/documents/huddoc?id=26-7c16VALH.pdf. It is best to check first with the lender who may have forms or examples of the required documents that can be provided to the association. 

Wisconsin brokers will recognize that this list of documents closely resembles the list of required condominium disclosure documents, and the rest are mentioned in the Additional Condominium Issues section on lines 235-246 of the WB-14 Residential Condominium Offer to Purchase. If the condominium does not have complete condominium disclosure documents, then it stands to reason it will have a difficult time qualifying for VA approval.

Some of the basic VA qualification standards include:

• 50 percent or more of the units must be owner-occupied.
• No more than 15 percent of the unit owners can be behind in assessment payments.
• If condominiums are to be newly constructed, 75 percent of the units must be sold prior to allowing VA loans.

Once the lender has submitted the request for VA approval and the condominium documents to the VA, it’s a waiting game. The VA review process may take anywhere from 30 to 90 days. Keeping the buyer and seller calm can be difficult, so agents should make sure they are aware of the approval process timeline upfront and draft the offer to allow for ample time. 

Note that VA condominium approval is a completely different process from FHA condominium approval. At one time, the VA would approve all FHA approved condominiums, but that has changed: the VA cannot accept HUD/FHA/USDA condominium approvals if the project approval was dated on or after December 7, 2009. However, the documentation submitted remains quite similar.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.