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Topic 1. Basic Elements of a VA-Guaranteed Loan
May 14, 2024
This topic was updated to remove a hyperlink and make minor grammatical edits.
The Funding Fee subject on Table 1 has been updated to include a note that for cash-out refinances, the loan amount, including the funding fee, may not exceed 100% of the reasonable value as determined by VA.
a. General Rules
The following table provides general rules and information critical to understanding a VA loan guaranty. Exceptions and detailed explanations have been omitted. Instead, a reference to the section in this handbook that addresses each subject is provided.
Table 1: General Rules Regarding VA-Guaranteed Loans
Subject Explanation Section
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Maximum Loan Amount
VA has no specified dollar amount(s) for the “maximum loan.” The maximum loan amount depends upon:
3 of this chapter
the reasonable value of the property indicated on the Notice of Value (NOV), and
the lender’s needs in terms of secondary market requirements.
Down payment No down payment is required by VA:
3 of this chapter
unless the purchase price exceeds the reasonable value of the property,
the loan is a Graduated Payment Mortgage (GPM), and
is necessary to meet secondary market requirements.
Amount of Guaranty Guaranty is the amount VA may pay a lender in the event of loss due to foreclosure.
4 of this chapter
Occupancy The Veteran must certify that they intend to personally occupy the property as their home.
5 of this chapter
Interest Rate and Points
Interest rate and points are negotiated between the lender and Veteran. Points requirements:
6 and 7 of this chapter
the Veteran and seller may negotiate for the seller to pay all or some of the points,
they must be reasonable, and
they may not be financed in the loan except with Interest Rate Reduction Refinancing Loans (IRRRLs).
Purpose of Guaranty
To encourage lenders to make VA loans by protecting lenders/loan holders against loss, up to the amount of guaranty, in the event of foreclosure.
11 of this chapter
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Underwriting Flexible standards. The Veteran must have:
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satisfactory credit, and
satisfactory repayment ability
□ stable income,
□ residual income (net effective income minus monthly shelter expense) in accordance with regional tables, and
□ acceptable ratio of total monthly debt payments to gross monthly income (ratios exceeding 41% requires closer scrutiny and compensating factors).
IRRRL (Streamline Refinancing Loans)
Used to refinance an existing VA loan at a lower interest rate.
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no appraisal or underwriting is required,
closing costs may be financed in the loan,
reasonable discount points can be charged, but only two discount points can be financed in the loan, and
no cash to the borrower.
Note: A fixed rate loan to refinance a VA Adjustable Rate Mortgage (ARM) may be at a higher interest rate.
Funding Fee The Veteran, unless exempt, must pay a funding fee to help defray costs of the VA Home Loan program.
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The funding fee may always be financed in the loan.
Note: for cash-out refinance loans, the loan amount, including the funding fee, may not exceed 100% of the reasonable value as determined by VA.
find the percentage appropriate to the Veteran’s particular circumstances on the funding fee table, and
apply this percentage to the loan amount to arrive at the funding fee.
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Closing Costs Those payable by the Veteran are limited by regulation to a specific list of items plus a one percent flat charge by the lender.
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Any other party, including the seller, can pay any costs on behalf of the Veteran. (Subject to concession limits).
Closing costs cannot be financed in the loan except on certain refinancing loans. (See chapter 8.)
Security Instruments
The lender may use any note or mortgage forms they wish as long as they contain certain VA-required clauses.
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