If the Department of Veteran's Affairs insures your mortgage, you don't need a down payment. That alone can make a VA loan a great deal -- but it can also be a confusing one. A VA certificate of eligibility proves you are entitled to VA mortgage insurance and determines how big a loan the VA will guarantee. You can apply online or your lender may be able to apply for you.
If you take out a VA-backed mortgage, the VA guarantees it will reimburse the lender for a quarter of the debt if you default. When you first receive your certificate of eligibility, it's good for $36,000 in mortgage insurance; the VA will approve loans of up to four times that amount, or $144,000. If you took out a $100,000 mortgage, the VA would pay the lender $25,000 if you defaulted. You would still have $9,000 left on your certificate after you close.
In many parts of the county, $144,000 won't go far toward buying a house. The VA will approve loans higher than that in most parts of the country. In most counties in the 2011 fiscal year, for instance, the maximum loan -- if you have your full eligibility -- was $417,000. In Napa Valley, Ca., it's $530,000 and in Eagle, Col., $850,000. If the loan is under the maximum, the VA will insure 25 percent of the debt.
Repay and Reuse
If you use up your eligibility buying a home, you can recover it by paying off the mortgage and selling the house. Once you do that, you can apply to the VA to regain your full eligibility and use it toward your next home purchase. The VA will also allow you, one time only, to regain eligibility without selling the house, if you've paid off the mortgage. If you default on the mortgage and the VA has to pay the lender, you can't regain your eligibility until you repay the VA.
Having a certificate of eligibility doesn't exempt you from your lender's normal requirements, other than the down payment. To secure the mortgage, you'll need good credit and enough income that you can make the monthly PITI -- principal and interest on the mortgage, taxes and insurance on the property. If you have enough money to make a down payment, it might be worthwhile checking conventional loans as well; although VA loans have good interest rates, it's possible another lender might offer a better deal.
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