VA home loans are an entitlement to those VA-eligible borrowers who qualify.  VA Loans, or veterans’ mortgages, are made by lenders like banks and mortgage companies and a portion of each loan is guaranteed by the U.S. Department of Veterans Affairs.  The VA Loan Guaranty Program wasn’t always in existence.  Discovering how VA Loans came to be can also be an interesting history lesson.   

America has a centuries-old record of taking care of its veterans.  Veterans’ benefits can be traced as early as 1636 when the Pilgrims of Plymouth Colony were at war with the Pequot Indians.  The Pilgrims passed a law way back then which entitled disabled soldiers to assistance from the Colony. 

Many historic events have shaped what is the VA Loan Guaranty Program and VA home loans we know today. 

In 1930, the Veterans Administration was established, and Brigadier General, Frank T. Hines, was its first administrator. Directors have come and gone, and even the Department’s name has changed (now called the U.S. Department of Veterans Affairs), but the mission is still the same, “to care for America’s veterans.”

After World War II, approximately 16 million veterans returned home, and the VA went through a substantial growth spurt. The GI Bill was passed along with education and housing benefits for veterans.  The first home loan guaranty program began in 1944 with the original Servicemen’s Readjustment Act that was passed by the United States Congress in order to extend a wide variety of benefits to eligible veterans. 

Basically, the VA loan benefit was started to help veterans become homeowners after the war. Returning servicepersons had missed opportunities as a result of serving in war.  Upon return, they had no established credit and could not climb the same economic ladders as their civilian counterparts. With no means to purchase homes, veterans experienced serious sociological impacts trying to make post-war readjustments. The establishment of the loan guaranty program was the government’s way of placing veterans on equal ground with those who hadn’t served in the war.

The original VA Loan Guaranty Program had a maximum loan guaranty amount of 50% of the loan, but not to exceed $2,000. Twenty-year mortgages were standard, and a maximum interest rate of 4% was enforced. 

 

In 1950, the maximum guaranty amount was raised to 60% of the amount of the loan and not to exceed $7,500, and 30 years became the new maximum loan duration. The VA funding fee was introduced for certain veterans.  Unremarried spouses who were widowed as a result of a soldier who had died in service or who had died as a result of service-connected injury or disease were extended the same loan privileges as veterans. Another change included protection for veterans in case of home loss.

 

Other historic events like the Korean conflict, Vietnam War, Cold War, Gulf War, the War in Afghanistan, the War in Iraq, inflation and the U.S. economy have all helped the VA Home Loan Guaranty Program to evolve. With each war and conflict more veterans became eligible for the VA loan entitlement.  Inflation and fluctuating real estate markets lead to increases in the maximum loan guaranty amounts, fees, and acceptable types of housing considered for VA home loans.  Of course, economic recessions and booms keep VA loan interest rates fluctuating and allow for refinancing opportunities.  And, due to fluctuating economy and markets, the VA Home Loan Guaranty Program incorporated  maximum guaranty amounts per county that allow for higher “loan limits” where the cost of living is higher.    

It is a common misunderstanding that the federal government makes VA Loans directly. However, the federal government merely guarantees a portion of each VA loan, and the loans themselves are made by VA-approved lenders. VA eligible borrowers make their own arrangements for the loans through typical lenders like banks and mortgage companies. The VA relies on its VA approved appraisers to value properties being considered for VA loans. Depending on the risk involved, the VA may guarantee the lender against loss of principal (usually about 25%) if the buyer defaults.

The Veteran’s Housing Act of 1970 was a milestone for the VA Home Loan Program, The Act made significant changes that greatly improved the viability of the VA loan guaranty and direct loan programs. The 1970 law made seven major changes in these programs: 1) It authorized a manufactured home loan program; 2) It authorized direct loans for veterans qualified for Specially Adapted Housing Grants irrespective of location; 3) The law also eliminated the terminal date of the direct loan program; 4) The law eliminated the funding fee for post-Korean War veterans; 5) It authorized loans on condominium units; 6) It authorized refinance of loans for condominiums; 7) Finally, it removed the delimiting dates on veterans’ entitlement.

The delimitation of dates had the most productive effect of all the changes made in 1970.  As a result of this change, expired unused home loan benefits of nearly 9 million World War II and Korean conflict veterans were restored. This meant that the entitlement of every eligible veteran remained available until used.

Continued growth of the Veterans Administration and the vast number of American veterans who qualified for VA loan entitlements resulted in President Reagan signing legislation on October 25, 1988 to create the Department of Veterans Affairs, a new federal Cabinet-level department that replaced the Veterans Administration. The new VA still had the same mission – to care for America’s veterans.

In 2009, VA home loans continue to thrive despite an economic recession. The VA is 270,000 employees large. General Eric Shinseki, a Vietnam veteran and highest-ranking Asian-American in the military, is now head of the department under President Barack Obama. Shinseki is the first VA Administrator of Japanese descent. The maximum home loan amount for which the VA will guaranty is now $417,000 – miles high from its original $2,000.