The Department of Veterans' Affairs Home Loan Guaranty Program Fnend or Foe?

• Author: by Major Bernard P. Ingold
• Pages: 10

1. INTRODUCTION

   Since its inception in 1944, over eleven million service members have taken advantage af the Department of Veterans' Affairs (V

   1. Home Loan Guaranty Program to purchase their portion of the American dream? The VA home loan guaranty program allows el@ ble service memben to purchase homes with no down payment at relatively low fixed-interest rates These loans may be assumed later by veterans or nonveterans without major administrative or finan-cial constraints.

   Despite its many advantages, the home loan program has had some serious difficulties in recent years, including an alarming rise in the number of defaults on VA The happy relationship between the veteran and the VA can become quite antagonistic when things start to go wrong. Because veteran-borrowers agree to indemnify the VA for any losses the VA mstams as a result of the guaranty, the V.4and the veteran often become advenanes when a default on the

   'Judge Advaate General's Corps. Currently arsigned ar inifructor. Adminislratrve and Civil Lam Dlil~ion,

   The Judge Advocate Geneus Sehoal Formedy aaigned =

   Defense Amellate Attorney, Branch Chlei. and Supreme Court Coordinator, Defense Apwllste Dlwimn. L 3 Amy Legal Semcei Agenq 1982 1086. Chief. Legal Asai~fance, Adminiifralive Law Officer, and Pmeuremenl Counsel, Fort Devens, MarsachuPeffs, 1070-1982 AuthorofReceMWom inDmorce ?bmtton For Betier mior Worse. 120 Mil L Rev 203 (1888), Bvyrng, Sdmg and Ratzng the Forntly The Army Lawyer, Oet 1087, at 23, Dwcmrnzng and RBmabing the Biared Court,Member The Army Lawyer Jan 1886. at 32 BG S I Lnweenlty of Michidan. 1876.

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   guaranteed loan occurs A number of statutory. administrative and judicial options are available to help a veteran avoid or reduce the potentially catastrophic financial canaequences associated with defaulting on a 1.4-guaranteed loan. In all too many msranres. however, veterans have misunderstood or failed to take advantage of the pro-grams and remedies available to them

   The high foreclosure rates on V.4 guaranteed loans ha\e spurred Congress to deielop methods to reduce foreclosures and better pi" tect the interests of the !'A and the >ereran Congress reientl) has amended the program and inserted neu procedures designed to help assure that those aswrning loans are good credit nsks Sex legisla tiun also contains prov~smn~that will help service members better understand their rights and obligations under the home loan guaranty program. In the most recent modification to the loan program. Con fund to be used to lower the risk of in the aenr of loan foreclosure.

   11. HISTORY OF THE VA LOAN PROGRAM

   The \A home loan guarant) program has established bF the Ser vicemen's Readjustment Act of 1944 (the Act) 3The Act was designed to help returmng ieterans who. due to their milltar) senice. were unable to establish a credit history to qualify for a mortgage Under the lnltlal leglslatmn, a veteran aith at least "met) days of actnedutg i e n ~ e has eligible far a home loan guarant) of up to lift! percent of the mortgage not exreeding $2001).

   The 1944 Act was to expire within fire gears after the end of Kwld War I1 The program was so successful however that It was extendeda number of times throughout the 1950's and 1960's Uot until 1970was the home loan program made a permanent benefits program .

   The program has been modified and expanded oier Its forts-fire year hiStor? To keep pace with rising home ~ 0 5 1 s the haw entitle^ ment ha5 men cTeadil> from its original lmel of $2000 The amuuiiI inrieaied to MOO0 in December 1945, $7500 in July 19Z0. 512 500

   111 Ma) 1968, 817,(100 in December 19il. 12.5.000 in October 1978$27.500 in October 1080 and $38.000 m March 1988 Under the most recent change-made in December 1989-the basic entitlement was lncrpased t" 846 1100

   IBBl] VA HOME LOANS

   The overriding federal interest in the loan program is "to enable veterans to obtain loans and to obtain them with the least risk of loss upon foreclosure, to both veteran and the Veterans' .4dministration as guarantor of the veteran's mdebtedness''STa ensure that this interest is met. Congress has modified rhe program throughout the yean. These changes have introduced a high degree of complexity into what began as a relatively simple, temporary program

   111. THE HOME LOAN GUARANTY PROGRAM A. ELIGIBILITY REQUIREMENTS

   Congress has been very generous in making most active duty and discharged service members elisble for the home loan guaranty program. All service members on active duty with the Cnited States armed forces are eligible to participate in the program if they have served far at least 181 days.

   Discharged service members aim are eligible depending on the length and date of service and character of discharge. Veterans who have served in peacetimes must have been on continuous active duty for over 181 days and must have been released under conditions other than dishonorable Enlisted personnel discharged after September 7, 1080. and officen with service after October 16, 1981, must have completed twenty-four months of continuous active duty or the full period of active duty (of at least 181 continuous days of active duty) and must have been discharged or reieased under canditions other than dishonorable Those saidien serring in peacetime who hare been discharged for a service-connected disability do not have to satisfy the 181 day contmwus actire-duty service reqmre-ment

   Wartime \eterans are elwbie If they have served on active duty for at least ninety days and been discharged under other than dishonorable conditions Service members separated for a service- 'Unlred States, Shimer 367 U S 374 383 (1961)*Senice la considered during peacetime If ~f falls entirely wfhm one of the follou mg perlad3 July 26. 1947 to June 26. 1050. Februar). 1 1956. Lo .

   'Dep t of Veterans' Affairs. Pam 26 i, Lender I Handbook Guaranty of Insurance

   of Loans to kteran. para 8-1 (Sept 15 18i7) [hereinafter V.4 Wm 26-71

   PU-artlmesemce includesUbrldllar II(September 16 1940 to July 25. 1947). Korean

   connlctuune 27. 1960 to JWW 31. ma

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   connected disability may be eligble even If they were on active duty less than ninety days

   Time served on active duty for traming m the Reserve components does not qualify for VA home loan eh@bility purposes. Moreover, active-duty traming in the National Guard does not count unless the member was activated for federal serv~ce. World W r I veterans generally are not entitled to participate in the home loan guaranti program

   Dependents of certain service members aim may be eligible for VA home loans Surviving spouses of eligible service members aha died as the result of service-connected injuries are eligible for VA financ ing. Spouses of active duty members who are carried in missing~in action or prisoner-of-war status for more than ninety days also may qualify.@

   To obtain V.4 financing, service members meeting the eligibility criteria must obtain a certificate of eligibility from the VA.LD Issuance of a certificate of eligibility does not, however. constitute approval of a loan by the VA

   B. ENTITLEMENT

   The guaranty program enables veterans to obtain home mortgages through conventional sources without making a substantial dawn payment?' Congress recently enacted a new tiered entitlement system that applies to all loans taken out after January 1, 1990L2The current basic entitlement, or loan guaranty amount, is $36,000. This

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   (1~881'OEliable apphcank rhould submit B completed IA Form 26 1880. Requerr for Derer mination of EhabihIy and A>adable Loan Guaranty Entitlement along alth cuplei af all discharge or reparation documents showing dater of service .Applicants on BC t~veduf) should submit a statement of service signed by an ad~uranr,penonoel officer or commander of the member's unit This statement should rho% date of enrrr

   on active dul) and the dates of an) time lobt

   "The Supreme Coun h a characfeilzed the guaranty pml-laans of the program a5 'the subrmntnal e~ulv8lent of a down paimenf m the same amount [of the enrlrle mentl ' Shrmer 367 C S at 383x*The l'eferanr' Home Loan Indemmt) and Reitructurlng Act of 1988, Pub L Zo 101-237 5 306. 103 Stat 2060 (10891 [hereinafter 1989 ACLI The n m Ian specifier that for lema hetween $56.250 and 8144,WO the guaranty amount 13 $36,000 or 40% of the loan For loans befreen 556,250 and $45 000 the maximum loan guaranri amount is S22,100 If the loan 1s under $45,000 the \A will guarantee 50% of the lorn Ihecumntguml) amounrformanufacfuredhomepandlol~ia40harS2OMO

   whichever IS lesa 38 L SC 5 16lO1cl 119881 234

   19911 \N HOME LOANS

   amount may be increased to $46,000 or forty percent of the loan, whichever LS less. if the amount of the loan exceeds $144,000.

   Mortgage lenders traditionally allow qualified veterans to take out loans worth four times the guaranty amount without down payment. Accordingly. veterans may be able to obtain VA.guaranteed mortgages of up to S184,000 without down paymenti3

   Veterans may have some portion of their eh@bhty remaining even if they have guaranteed loans outstanding. Because the basic entitlement has risen over the last few yean, veterans who previously have used their entitlement generally WI!J have partial entitlement remaining. For example, a veteran who used all of the 1986 entitlement amount of $27.600 to purchme a home UI 1985 ma) now have $18,500 of entitlement guaranty remaining If the veteran takes out a loan in excess of $144.000?4

   Although a veteran 1s aliowed only one entitlement, it may be restored under two conditions The entitlement will be restored when the property subject to the VA loan has been sold and the loan paid ~n full A veteran aim may receive restoration of entitlement by aliowmg a aualified veteran to assume the VA loan and substitute

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   his or her entitlement1s The veteran...