The Senate has passed the Veterans Benefits Improvement Act, legislation that would increase the "guaranty limit" on mortgages backed by the Department of Veterans Affairs for the first time in seven years.

Under the VA program, the government guarantees a portion of a borrower's mortgage loan. If the borrower defaults, the lender knows that the government is there to pay-off any claim up to the amount of the guarantee. The guarantee is equal to 25 percent of the loan amount and the current guarantee limit is $50,750. The result is that today VA-qualified individuals can borrow up to $203,000 ($50,750 x 4) with no money down.

The proposed Senate legislation would increase the guarantee limit to $63,175. This higher limit would allow veterans to qualify for mortgages of up to $252,700 ($63,175 x 4) with no downpayment. In effect, the government's promise to pay is a substitute for a borrower's downpayment.

Of course, vets can also borrow more than the VA loan limit. But if they do, they must ante up $1 for every $4 over the limit.

The House has cleared a similar measure. But members of the House Veterans' Affairs Committee must now come up with either a budget offset to pay for the greater number of defaults that are anticipated as a result of the higher limit or secure a waiver from budgetary requirements. A final vote in the lower chamber is expected late this week or early next.

Created under the GI Bill in 1944, when President Franklin Roosevelt signed the Servicemen's Readjustment Act into law, the DVA's home loan guaranty program, sometimes known as "GI loans," allows private lenders to offer favorable loan terms to qualified veterans.

The interest rate on VA loans is usually a tad over market. And there is a 2 percent "funding fee" that must be paid at closing. But there is no mortgage insurance in the usual sense -- loans are "guaranteed" not "insured" (though some argue that the "funding fee" is nothing more than a one-time insurance premium by another name). Futhermore, the funding fee can be included in the loan amount or paid from the loan proceeds.

A VA loan can be assumed by anyone who buys the property when the VA borrower is ready to move.

The VA will back mortgages on behalf of qualified veterans, certain members of the reserve, active duty personnel and some spouses. More than 29 million people are currently eligible for VA financing, according to Keith Pedigo, director of the loan guaranty program.

And even though many veterans have already used their mortgage benefits, it may be possible to buy another house by using their remaining entitlement or by having the entitlement restored. Generally, full benefits can be returned if the original property is sold and the loan is paid in full.

In some cases, moreover, vets can combine their federal and state benefits. In California and Mississippi, for example, veterans buying single-family houses or condominium may be eligible for below-market rates.

While the pending increase in the federal guaranty will be of particular help to veterans in high-cost markets, it will still lag behind the level of other government and private mortgage programs, the National Association of Realtors points out.

Since the last time the guaranty was raised in 1994, the conforming loan limit on loans that can be purchased or "securitized" by Fannie Mae and Freddie Mac has increased 48 percent to $300,700 beginning Jan. 1. Also on Jan. 1, the ceiling on mortgages insured by the Federal Housing Administration will rise to about $260,600 in high-cost areas.

Meanwhile, Ginnie Mae, a government-sponsored enterprise which purchases FHA and VA loans from private lenders and pools them into securities for sale to private investors, will begin accepting VA loans of up to $300,700 starting Jan. 1.

However, a loan of that amount can be pooled into a Ginnie Mae security only if the VA guaranty, plus the veteran's cash downpayment, is no less than $75,175. That means the veteran has to come up with $24,250 down.

For more articles by Lew Sichelman, please press here.

Published: December 12, 2001

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.