The President has signed legislation that raises the ceiling on home loans for the nation's military personnel for the first time in seven years.

The Department of Veterans Affairs doesn't make loans directly. Instead, 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 guarantee limit for the past seven years has been $50,750. The result is that VA-qualified individuals could borrow up to $203,000 ($50,750 x 4) with no money down.

The increase in the guaranty limit to $60,000 isn't as great as the Bush Administration and the housing lobby had sought. But it's still enough for an eligible veteran to buy a $240,000 house without putting up any of his own money.

The increase takes effect immediately.

The DVA backs about 260,000 loans a year. The vast majority of the nation's 24 million veterans qualify for the benefit, which is known as an "entitlement."

Real estate groups and the DVA have been pushing Congress for several years to increase the VA ceiling to keep up with rising house prices in high-cost areas. But every time it appeared lawmakers would act, they changed their minds at the last minute, said Jerry Giovaniello of the National Association of Realtors.

This time, though, with the war on terrorism serving as a catalyst, Congress voted to raise the guaranty from $50,750 to $60,000. But even then, lawmakers had to scale back the increase somewhat for budgetary reasons.

"It's a bit of a disappointment," said Keith Pedigo, director of the DVA's Loan Guaranty Service. "We were hoping to bring (the guaranty) up to $63,175, but $60,000 is quite acceptable. It will put us back in business in some of the high-cost areas."

"Given that the conforming loan limit has increased 48 percent since the last time the VA limit was raised in 1994, the increase is long overdue," said Bud Carter of the Mortgage Bankers Association, whose members make the lion's share of government-backed home loans.

The "conforming" loan limit, which is the ceiling on loans that can be purchased from local lenders by Fannie Mae and Freddie Mac, the two federally chartered corporations which bring liquidity to the mortgage market, was increased as of Jan. 1 to $300,700. Loans above $300,700 are regarded as "jumbo" financing and usually require somewhat higher interest rates.

Also as of Jan. 1, the ceiling on loans that can be insured by the Federal Housing Administration was raised to $260,600 in the nation's 38 most expensive housing markets.

Since the loan guaranty program was enacted in 1944 as part of the Servicemen's Retirement Act, better known as the GI Bill, an estimated 16.5 million veterans have used the benefit, some multiple times.

In some places, veterans often combine their federal benefits with those provided by state governments. California, Oregon, Wisconsin, Mississippi and Texas are among the handful of states which also offer housing assistance to veterans residing within their borders.

Mortgage rates on VA loans are usually slightly above the market, but there is no mortgage insurance because the loan is "guaranteed," not insured. The loan can be assumed by anyone who buys the house when the time comes to move on.

But there is no free lunch: Borrowers must pay a "funding fee" of 2 percent of the loan amount for no-downpayment loans, a fee which can be included in the loan amount. The fee is 1.5 percent on loans in which the borrower puts at least 5 percent down and 1.25 percent with a 10 percent downpayment.

If the full entitlement is not used, the remainder can be used to buy another home. Also full benefits can usually be restored if the original property is sold and the loan is paid in full. But for second-time users, the funding fee on no-downpayment loans is 3 percent.

To qualify for federal benefits, veterans must have served at least 90 days on active duty during World War II, the Korean War, Viet Nam or the Gulf War. Enlisted personnel who started their service after Sept, 7, 1980 and officers who began after Oct. 16, 1981 also are eligible if they completed 24 months of continuous active duty.

In addition, servicemen and women who served at least 181 days during several peacetime periods July 25, 1947 to June 26, 1950, Feb. 2, 1955 to Aug. 6, 1964 and May 8, 1975 to Sept. 7, 1980 for enlisted personnel and Oct. 16, 1981 for officers are eligible.

Reservists and members of the National Guard who completed six years of service are eligible, too, as are unremarried spouses of a vet who died while in service or from a service- connected disability and spouses of a serviceperson missing in action or a prisoner of war.

For more articles by Lew Sichelman, please press here.

Published: January 2, 2002

Use of this article without permission is a violation of federal copyright laws.

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.