The Department of Veterans Affairs has overhauled its home-loan guarantee program, opening it to thousands of current and former reservists and National Guardsmen.

Other recent changes should make it easier for VA borrowers to complete home purchases, experts said.For instance, VA borrowers may now negotiate interest rates with the lender and pay discount points, instead of using the VA's set rate and persuading the seller to pay any points needed to bring the loan in line with market rates.

The negotiable rates have "stirred up" some home buying among those veterans who were eligible even under the old rules, says Joseph A. Hanlon, vice president and Pennsylvania district manager for Margaretten & Co., mortgage brokers.

But so far reservists and guardsmen haven't begun using the program, he said.

The VA program does not actually make loans, but it had on its books guarantees for 13.24 million of them, with a total value of $364.04 billion, at the start of 1992, according to the Department of Veterans Affairs. Eligible veterans can purchase homes through the VA program with less money up front than they could with private mortgage insurance (PMI) or Federal Housing Administration (FHA) loans.

The Congressional Budget Office estimated that the law authorizing the changes would open the VA home-loan program to 290,000 newly eligible veterans, mostly guardsmen and reservists who served for at least six years and were not dishonorably discharged. The eligibility for guardsmen and reservists is authorized only until October 1999.

Terry Jemison, a VA spokesman, says that 7,000 to 10,000 additional loans could be made each year as a result of the changes.

To qualify for VA loans under the previous rules, veterans had to serve in wartime or for at least 24 months on active duty.

Expanding the program to include guardsmen and reservists is perhaps the most significant change, said John White, vice president of the Orleans Co., a Huntingdon Valley, Pa., builder that sells many of its homes to first-time buyers.

But the law also adds new flexibility by allowing borrowers to negotiate interest rates on VA loans. Veterans were not allowed to pay discount points in the past, White said, and they lost some negotiating power because sellers were paying points.

If rates went up before closing, the seller might have to choose between killing the deal or paying additional points, he said.

Now that rates are negotiable and borrowers may pay discount points, the system should make it "a lot easier" to complete sales with VA loans, White says. The negotiable rates are only authorized for the next three years, after which the VA program would revert to the old system of setting rates.

Another change in the VA system is a three-year test of adjustable-rate loans modeled on an FHA program.

The VA and FHA adjustable-rate mortgages have rate "caps" of 1 percentage point per year and 5 points over the life of the loan. That means that a loan that begins at 6 percent could rise to no more than 7 percent in the second year and to no more than 11 percent at any time during its life. If the caps permit, rates will be set at 2 percentage points above the one-year T-bill index.

View Comments

Hanlon says the FHA caps and margins are "very attractive" and the loan program is not used as much as it should be.

White says he has not seen an increase in borrowing by reservists and guardsmen - at least not yet.

"I don't think it's getting enough publicity," he said.

For more information, the Department of Veterans Affairs may be reached at (800) 827-1000.

Join the Conversation
Looking for comments?
Find comments in their new home! Click the buttons at the top or within the article to view them — or use the button below for quick access.