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Tuesday, February 16, 2010

VA-Home Loan Guaranty Program: An Overview

Bruce E. Foote
Analyst in Housing Policy

Under the Department of Veterans Affairs' (VA) home loan guaranty program, an eligible veteran may purchase a home through a private lender and the VA guarantees to pay the lender a portion of the losses if the veteran defaults on the loan. From the program's inception in 1944 through the end of FY2009, VA has guaranteed the purchase or refinancing of nearly 18.7 million homes for veterans. This report discusses the features of the VA home loan guaranty program; it will be updated as suggested by changes in law or regulation.

The Servicemen's Readjustment Act of 1944 established the VA home loan guaranty program. The program authorized the guaranty of 20-year loans at a 4% interest rate under which the VA guaranteed to pay the lender the lesser of 50% of the loan amount or $2,000 if the borrower defaulted. The loan term, interest rate, and the percentage and dollar guaranty limitations have been increased over the years. 

The VA loan guaranty program was an alternative to cash bonuses for the millions of men and women who served in the Armed Forces during World War II. There was the feeling that veterans, during their service to the country, had missed the opportunity to accumulate savings or to establish a credit rating which could be the basis of borrowing to acquire a home or establish a business. The loan guaranty program was an attempt to put them on par with their nonveteran counterparts. The program also provided an investment outlet for the country's post-war wealth. Under this program, an eligible veteran may purchase a home through a private lender and the VA guarantees to pay the lender a portion of the losses if the veteran defaults on the loan. 

Although initially established to benefit veterans who had served during war times, the program has been amended to extend eligibility to all parties who are on active duty or honorably discharged from the services. The main objective of the current VA home loan guaranty program is to help veterans finance the purchase of homes on favorable loan terms.

Date of Report: February 3, 2010
Number of Pages: 8
Order Number: RS20533
Price: $29.95

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