New Jersey bankruptcy Article

By JAY ROMANO

The New York Times, July 27, 2003

MORTGAGES guaranteed by the Department of Veterans Affairs have traditionally been regarded by residential specialists with less than high enthusiasm, but these loans offer characteristics — notably a zero-down-payment option and an ability to be passed on to a subsequent buyer of a home — that make them a financing option worth considering.

Such mortgages — commonly referred to as V.A. loans — are attractive because they allow veterans to purchase a home with no money down and without having to pay private mortgage insurance that is usually required when the down payment is less than 20 percent. The loans are also appealing because, unlike most conventional mortgages, they are assumable by a subsequent buyer on the same terms and conditions that the veteran received.

While such loans have been available since the end of World War II, they have traditionally been viewed by real estate brokers and lawyers for both buyers and sellers as being more trouble than they are worth because of the time and red tape involved in applying for them.

Over the past several years, however, the Department of Veterans Affairs has been streamlining its application procedures — and tweaking its regulations — to make obtaining a V.A. loan nearly as easy as applying for a conventional mortgage. And with interest rates now at historic lows, mortgage experts say, the fact that V.A. mortgages can usually be assumed by a subsequent buyer could give those who obtain such loans now a distinct advantage when the time comes to sell.

“There are a lot of misconceptions out there about V.A. loans,” said Monique A. Beaudoin, loan production officer for the V.A. regional loan center in Manchester, N.H. Among those misconceptions, Ms. Beaudoin said, are that V.A. loans cost more, take much longer to process and require much more paperwork than conventional loans.

“I was a lender back in the 80’s” she said. “And getting a V.A. mortgage was a lot more complex back then.”

Ms. Beaudoin explained that under the V.A. loan program, an estimated 29 million veterans are eligible to obtain mortgages of up to $240,000 to buy (or build) homes without making any down payment whatsoever. (Some lenders will make loans of up to $300,000, with a $15,000 down payment.) Frequently, she said, V.A. loans are somewhat easier to qualify for because a more generous formula is used to determine a buyer’s ability to pay.

In addition, Ms. Beaudoin said, lenders who participate in the V.A. “automatic processing” program typically do not have to wait for the government to approve a mortgage application. In fact, she said, veterans who already have V.A. mortgages and want to refinance can do so in as little as a week.

The first step in obtaining a V.A. mortgage, Ms. Beaudoin said, is for the veteran to obtain a certificate of eligibility. Generally, she said, veterans who served on active duty during wartime for 90 days or more are eligible. Veterans with service only during peacetime must have had more than 180 days of active service, and veterans of enlisted service that began after Sept. 7, 1980, or officers with service beginning after Oct. 16, 1981, must, in most cases, have served at least two years.

Also eligible are current full-time active-duty military personnel who have served for at least 60 days; reservists and National Guard members who were activated on or after Aug. 2, 1990, and served in the Persian Gulf War for at least 90 days; and Guard members and reservists who served in support of operations in Kosovo, Afghanistan or Iraq for at least 90 days.

In addition, reservists and National Guard members who have completed six years of service and have been honorably discharged or who are still serving may be eligible. Those who believe they may be eligible for a V.A. mortgage, Ms. Beaudoin said, should complete a “request for a certificate of eligibility” (found on the V.A. Internet site,

homeloans.va.gov/lgyinfo.htm) and submit the completed form along with copies of the most recent discharge or separation papers or a current statement of service.

After a certificate of eligibility has been received, she said, the veteran shops for a home. Once a home is found, the veteran contacts a mortgage lender. If the lender is authorized by the V.A. to do automatic processing, Ms. Beaudoin said, the loan can be closed without V.A. review of the credit application. (Approved lenders are listed on the agency’s Web site.) Loans from other lenders require V.A. credit approval

After the loan is applied for, Ms. Beaudoin said, the lender must order an appraisal from an appraiser designated by the V.A. “This is the only thing that we do differently,” she said, explaining that while most lenders hire their own appraisers, the V.A. insists that the appraiser be chosen by the agency.

That, however, is one reason that lawyers, brokers and, frequently, sellers, are hardly overjoyed when a buyer indicates he or she is applying for a V.A. loan. “The V.A. appraiser comes in and goes through the house with a fine-toothed comb,” said Peter Bell, an agent for Balch Buyers Realty in Mamaroneck. “It’s almost like they’re doing an inspection instead of an appraisal.”

Another thing that makes sellers uncomfortable with such deals, he said, is the fact that in most cases, the buyer has no money on the line. “The seller says, `I don’t really want to deal with a V.A. loan,’ ” Mr. Bell said. “They say they would rather deal with somebody who has 10 percent or 20 percent down than somebody who has no down payment.”

But veterans who are able to buy a house using V.A. financing could find they obtain a significant additional benefit. Ms. Beaudoin, the loan production officer, explained that V.A. loans are assumable by a subsequent buyer subject to the V.A.’s approval. This means that when the veteran decides to sell the home, the buyer may be able to buy it without having to obtain a mortgage on his or her own.

“Assumability is a great feature when it’s time to sell,” Ms. Beaudoin said. While the person assuming a mortgage issued on March 1, 1988, or later must be approved by the V.A., obtaining such approval is said to be no more difficult than it would be for the buyer to obtain a new mortgage.

For example, imagine that a veteran buys a $200,000 house with a $200,000 mortgage and two years later wants to sell the house for $240,000. With an ordinary mortgage, a buyer would have to make some sort of cash down payment — typically, 20 percent — and would have to pay all the costs associated with obtaining the mortgage.

With a veteran’s mortgage, on the other hand, if the buyer has a $40,000 down payment — an amount that is actually less than 20 percent — he can buy the house by paying the $40,000 cash to the seller (plus whatever amount the seller has paid against principal) and assuming the seller’s remaining obligation on the mortgage. Buyers can save even more money when buying a home and assuming a veteran’s mortgage after interest rates have risen.

A veteran who obtained a 30-year V.A. mortgage earlier this year, for example, might be paying 5.5 percent interest. If, two years from now, rates have risen, say, two percentage points, to 7.5 percent, a buyer assuming the V.A. mortgage would get the benefit of lower monthly payments, and the original owner would be released from the mortgage. While one does not have to be a veteran to assume a veteran’s mortgage, she said, if the buyer happens to be a qualified veteran, the seller’s entitlement for a V.A. loan is “freed up” and he or she can get a zero-down-payment V.A. loan on the next house as well.

Ms. Beaudoin pointed out, however, that the V.A. usually charges the veteran 2 percent of the loan amount for a zero-down-payment mortgage — commonly referred to as the “funding fee” — and this is usually in addition to the 1 percent origination fee charged by most lenders. On the other hand, there is no requirement for the buyer to pay any monthly mortgage insurance premium. “And the funding fee can be included in the loan,” she said.