VA Loan Articles

The Difference Between a VA Guaranty and a VA Loan

Buying a home for the first time is confusing—there are many terms to learn, a great deal of paperwork and many little details. Buying a home with a VA guaranteed home loan is definitely more buyer-friendly, but if you have never purchased a home before, there are a few additional terms and details you’ll need to learn about the VA.

One of the most common misconceptions lenders must dispel about VA mortgages is where the funds come from. Private banks issue the actual VA mortgage—no money comes from the VA itself. The Department of Veterans Affairs comes in on the veteran’s behalf with a loan guaranty, making the loan more secure for the lender. The VA promises to pay a specific amount of the VA mortgage should the veteran go into foreclosure.

This leads to a second misconception—that the VA issues a guaranty for the entire loan amount. This isn’t true. The entire lending industry uses the phrase “VA home loan” as a blanket term and it’s easy to see why people might think the VA covers the whole amount on that basis. But in reality, your VA guaranty covers up to 50 percent of a home loan amount up to $45 thousand.

The VA also issues a 40 percent guaranty for loans valued higher than $45 thousand up to $144 thousand. The absolute maximum the VA will issue in a guaranty is $36 thousand.

That set of figures can be confusing for first-time home buyers. It’s common to mistake the amount the VA issues as a loan guaranty—that amount up to a maximum of $36 thousand—for the amount of the loan itself.

The $36 thousand is not the limit of how much you can borrow. It’s simply the maximum the VA promises to pay the lender should you default on the loan. Is there a maximum amount you can borrow on a VA home loan? Yes and no. The VA does not issue limits, but VA mortgage rules do state that you can only borrow;

the purchase price of a home

-or-

the appraised value of the home

The VA says you can borrow whichever amount is lower for that property. Also, banks set a limit on how much they will lend without a down payment. Once you start learning about VA home mortgage loans, you’ll soon understand the logic behind these rules, but don’t be afraid to ask your lender for clarification if there are issues you still don’t understand.

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