Guaranty v. Guarantee: Why You Don’t Automatically Get a VA Home Loan

Colorful VA purchased home

The VA doesn’t guarantee you a home loan. It provides a financial guaranty, a promise to repay a part of the loan in the event you default.

Words mean what they mean. When it comes to the VA home loan program, one of the most confusing ones out there is “guaranty.”

A guaranty is basically when someone agrees to pay a debt for someone else in the event that person defaults. In the context of VA loans, the guaranty is the VA’s promise to repay a portion of the loan if you default. That financial pledge helps gives lenders the confidence to extend financing to qualified veterans with no money down.

But the VA guaranty doesn’t mean veterans and active military members are guaranteed a home loan. There’s nothing automatic about getting a mortgage, even for those who have proudly served our country.

No Guarantee

The VA program is an incredible benefit meant to honor the service and sacrifice of military members and their families. This nearly 70-year-old loan product has helped open the doors of homeownership to more than 20 million military borrowers. Some of the major benefits of VA loans include:

  • The ability to purchase with no money down
  • No need for private mortgage insurance, which is required for other loan types unless you put down at least 20 percent
  • More flexible and forgiving credit and income requirements
  • Competitive interest rates that are often lower than conventional and FHA rates
  • And many more

These benefits are possible because the VA promises to repay at least a quarter of the loan amount if one of its borrowers defaults on the mortgage. But the VA itself doesn’t actually make home loans. It relies on private mortgage lenders to extend financing to military borrowers who meet the VA’s requirements, which range from service time to an acceptable debt-to-income ratio and more.

Despite the VA guaranty, those lenders are still on the hook for the majority of the loan should the veteran default. For that reason and others private, VA-approved lenders will have their own requirements for a mortgage, many of which go beyond what the VA wants to see.

Credit scores are perhaps the most common example. The VA doesn’t require borrowers to hit any specific credit score in order to participate in the program. You simply need to be deemed a “satisfactory credit risk” who’s made on-time payments. But lenders are going to have a minimum qualifying score, in part because credit scores are indicators of your willingness and ability to repay debt.

Your Best Shot

As much as they might like, especially in the case of veterans and military families, mortgage lenders can’t simply give loans to whoever wants one. A mortgage is a significant financial outlay, and lenders who make loans to folks who can’t pay them back don’t stay in business very long.

But it’s important to remember that even though there’s no guarantee when it comes to VA loans, these government-backed mortgages are often the only way veterans and military borrowers can make homeownership a reality. Other loan types will require some manner of down payment and often have higher credit score requirements than VA lenders.

So while there’s no guarantee, VA loans often represent the best shot at homeownership that many military borrowers have.

Photo courtesy of thepipe26

Learn more loan and mortgage terms you might be unfamiliar with in the Veterans United Glossary of Terms.