A VA Home Loan Guarantee Doesn't Mean That You're Guaranteed an Approval.
For those who qualify for these government-backed loans, the VA loan program is a great program that offers competitive interest rates with no money down. One of the benefits of the GI Bill, first established in 1944, was the home loan benefit, and frankly, it's still the best mortgage program around for those who want a zero-down loan. But the VA home loan guarantee is not a guarantee to the veteran—it's a guarantee to the lender.
When a lender evaluates a VA loan application, one of the first things it does is contact the Department of Veterans Affairs and ask for the applicant's certificate of eligibility, or COE. The COE states whether the applicant is in fact eligible for a VA loan. If the applicant is an honorably discharged veteran or qualifying active-duty personnel, then the lender receives a clean COE.
The lender then checks the applicant's credit, income, and all the other things that go along with a loan approval, and if everything is in order, then the VA loan is made. But just because a veteran is "eligible" for a VA loan doesn't necessarily mean that he qualifies for one. Good credit and job history, among other things, are still necessary for a VA mortgage. And even though the VA guarantees the loan, it doesn't guarantee loan approval. The guarantee is there to compensate the lender should the VA loan go bad sometime in the future.
There Might Be One More Zero-Down Loan for You: US DA.
The United States Department of Agriculture, or US DA, also has a loan program that few people know about but that has been around for decades. Originally established in 1939, it was called the Rural Development Program and was designed to help people buy homes in remote or rural areas. The program never really took off until the mortgage debacle in the late 2000s.
One of the culprits in the mortgage problems in the 2000s was the emergence of zero-money-down loans. Previously reserved for qualifying veterans, no-money-down loans became hugely popular with the emergence of no-money-down alternative and subprime mortgages. People could buy real estate with no money down. Fewer and fewer government-backed loans were issued during that period.
When alternative and subprime mortgages went away in the late 2000s, suddenly the US DA began getting a second look because it offers a loan program with no money down and even lets the borrower roll some of the closing costs into the loan.
There are some restrictions on these loans, and, as the name might imply, they are reserved for rural areas. Applicants must also meet certain income restrictions. But the definition of "rural" for these loans can be surprising. Even some suburban areas can be determined to be rural under the US DA guidelines. The way to find out if a property you're considering is eligible for this loan type is to visit rurdev .usda.gov/rhs/common/indiv_intro.htm.