Normally we try to keep each chapter to only three articles covering the most relevant portions of the Handbook. But Chapter three is so full of great information that we’re giving it an extra three articles to make sure that you get all the information you need from it. Chapter three has covered the basic elements of a VA loan, all the eligible purposes for a VA loan, maximum loan and guaranty amounts, the occupancy requirement and how to satisfy it, how interest rates on a VA loan are calculated and how a borrower can buy discount points in the VA loan program. In this article, we’ll be talking about the maximum times for loan maturity and amortization for a VA loan. We’ll be going into detail on both maturity and amortization.
The first thing the Handbook puts here is the maximum length of time that a loan can take to mature. For an amortized loan, the maximum is 30 years and 32 days; for a nonamortized loan, the maximum length is much shorter at 5 years. Why the difference? Amortizing and non-amortizing loans are very different. In a non-amortizing loan, the monthly payments you are making are not going towards the principal of the loan; they are just covering interest, and the actual loan principal is due at the end of the loan term. In the case of VA loans, this is 5 years. Amortizing loans are the loans we are all familiar with; both interest and principal are included with every monthly payment with more principal and less interest being paid each month throughout the loan. As you can tell, there aren’t very many great use cases for the non-amortizing loan, and those few cases will be better served with a 5-year maturity rather than 7 or more.
Another restriction on the maximum maturity on a loan is the estimated economic life of the property that is being purchased. If the home isn’t expected to last longer than 15 more years, then the borrower will be unable to secure a loan with a maturity longer than 15 years. The Handbook specifies that the period of loan repayment begins from the date of the note or, in the absence of the note, any other evidence of indebtedness. The maturity date cannot be extended beyond the maximum (this is different from a refinance). Any amount of money that falls due beyond the maximum maturity automatically will be due on the maximum maturity date. This can happen if a lender either miscalculates the monthly payment or otherwise unintentionally makes a loan that exceeds the maximum maturity. The loan can still be subject to guaranty, but the amount remaining after maximum maturity will come due on the maturity date. Remember, though, that there are restrictions to this to prevent excessive ballooning. VA regulations limit the amount that can be due on the maturity date.
The VA requires that if the loan maturity date is beyond 5 years, the loan must be amortized. Anything 5 years or less is considered a ‘term’ loan and does not have to be amortized. For amortized loans, the VA generally requires that the monthly payments must be equal or approximately equal, the principal must be reduced at least once annually, and the final installment must not exceed two times the average of the preceding installments. There are two exceptions to these: GPMs and GEMs. These stand for Graduated Payment Mortgages and Growing-Equity Mortgages and will be discussed more in a future chapter. Construction loans can also have an exception made in this area, but the majority of VA-approved do not offer construction loans.
The VA also has guidelines for getting an alternative amortization plan approved even if it does not meet the requirements above. The plan must be approved in advance and must fulfill the following two criteria:
● It is generally recognized; that is, is used extensively by established lending institutions, but
● does not meet the requirements of approximately equal periodic payments and a reduction in principal not less often than annually.
There are two plans that are pre-approved by the VA: the Standard and Springfield plans, described below:
● The Standard plan provides for equal payments over the life of the loan. The amount applied to interest decreases, with a corresponding increase in the amount applied to principal.
● The Springfield plan provides for gradually decreasing payments over the life of the loan. The amount applied to interest decreases while the amount applied to principal remains constant.