Adjustable Rate VA Loan

When considering the VA Loan, an adjustable rate option may be what you need for qualifying for the home of your choice, or it may just be you prefer the lower payment option it provides.

President Bush signed into law S. 2486, the Veterans Benefits Act of 2004, and was signed by the President on December 10, 2004. A Public Law number has not yet been assigned. This page explains provisions affecting the Loan Guaranty Program as they relate directly to the ARM program.

The law gives VA authority to guarantee "traditional" Adjustable Rate Mortgages (ARMs) in a manner similar to that by which HUD insures adjustable rate mortgages under section 251 of the National Housing Act. VA previously had this authority but it expired September 30, 1995. The legislation provides authority through September 30, 2008. Key features of this program are:

(1) Interest rate adjustments on an annual basis;

(2) Annual interest rate adjustments limited to a maximum increase or decrease of 1 percentage point;

(3) Interest rate increases limited to a maximum of 5 percent points over the life of the loan;

(4) This type of ARM loan MUST be underwritten at 1 percentage point above the initial rate.

Hybrid Loan Options

(1) Extension of Authority. The law extends VA authority to guarantee hybrid ARM loans to September 30, 2008.

(2) Modification of Interest Rate Adjustment Requirements:

(a) If the initial contract interest rate remains fixed for less than 5 years, the initial adjustment is limited to a maximum increase or decrease of 1 percentage point and the interest rate increase over the life of the loan is limited to 5 percentage points.

(b) If the initial contract interest rate remains fixed for 5 years or more, the initial adjustment will be limited to a maximum increase or decrease of 2 percentage points.

(c) In cases where the initial interest rate remains fixed for 5 years or more, the interest rate increase over the life of the loan will be limited to 6 percentage points.

(3) Effect on hybrid ARMS Guaranteed prior to Enactment of the Act. The provisions of this Act will not affect existing hybrid ARMs. VA hybrid ARM loans made prior to this Act will be subject to the terms in effect at the time they were made. For example, a hybrid ARM with an initial fixed rate for 5 years or more made prior to this Act is limited to a 1 percentage point initial adjustment and a 5 percent limit over the life of the loan.

Your VA Loan Specialist would love to go over the options and benefit available to home buyers with these great ARM options.