What is a VA surety bond?
A VA surety bond is a three-party agreement between an obligee, a veteran borrower, and the surety who provides the funds. If the veteran defaults on the obligation or pays late, then the surety reimburses the lender.
Veteran borrowers have used VA surety bonds for many years to obtain real estate financing when conventional mortgage insurance was not available.
In recent years, however, banks’ appetite for insuring loans has grown so that today they generally buy insurance directly from a private mortgage insurer rather than ask a veteran to provide a separate surety bond.
Nevertheless, veterans continue to be asked by lenders to provide them with surety bonds in order to qualify for down payment assistance programs such as those offered by the Department of Veterans Affairs.
The first thing a veteran should do when asking for a VA surety bond is to determine whether the planned transaction involves an obligation that can be completed without one. If this is not possible, then the borrower should seek independent financial counsel before proceeding with the loan. The lawyer can help review all aspects of the proposed bond arrangement and assist in evaluating its desirability from both lender and borrower perspectives.
Why do veterans request a surety bond?
Veterans request surety bonds for the three following reasons:
To purchase or build a house quickly – To get out of an apartment lease to buy their own home – To qualify for down payment assistance programs
Veterans are often in need of funds but don’t have the necessary cash available. Unable to find lenders willing to action loans that are not insured, they are asked by their sellers and real estate agents to provide surety bonds when the seller will pay part of the loan amount as an incentive to close on time.
Those veterans who build homes in subdivisions with homeowners associations may also be required by local building codes or homeowner association rules, to obtain financial guarantees from veteran borrowers in order to ensure completion of construction projects in a timely manner.
The bottom line is that a veteran borrower should determine whether the use of a surety bond for a particular transaction will be to his or her advantage. If it will, then he or she should proceed with his or her eyes wide open.
What is a surety bond used for?
Surety bonds have been in use in the United States since colonial times when, to attract trade from abroad, British merchants who were bankrupt would provide a bond that promised repayment of monies owed by them. The bond obligated others who vouched for their financial soundness to pay their debts if they failed to do so. It is still sometimes referred to as “the old standby of American mercantile credit.”
Today, VA surety bonds are used primarily as an alternative or supplement to traditional mortgage insurance for lenders seeking indemnification against borrower default on obligations secured by real estate. They are also required by local building departments and homeowner associations before commencing construction projects on homes within subdivisions where homeownership is limited to dues-paying members only.
What is the purpose of a VA surety bond?
A Veterans Administration (VA) surety bond guarantees that an obligation will be met. When veterans request this type of coverage they are generally trying to overcome financing obstacles that require them to provide some form of secondary security. Lenders may ask for a surety, or guaranty, in a number of different situations, sometimes to satisfy local building codes or other times because conventional mortgage insurance is not available.
Who benefits from a surety bond?
Veterans benefit from surety bonding because it allows them to overcome potentially insurmountable financing obstacles. Surety bonds are often the only way veterans who have little or no savings can purchase homes. Banks, mortgage companies, and other lenders also benefit because they are able to close deals more quickly when contingencies such as VA down payment assistance are met at closing.
There are many benefits to veterans who request surety bonds for their transactions, including Having an alternative way to close financing deals that might otherwise fall through; The ability to purchase homes without putting forth large down payments; and The ability to qualify for interest rates well below those quoted by conventional mortgage insurance providers.
Homebuyers who have asked for a VA surety bond can benefit from: A reduction in the amount of money they must put down to purchase their homes; Having alternatives to traditional mortgage insurance, which many veterans cannot afford or do not want because it requires monthly payments even if there is no loan outstanding; and Having the ability to compare surety bond quotes from a number of different providers, getting the coverage they need at a price that fits their budget.
What is the use of surety bonds for veterans?
Surety bonds have been used for centuries as a way to guarantee the financial soundness of a person or business that accepts a contract or obligation. In more recent times, they have been found to be useful for guaranteeing the completion of projects such as home construction and bridge-building.
A bond is required when there is no insurance company willing to insure the borrower’s creditworthiness. VA surety bonds are specifically intended to help veterans overcome obstacles that prevent them from obtaining financing for homes. The process begins by either contacting lenders who may offer surety bonding directly or by seeking quotes from several different providers in order to find competitive rates with flexible terms tailored to individual needs.
Once an agreement has been reached, the lender will provide all necessary paperwork including application materials which must be completed by the borrower. A bond will then be issued and a copy filed with all parties involved in the transaction including the lender, their attorney, the closing agent, and any other party that requires notification of its issuance.
Surety bonds for veterans are available to assist the veteran in meeting down payment, time of occupancy, and other financial requirements. They can enable a veteran to close on a loan when otherwise unable to do so because of such factors as an insufficient down payment or credit history.