Why more veterans aren’t using VA loans to buy a home
On a day when Americans pause to commemorate servicemen and women, the Department of Veterans Affairs (VA) can boast of an astounding statistic: 22 million veterans in the United States, with 21 million VA home loans.
According to Inside Mortgage Finance, a Bethesda, Md.-based mortgage journal, the VA Home Loan program, which was established in 1944 as part of the GI Bill, had a total of $427 billion in loans outstanding at the end of September, up from $380 billion a year ago.
Meanwhile, since 1995, the amount of new VA loans has been steadily increasing, going from $24 billion in 1995 to $124 billion in 2013. Last year, the amount of new VA loans fell to $110.8 billion, marking the first year-over-year decrease.
Understanding VA home loans
VA loans provide lower interest rates than conventional loans, and they don’t require private mortgage insurance. They also allow for larger debt-to-income ratios and poorer credit ratings. “The VA loan is the finest program out there if you can qualify,” said Darren Ferlisi, a loan officer with Integrity Home Mortgage Corp. in Frederick, Md.
According to Trulia.com, the VA loan is one of the reasons that 79 percent of veterans own their houses, compared to only 63 percent of non-veterans.
However, the statistics conceal other figures that aren’t cause for celebration. Despite the rise, some industry insiders believe that too many veterans are being turned down for VA loans, and that some veterans are unaware of the program.
“Some veterans believe VA loans are inferior to commercial loans, but they aren’t,” said Dennis Wynant, a ten-year veteran of the United States Marine Corps who is now vice president of sales at loanDepot.com in Foothill Ranch, Calif.
He claims that lenders frequently offer veterans items other than VA loans that benefit the lender rather than the borrower. “VA loans require more effort and time from lenders than traditional loans, which reduces the amount of money available to borrowers.
How VA loans work, and why some lenders don’t like them
The “basic entitlement” provided to most current duty, reserve, National Guard, and veteran service members, as well as certain surviving spouses, is the key to VA loans.
Veterans can borrow up to $417,000 for a home without putting down any money as long as it is their primary residence. (The current median house value in the United States is $182,500.) According to the VA, around 90% of VA loans do not need a down payment.
And, unlike other lenders, there is no maximum debt ratio, which means that the monthly mortgage payment can be greater than the normal lender’s demand of no more than 28 percent of gross monthly income or more than 43 percent of total debt-to-income ratio.
A VA loan requires no minimum credit score, unlike most home mortgage loans demand a credit score of at least 620 for conventional loans and 580 for most FHA loans. You can also utilize a VA loan to refinance an existing debt.
Military personnel and veterans are also eligible for bigger loans as a result of the entitlement. In certain situations, a down payment is required, but with a VA loan, veterans will not be required to put as much money down as they would with commercial financing. If the prior loan is paid off first, the entitlement can be utilized on subsequent property purchases.
If the loan defaults, the VA guarantees to reimburse a part of the debt (between 25 percent and 50 percent, depending on the loan size).
Recent veterans, on the other hand, do not appear to be taking advantage of the program in great numbers. Only 36% of 2,000 members of the Iraq and Afghanistan Veterans of America (IAVA) group stated they had applied for a VA house loan in a 2014 poll.
Some claim they were never told about it. That was the case for Andrew Passaretti, a six-year veteran of the United States Marine Corps who now works as a server at a restaurant in Santa Cruz, California.
He stated, “The VA loan program doesn’t even strike a bell.” He added, “I don’t recall anything being mentioned to me about what was available once I got out.”
The IAVA claims that the low rate of VA loan penetration among veterans is a hangover from the housing boom, when subprime lenders targeted military families as prices soared faster than VA loan limitations could keep up.
During the housing crisis, the IAVA reported that foreclosure rates in some military communities were up to four times higher than the national average in 2008.
According to a 2012 research from the FINRA Investor Education Foundation, 42 percent of military homeowners (males 18 to 35 years old) were underwater, or owed more than their property was worth, compared to 27 percent of civilian homeowners.
The VA claims that veterans who have benefited from the program have some of the lowest homeownership default rates, and that in 2014, the agency assisted 80,000 VA borrowers in avoiding foreclosure, saving taxpayers $2.8 billion. A VA representative did not respond to requests for comment through email.
However, real estate experts say the VA’s rush-and-wait requirements for appraisals and inspections, as well as associated red tape and other idiosyncrasies when compared to other non-government loan programs, can hurt military buyers in some markets, discouraging brokers from referring borrowers to VA loans, and ultimately hurting veterans’ efforts to find homes.
According to Bankrate.com, loan origination fees with VA loans can be greater than those with conventional loans, which generally range from 0.5 percent to 1%.
The higher costs are necessary, according to the VA, because the loans do not need down deposits or private mortgage insurance, but the fees can be rolled into the monthly mortgage payment like other loans. The VA, on the other hand, will not let veterans pay so-called “junk” processing costs charged by loan servicers or title firms.
Even yet, if the no-down-payment option is chosen for the initial loan, whether it is a buy loan or a refinancing loan, the cost can be roughly 2.2 percent. The charge for reservists and National Guard members, as well as future loans, is much higher — often more than 3% — but it is waived for most veterans getting VA compensation for service-related illnesses and surviving spouses of veterans who died while serving. More information about loan costs may be found here.
There are a few more bureaucratic annoyances. When two married veterans want to purchase a house, for example, their benefits must frequently be divided, and lenders must obtain permission from a regional VA loan office, which takes longer.
The VA’s home inspection, known as the Minimum Property Requirements or MPR, is also available. The VA’s examination is particularly thorough as compared to the non-VA mortgage market, where house inspections can be informal or even optional.
Work on the house, for example, cannot be done during the inspection. Furthermore, there must be no cracked or peeling paint on the interior or outside (because the VA thinks this indicates lead-based paint), termites, mildew, or even sagging handrails.
While most home inspectors would just switch on the furnace to see whether it works, the VA requires inspectors to ensure that the heat source is capable of preventing pipes from freezing.
Some evaluations with VA loans take longer, according to Hillary Legrain, vice president of First Savings Mortgage Corp. in Bethesda, Md. “The VA orders and assigns the appraisal to one of their appraisers, and they can take several weeks to complete, so a VA loan does not allow for rapid closing times,” she explained.
However, she claims that the VA approval process for condominiums is typically faster than a conventional loan since Fannie Mae and Freddie Mac tightened their criteria after getting burnt by poor condo loans during the recession. “I can get a condo project authorized via VA that Fannie (Mae) or Freddie (Mac) would never approve,” she added.