The VA Home Loan program, founded in 1944 as part of the GI Bill, had a total of $427 billion worth of loans outstanding at the end of September, up from $380 billion a year ago, according to Inside Mortgage Finance, a Bethesda, Md.-based mortgage publication. Meanwhile, the number of new VA loans has been on a near-steady climb since 1995, rising from $24 billion to $124 billion in 2013. The number of new VA loans declined last year to $110.8 billion, the first year-over-year decline since 2010.
The VA loans typically have lower interest rates than conventional mortgages, allow for higher debt-to-income ratios and lower credit scores, and they don’t require private mortgage insurance. “If you can qualify, the VA loan is the best program out there,” said Darren Ferlisi, a loan officer with Integrity Home Mortgage Corp. in Frederick, Md.
The VA loan is one of the reasons 79% of veterans own their own homes, compared with just 63% for the non-veteran population, according to Trulia.com.
“Some veterans think VA loans are somehow inferior to a conventional loan, but they really aren’t,” said Dennis Wynant, who served in the U.S. Marine Corps for a decade and is now the vice president for sales at mortgage lender loanDepot.com, in Foothill Ranch, Calif. He says lenders often pitch veterans products other than VA loans that are better for the bank, not the borrower. “It takes lenders more work and time to process VA loans than conventional loans, which cuts into profits,” Wynant said.
How VA loans work, and why some lenders don’t like them
The key to VA loans is the “basic entitlement” offered to most active duty, reserve or National Guard and veteran service members and even some surviving spouses. Veterans can borrow up to $417,000 without any down payment for a home so long as it is for their principal residence. (The median home value in the U.S. is currently $182,500.) About 90% of VA loans have no down payment, the VA says. And unlike for most lenders, there is no maximum debt ratio, meaning that the monthly mortgage payment can be higher than the typical lenders requirement of no more than 28% of gross monthly income, or exceeding the 43% of total debt-to-income ratio. There’s also no minimum credit score requirement for a VA loan, while most home mortgage loans require a credit score of at least 620 for conventional loans or 580 for most FHA loans. A VA loan can also be used to refinance an existing loan.
See the VA’s home loan factsheet
The entitlement also allows military members and vets to qualify for larger loans. In those cases, a down payment is needed, but with a VA loan the vets won’t need as much down as they would if they chose conventional financing. The entitlement can also be reused on subsequent home purchases, so long as the previous loan is paid off first.
The VA also promises lenders that they’ll repay a portion of the loan (between 25% and 50% depending on the loan balance) if the loan defaults.
But recent vets don’t seem to be taking advantage of the program in large numbers. In a 2014 survey of 2,000 members of the Iraq and Afghanistan Veterans of America (IAVA) association, just 36% said they had applied for a VA home loan.
Some say they were never informed of it. That was the case for Andrew Passaretti, a six-year U.S. Marine Corps. veteran who now helps manage a restaurant in Santa Cruz, Calif. “The VA loan program doesn’t even ring a bell,” he said. “I don’t remember anything said to me about what was available after I got out,” he said.
The IAVA argues the modest penetration of VA loans among veterans may be a hangover from the real-estate boom, during which subprime lenders targeted military families as prices rose faster than VA loan limits could keep up. During the housing bust, the IAVA said foreclosure rates in some military towns in 2008 were as much as four times the national average. In addition, 42% of military homeowners (males, 18 to 35 years of age) were underwater, or owing more than what their house was worth, compared with 27% of their civilian counterparts, according to a 2012 report from the FINRA Investor Education Foundation.
The VA points out that the veterans who have taken advantage of the program have some of the lowest homeownership default rates, and that the agency also helped 80,000 VA borrowers avoid foreclosure in 2014, saving taxpayers $2.8 billion. A VA spokesperson did not return emailed requests for comment.
Too much red tape?
But real-estate pros say that the VA’s hurry-up-and-wait requirements when it comes to appraisals and inspections, associated red tape and other idiosyncrasies when compared with other non-government loan programs can hurt military buyers in some markets, deterring brokers from steering borrowers to VA loans, and ultimately hurting veterans’ efforts to land homes.
For one, loan origination fees with VA loans can be higher than some conventional loans, which typically are about 0.5% to 1%, according to Bankrate.com. The VA says the higher fees are needed because the loans don’t require down payments or private mortgage insurance, though like other loans, the fees can be rolled into the monthly mortgage payment. The VA, however, won’t allow veterans to pay any so-called “junk” processing fees by loan servicers or title companies. Still, the fee can be nearly 2.2% if the no-down-payment-option is used for the first loan, whether it is a purchase loan or a refinance loan. The fee is even higher for reservists and National Guard members, and for subsequent loans — sometimes more than 3%, though it’s waived for most veterans who are receiving VA compensation for service-related disabilities and for surviving spouses of veterans who died while serving. See more about loan fees.
There are some other bureaucratic hassles. For example, when two married veterans want to buy a home, they must often divide their entitlements, and lenders have to get approval from a regional VA loan office, which takes more time.
There’s also the VA’s home inspection, known as the Minimum Property Requirements or MPR. Compared with the non-VA mortgage market, in which home inspections can be relatively casual or even optional, the VA’s inspection is particularly rigorous.
For example, there can’t be work being done on the house during the inspection. Moreover, there can’t be chipped or peeling paint inside or out (since the VA assumes that to be an indication of lead-based paint), or termites or mold or even loose handrails. And while most home inspectors will merely turn on the home’s furnace to see if it works; the VA requires inspectors to verify that the heat source can keep pipes from freezing.
Hillary Legrain, vice president with First Savings Mortgage Corp. in Bethesda, Md., says that some appraisals with VA loans also take longer. “The VA orders and assigns the appraisal to one of their appraisers, and they can take several weeks to get them done, so it prevents quick close times with a VA loan,” she said. But, she says that the VA approval process for condominiums can often be quicker than than with a conventional loan because Fannie Mae and Freddie Mac’s requirements became much stricter after being burned by bad condo loans during the downturn. “I can get a condo building approved through VA that would never be approved by Fannie (Mae) or Freddie (Mac),” she said.
Still, Chris Kershisnik, a U.S. Marine Corps veteran ,and now a real estate agent in the Washington D.C. metro area, says his military buyers with VA financing too often lose out to home buyers with other types of financing. He said that, especially in competitive markets like D.C., “VA couldn’t compete with conventional financing. It was not a realistic option.”