The US Department of Veterans Affairs’ home loan program has the most arduous task of any government loan program: Give those who make the American dream possible the best chance to live that same dream. It’s a big task, and the VA has answered the call.
2015 saw the VA back a record 631,151 loans. That is a forty percent increase from 2014, and nearly a 400 percent increase since 2007. While these numbers are due to historically low interest rates, the bottom line is that regardless of numbers, the VA is offering veterans relief from today’s stringent lending laws, while protecting them from the foreclosures that scarred the housing market in 2008.
The building of the VA loan has been a decades long process that has yet to be perfected, but is always making progress. When servicemen returned home after WWI, the government gave them about $60 and a train ticket home. It wasn’t until 1944 that Congress passed the GI Bill of Rights, and the VA loan entered its infancy. Since then, it has helped over 20 million veterans become homeowners.
Like most things that are 71 years old, the VA loan of 1945 is hardly recognizable from what we have today. In 1945, the loan was only eligible to WWII veterans, the government only backed 50 percent of the loan, and the loan cap was $4,000 at a time when average home prices were $8,300. With today’s inflation that is like capping a loan at $53,000 when average home prices are $110,000.
Today, VA loans are capped at $417,000 (in most counties) while the average home price is $330,000. The VA also backs 100 percent of all loans, which makes it less risky to lenders, who therefore offer rates which on average are 0.31% lower than conventional loans. In addition, VA loans don’t charge Private Mortgage Insurance, and the VA picks up fees ranging from termite inspections to postage. In summary, it is a pretty good deal.
But it is important to remember that nothing is permanent. VA rules did not change one bit from 2014 to 2015, yet activity rose 40 percent. When rates no longer make the VA loan such an obvious choice, it is important to understand the gripes people have with the VA, or what head of VA Loan Program Mike Frueh calls, the “myth of my father’s VA.”
- You need perfect credit for a VA loan – The VA does not have credit standards, but private lenders do. Fortunately they are not too stringent. Typically, a score of 620 will be approved. For the VA IRRL, which accounted for 30 percent of volume in 2015, credit scores can be as low as 580.
- VA loans cost more – Some may view a 0 percent down payment as a detriment that drives up interest costs. The down payment is not mandatory, although 90 percent of VA borrowers utilized it last year. In less erratic economic times, borrowers can even take the money kept from the zero down payment and invest it in stocks and mutual funds, which very well could outpace interest costs.
VA loans also have a unique feature called the Funding Fee Rate, which indirectly makes borrowers pay for the zero down payment in an effort to limit costs to taxpayers. This fee can be reduced drastically for veterans with disabilities.
- VA Loans are Risky – No way. VA borrowers have had the lowest foreclosure rate for the past 8 years. The VA has a common sense guideline for discretionary income, and a foreclosure prevention team which gets regular updates on every single VA loan in the country, alerting home owners if they are in danger of foreclosure. The VA estimates that this team helped avoid 90,000 foreclosures last year.
- VA Loans Take Forever to Close – In December 2015, the average VA loan closed in 51, days, one day longer than the conventional loan average.
After 71 years, the VA loan remains a solid option that is continuously improving. For example, there is now work being done to lift the $417,000 limit on fully backed loans. There is no doubt that the VA loan has come a long way, and is something Americans should be proud of.