By: Chris Birk
Twenty million and counting! That’s how many Veterans have secured home financing since 1944 using the VA Loan Guaranty Program. This benefit has now helped generations achieve part of the American dream they fought to defend.
Today, in an era of tighter mortgage lending requirements, this long-cherished program is arguably more important than ever. So is making sure that Service members and Veterans are aware of the home loan benefits earned by their service.
To that end, here’s a look at seven key facts about VA loans.
No down payment
This is the singular, headline-garnering benefit of the program. Qualified Veterans can purchase up to $417,000 in most parts of the country without having to make a down payment. Buyers in more expensive parts of the country can go even higher. It’s tough to overstate just how significant this is in the current lending environment.
For example, let’s say you want to purchase a $200,000 home. For a conventional mortgage, the minimum down payment would be $10,000, or 5 percent of the purchase price. FHA loans require at least 3.5 percent down, which in this case is $7,000. Saving that kind of lump sum can be a tall order for the average military homebuyer. For some perspective, VA borrowers on average have just under $7,000 in assets.
The no-down-payment benefit helps Veterans get into homes without having to spend years scrimping and saving for a day that might never come.
VA doesn’t actually make home loans — in all but a few cases. Instead, it provides a financial guaranty to private VA-approved lenders; basically a promise to repay a portion of the loan should the borrower default. That promise gives lenders a degree of confidence and allows them to extend financing to qualified Veterans without the need for a down payment.
It’s important to understand that VA’s fiscal guaranty doesn’t mean that eligible Veterans automatically get a home loan. Not every Veteran who’s eligible for a VA home loan will get one, because prospective borrowers still need to meet requirements set forth by both VA and approved lenders.
While the VA guaranty breeds confidence, lenders are still on the hook for most of the loss if a Veteran defaults. That’s a big reason why lenders are able to introduce requirements beyond what VA needs to see to determine eligibility. A credit score minimum is probably the most common example of where these two roads diverge.
A credit score is essentially a representation of your ability and willingness to repay debt. Rather than cite a specific score, VA simply wants Veterans to be a “satisfactory credit risk” in order to utilize this program. But lenders go a step further and require that borrowers meet or exceed credit benchmarks. This type of additional requirement is known as an “overlay” and helps lenders better manage their risk.
Right now, most VA lenders are generally looking for a score of at least 620. That’s well below what Veterans will typically need to satisfy conventional and even FHA lenders.
No private mortgage insurance
Loan programs that require a down payment often come with an additional financial drain: mortgage insurance. Unless you can put down a hefty chunk of change (typically 20 percent of the purchase price), conventional borrowers will be on the hook for a monthly mortgage insurance payment until they’ve built sufficient equity.
FHA loans have an upfront mortgage insurance premium along with an annual fee that borrowers now pay for the entirety of the loan term.
VA loans have no mortgage insurance. Because of this benefit, the Veterans who secured VA financing last year will save $19 billion over the life of their loans.
Fighting off foreclosure
VA loans have had the lowest foreclosure rate of any loan product for nearly all of the last five years. That’s an incredible achievement considering nine in 10 come with no down payment.
The overall safety of the loan program is rooted in VA’s prudent underwriting requirements, its even-handed appraisal process, and its tremendous commitment to helping Veterans keep their homes.
The Loan Guaranty program has more than 150 loan specialists who work to educate Veterans about foreclosure avoidance and intervene with lenders and servicers. Their efforts have helped more than 300,000 Veterans who became delinquent on their mortgage to fight off foreclosure.
It’s not a one-time benefit
One of the most common misconceptions about this program is that it’s a one-time shot. That’s absolutely untrue. Once you earn this benefit, it’s yours for life. You also don’t necessarily need to repay your original loan in full in order to purchase again with a VA loan. What’s possible will depend in part on how much VA loan entitlement you have remaining.
VA loans are booming
VA loan volume has soared 380 percent since FY07. The program’s recent boom comes as Veterans have struggled to qualify for conventional and even FHA home financing in the wake of the housing market collapse. Veterans are flocking to the safety, security and significant benefits of VA loans.
The federal government created this program nearly 70 years ago to help level the playing field for Veterans and military families. Today, the VA Loan Guaranty program plays the same critical role in helping open the doors of homeownership to those who might otherwise struggle to secure it.
In fact, VA loans may now be more of a lifeline for military borrowers than at any time since World War II.
Chris Birk is the author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.” He is also executive editor at Veterans United Home Loans. You can follow him on Google+.