In the Current Mortgage Climate is a VA Loan A Good Option?
With the implosion of the housing bubble and subsequent mortgage crisis, tightened credit standards and escalated loan review limited and often times debilitated borrower’s ability to obtain a traditional loan package. As traditional loan originations plummeted over the last few years, VA guaranteed loan funding actually increased by 168% since 2007, with 14% increase in the last year alone. VA loan packages have not only been attractive to borrowers but increasingly to lenders.
VA loan default and delinquency rates have been the lowest of all loan packages throughout the mortgage crisis, particularly spanning the last 14 quarters. Delinquency rates recorded for 90 day defaults have steadily been recorded at just 2.2% for VA loans, less than half of that of all other conventional and FHA loans. Loan specialists were initially perplexed at these statistics. VA borrower’s statistically have higher debt to income ratio, strikingly low cash assets and lower credit scores. Yet, these same borrowers are far less likely to default.
In a recent column for the Washington Post, Kenneth Harney wrote, "Michael Frueh, the VA program's acting director, says the key to the agency's quiet success is its almost paternalistic emphasis on servicing its 1.5 million borrowers — moving early and quickly to intervene at the slightest hint of payment problems." The VA objective to keep borrowers in their homes contrasts starkly to the failure of other federally backed, but commercially serviced loan assistance programs. Further explanation of VA loan reliability can of course be found in the borrowers themselves. Despite lower credit review and asset availability, these borrowers, military veterans, prove to be more solid and conscientious. Their financial habits notably a reflection of the culture and values of our veterans.
What makes a VA loan so attractive to military veterans? Will it continue to be a good choice as credit standards begin to relax?
First thing to consider, no down payment is required. However, even a small down payment can significantly reduce the VA fee that is associated with the loan. The loan cannot be funded for more than the appraised value and in most states the limit for funding is $417,000.
Closing costs paid by the borrower are limited and oftentimes even these can be covered by the seller. Approved closing costs of up to 4% of the total can be covered by the seller at closing. Some costs including termite inspection, cannot be paid by the buyer.
Private Mortgage insurance is not required with a VA guaranteed loan. PMI is the extra insurance that lenders require buyers to pay when they take out a loan that is usually greater than 80% the cost of their home. In other words, if you can only afford to pay 20% of the cost of your home, lenders make you pay the PMI. If you choose a VA loan, lenders cannot require you to pay PMI.
VA rates are trending lower than traditional fixed rates as VA loans prove to have a markedly lower rate of default through the mortgage crisis. Careful evaluation of the home appraisal and purchase price allows the borrower to build fees and costs into the loan, including the non-negotiable VA funding fee. VA loan appraisals do tend to be more conservative that may limit negotiating space to add in additional costs or fees. But in the current climate, sellers are more conducive to negotiate small changes in purchase price to allow room for the fees with the loan package.
Grant Moon from VAloancaptain.com gives this overview of the interest rate trends, "VA loans are arguably the most attractive and competitive loans on the market. For example, a loan that would be offered to a conventional loan buyer at 4.25% on a 30 fixed rate, could be offered at 3.75% affording a VA homeowner considerable savings over the life of a loan. Not only are rates almost a half a point lower than conventional loans, once you have a VA loan the homeowner would be eligible to refinance through the VA Interest Rate Reduction Loan if rates went down."
There are negative factors to consider with a VA loan including the VA funding fee that is required by law. The fee, currently 2.15% on no down payment loans for a first-time use, is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is 3.3%.
a. A 5 – 10% down payment will reduce the funding fee to 1.5%, a down payment of greater than 10% reduces the fee 1.25%.
b. Members of the Reserves and National Guard have slightly higher funding fee rates, beginning at 2.4%.
VA loans take longer to process. Any necessary repairs found during the VA appraisal are required to be completed before the VA will guarantee the loan. In a conventional loan package the lender will oftentimes allow repair funds to be put into escrow for completion after the closing. Some consideration is given to this rule if environmental factors like weather would prohibit completion of repairs within a reasonable period for closing.
Chris Birk, from VeteransUnited.com on the process, "VA loans typically close in 30 to 45 days, although that time frame can accelerate depending on the needs of the veteran and other factors. It’s important to remember that the pace of loan processing can vary greatly depending on the unique circumstances of a given borrower. Military borrowers can help themselves by taking steps to ensure the process is as seamless as possible, ranging from double checking loan paperwork and avoiding major purchases to retaining consistent employment."
VA loans can only be utilized for the veteran’s primary residence. Investment properties and multiple dwelling units are not eligible for VA guarantee. VA loans can also be used to buy a townhouse or condominium unit in a project that has been approved by VA, to build a home, to repair, alter, or improve a home, to simultaneously purchase and improve a home, to improve a home through installment of a solar heating and/or cooling system or other energy efficient improvements, to buy a manufactured (mobile) home and to buy and improve a lot on which to place a manufactured home which you already own and occupy.
Construction VA Loans are difficult to obtain in the current mortgage climate. Many lenders are not accepting applications for construction VA loans. VA Construction loans require the use of a VA approved home builder, a valid home warranty and funding of the loan does not occur until the final inspection of the completed property. Depending on the builder, this oftentimes requires the borrower to obtain a short term traditional construction loan to make payments to the builder throughout the construction process. Large builders are generally willing to work with the VA payment process and not require funding throughout construction.
Veterans must obtain a Certificate of Eligibility to be considered for a VA Loan. COE’s can be obtained through http://www.ebenefits.va.gov/
. Eligibility requirements include:
- Served 181 days during peacetime (Active Duty)
- Served 90 days during war time (Active Duty) • Served 6 years in the Reserves or National Guard
- You are the spouse of a service member who died while in service or from a service-connected disability
- Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16,1981, must in most cases have served at least 2 years
Guidelines for debt to income ratio for the VA borrower recommend the debt does not exceed 41%. What are Mortgage Debt to Income Ratios? – You can calculate your debt to income ratios or DTI by adding up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, homeowners' dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, divide it by the gross monthly income.
Once approved for a VA guaranteed loan, borrowers or borrower’s agent can negotiate rates for Fixed Rate, Adjustable Rates, Hybrid ARMS, Growing Equity Mortgages and Graduated Payment Mortgages to find the best rate for the borrower.
Grant Moon favors the VA loan choice in this current economy, "With historically low interest rates and home prices VA Home Loans offer great opportunity to purchase a home with no money down and no Private Mortgage Insurance (PMI). Without having to put any money down the buyer forgoes having to save 20% of the value on a home that conventional loans require. In addition, without any PMI Payments the buyer saves on their monthly payment on their home which usually between $100-$200 a month."
VA loans are not only attractive to the veteran lender with no or little down payment, but they are increasingly a more secure investment for lenders.