The Housing Scene by Lew Sichelman

Despite Myths, VA Loans Prosper

Mortgages guaranteed by the Department of Veterans Affairs were among the most popular last year, as thousands of current and former servicemen and servicewomen used the program to finance their houses. And now, legislation has been signed that expands eligibility for these loans.

Under the new rules, members of the National Guard and Army Reserve who have been activated in response to the COVID-19 outbreak, recent civil disturbances and natural disasters are eligible for the benefits, which include mortgages with nothing down. Previously, they needed at least 90 days of consecutive active-duty service to qualify, or to have been members for six years.

Currently, about 3.5 million veterans and active-duty personnel have VA financing. Under the new law, roughly 37,100 more are now eligible, plus the 26,000 or so who were called to Washington, D.C., after the Jan. 6 siege on the Capitol.

Of course, vets and current military personnel must also meet certain government eligibility requirements: See va.gov/housing-assistance/home-loans/eligibility for details. In some instances, surviving spouses of vets also qualify.

Applicants also must meet their lenders’ income and employment criteria. But if they do, they won’t have to spend years accumulating a down payment or building up credit. This eligibility can be used over and over -- again, depending on the rules -- to move up the housing ladder.

Since 1944, when the GI Bill gave soldiers, sailors and airmen returning from World War II a housing benefit, the VA has guaranteed more than 25 million mortgages on their behalf. About 9 out of 10 VA loans are made without a down payment.

Just since the turn of the century, lenders have booked some 9.3 million VA loans. In fiscal 2020 alone, it agreed to back 1.24 million home loans -- a record amount, and more than were guaranteed in fiscal 2018 and 2019 combined. VA loans now account for roughly 10% of the market.

Most of the loans written in fiscal 2020 were for refinancing, as previous borrowers took advantage of record-low interest rates. But plenty of new buyers rushed to do the same.

Despite all this activity, there’s a persistent myth among some realty and lending professionals that VA loans are inferior products that involve tons more paperwork than alternative choices. But that’s just not the case, according to the National Association of Mortgage Brokers, which calls them “an amazing benefit that veterans have earned.”

Chris Birk, vice president of mortgage insight at Veterans United Home Loans, agrees. “It’s not an inferior product at all,” he says. “It’s a remarkable program. Remarkable.”

Birk, who’s also the author of a guide called “The Book on VA Loans,” points to these key statistics from mortgage origination platform Ellie Mae:

The average time it took to close a VA loan last year was 51 days -- just two days longer than a mortgage insured by the Federal Housing Administration, and three days longer than a conventional loan. Also, 78% of all VA loan applicants make it to the closing table, compared to 77% of wannabe FHA borrowers and 79% of those taking conventional financing.

Birk also points out that over the six years Ellie Mae has been tracking VA data, the program has had the lowest average mortgage rate AND the highest closing rate.

Yes, rates on VA-guaranteed loans are often lower. For the first 10 months of 2020, Ellie Mae says the average rate on a VA loan was 3.19%, versus 3.43% for an FHA mortgage and 3.48% for conventional funding. And on top of that, there’s no need for costly mortgage insurance, even with nothing down.

The program works like this: In place of a down payment, the VA guarantees 25% of the mortgage amount. The lender accepts, as your down payment, that promise from the VA that it will to pay if you should fail to do so. That way, there’s no cash out of your pocket, save for closing costs.

Prior to 2020, you could borrow up to $484,350 -- or up to $726,525, in a handful of high-cost areas -- without dipping into your wallet. You could, of course, borrow an amount above those ceilings, but you’d have had to put up $1 of your own money for every $4 above the limit.

But as of last year, the ceiling has been eliminated for most borrowers. Consequently, as long as you have never used your home loan benefit; never had a VA loan, sold the property and repaid the loan; and never paid the VA back after going through a foreclosure or short sale, qualified borrowers could borrow as much as a lender would allow without a down payment.

If you have a remaining entitlement -- that is, you have used some but not all your benefit -- you can use that to purchase a second property. But in that case, the limit comes back into play: The VA will cover up to 25% of the loan limit, minus the amount of entitlement you’ve already used.

This limit also comes into play if you are still paying back a VA loan, paid a previous VA loan in full but still own the house, refinanced out of a VA loan into another type of mortgage and still own the house, or failed to repay the loan in full.

So if you want to move and use your benefit again, simply sell the house, repay the loan and apply for another VA mortgage.