VA loans have seen a significant rise in originations in the past year. Does this mean that more veterans are now realizing the benefits of the program?
If you’re looking for a mortgage with competitive rates, low down payment, and no stringent credit and income requirements, any expert would tell you the VA loan is the most viable option. That is, if you are a veteran. VA loans, albeit being exclusive to the country’s modern day heroes, offer less stringent qualifications compared to other GSE backed loans or conventional mortgage programs.
Yet, despite these great benefits, only few veterans are putting their guarantees to service. But a recent report says the nation’s veterans might just be waking up to this realization.
Last year, 740,000 new VA loans were issued, the most in a single year and up by more than 300,000 compared to the record three years prior.
Why the shift?
Experts attribute the sudden change of heart to the historically low interest rate. When Britain voted to exit the European Union. Since last year, interest rates embraced the 3 percent tier, allowing VA loans to dip to its lowest average in 41 months, per an Ellie Mae data. Even a year after, rates maintained a gradual march up, allowing more people to consider purchasing a new home or refinance their existing mortgages.
Another factor that may have contributed to the new trend is one of the most attractive features of a VA loan: 100 percent financing. That means the veteran does not have to worry about coming up with the hefty down payment money which is one of the most common hurdles to homeownership for most Americans. The only requirement for the veteran is to have his or her full VA loan entitlement and to borrow less or within the average VA loan limit of $424,100. On top of not having to pay a down payment, the eligible veteran or servicemember is also freed up from paying for mortgage insurance.
Typically with conventional loans, borrowers have to pay for a mortgage insurance if they cannot put at least 20 percent of the home’s purchase price as down payment. The VA loan eradicates that expense.
However, they have to pay the VA funding fee which costs around 2.15 percent of the total loan amount. If the borrower doesn’t want to pay this fee, they can choose to roll the cost into the loan. This is often seen as a disadvantage because given that you don’t put any money on the down payment, you will easily find yourself in a compromising situation with a negative equity.
Why did eligible VA borrowers steer clear from the program?
VA loans have a reputation among lenders of being difficult loans to originate. There are also concerns about red tape. But the most common concern is in the appraisal process. Before the process can proceed, an appraiser certified by the Veterans Affairs have to inspect the property to make sure it meets the program’s minimum property standards. Not only is a VA appraisal deemed stricter than the standard appraisal process, it also takes time. There have been known closing delays and costly rate lock expirations due to these long appraisals.
Will the current trend hold? If the current market situation remains favorable for the country’s veterans and service members, we are hopeful that more will benefit from this great opportunity to own a home. But what is true for the group level may not always be true on the individual level. The right time to buy a home is different for every individual.
Before you finalize your decision, make sure that the benefit outweighs the risks.Click to See the Latest Mortgage Rates»