VA loans benefit more than just veterans.
Because of this, it's always puzzled me that so many banks and mortgage companies choose not to make VA loans, foregoing millions in lost revenue each year and the opportunity to do good for veterans while doing profitable business for themselves.
VA loans help veterans, active-duty military personnel and their eligible surviving spouses buy or repair their homes without having to make a down payment. Without this benefit, many people simply would be unable to purchase homes, and many existing homeowners would be unable to refinance into a more affordable loan. But VA loans also provide a great product for the lenders that make these loans.
The VA home loan program was established as part of the GI Bill back in 1944 to smooth the transition for returning World War II veterans from military to civilian life. Since then, the program has undergone significant changes to keep it relevant as the mortgage industry has evolved, but the key component hasn't changed: a no-down-payment, government-guaranteed loan to help individuals purchase a home or refinance their existing mortgage. That remains the most attractive feature of the program. No other loan on the market provides that kind of benefit to more people on an ongoing basis.
And there are many other benefits to the VA mortgage that you won't find anywhere else.
In order to give veterans every reasonable opportunity to use their earned benefit, VA underwriting guidelines are much more flexible than most conventional loan programs and even Federal Housing Administration (FHA) loans. For example, unlike conventional loans, the VA does not require a minimum credit score and has regulations that control the closing costs. Lenders must use manual underwriting and must consider non-traditional factors to give the veteran every reasonable chance to qualify.
And unlike FHA loans, there are no ongoing monthly mortgage insurance payments with VA loans. In some areas, VA loans are even exempt from property taxes.
There's no time limit on when veterans must use the benefit and no limit on how many times they can use it, as long as the home purchased with a previous VA loan has been sold or the loan paid off. A large percentage of veterans have used their benefit multiple times.
Lending to veterans is good business for lenders
Lending to veterans also makes sound financial sense for lenders. Not only is it the right thing to do, it's good business.
The VA delegates to lenders the authority to underwrite veterans' loans. As a result, lenders can take a veteran's application, obtain full credit documentation and make the decision on whether to approve the loan using VA's credit underwriting guidelines without the VA's involvement.
The VA also allows lenders the option of using VA-approved automated underwriting systems, such as Fannie Mae's Desktop Underwriter[R] and Freddie Mac's Loan Prospector[R]. But lenders can also consider non-traditional factors to help those who marginally qualify. For example, at NewDay USA we spend a lot of time with veteran applicants on the phone. We learn a lot about their personal situations, such as whether they are involved in their communities and how deeply they are rooted to their home. Those sorts of details make a big difference in determining eligibility, and they're things a computer can't ferret out.
The VA also maintains and oversees a nationwide panel of private-sector appraisers and controls the assignment of the appraiser in order to ensure that both the borrower and lender get a fair and objective determination of the value of the property.
And don't think that because the VA loan is a government benefit, it's a government handout. Veterans don't want a handout. VA loans are good loans.
Low foreclosures and government insurance
VA loans have one of the lowest foreclosure rates in the industry. One reason is that the VA has a very active program to provide counseling to veterans who fall behind on their loan payments to try to bring the loan current. The primary responsibility for that falls on the loan servicer, but the VA supplements that with direct intervention if it appears that the servicer may not have given the veteran every reasonable opportunity to avoid foreclosure.
But the other reason is that veterans are simply better credit risks than the general population. That comes as a surprise to many people, including many in our industry. In fact, on average, veterans are more highly educated, make more money and have better benefits than non-veterans.
Veterans are less likely to be unemployed, too. After leaving the service, many veterans go on to second and third careers and collect paychecks, benefits and pensions from multiple employers in addition to their veteran's pension and benefits. Veterans also tend to have better health-care coverage, including employer-sponsored health insurance, Medicare, Medicaid, VA health care and purchased coverage. If they're hit with a health emergency, they're more likely to be able to continue to pay their bills.
Plus, lenders are protected against default by a partial government guarantee, which also enables them to provide more favorable terms to veteran borrowers.
According to Pleasanton, California-based Ellie Mae, the closing rate on purchase VA loans is the highest of any loan type, so other things being equal, they should be more profitable. That's pretty remarkable, considering that most VA purchase loans are made to active-duty military personnel, who tend to have almost no equity and lower FICO[R] scores due to their young age and multiple deployments. But as I've mentioned, lenders are given ample opportunity to say "yes," by giving borrowers every reasonable benefit of the doubt, so that does raise the approval rate.
VA lending, like FHA, also offers lenders the opportunity to become Ginnie Mae issuers, allowing them to expand their business beyond simply selling conventional loans to the government-sponsored enterprises (GSEs) and aggregators.
What's stopping you from making VA loans?
Despite the obvious benefits to veterans and the built-in safeguards to protect lenders--chiefly the government guarantee--many banks and mortgage companies still choose not to make VA loans. Why?
In many cases, some lenders avoid VA loans for public relations reasons. They're worried that one day they may have to foreclose on a veteran, so they avoid that possibility by not making any such loans in the first place. However, as we've seen, the idea that they are taking on an outsized risk by lending to veterans simply is inaccurate.
Some lenders don't want to manually underwrite VA loans simply because it's too much work or because they've forgotten how to underwrite credit risk due to an overreliance on automated underwriting systems. That's really unfortunate. After all, if we are in the lending business, we're supposed to want to make loans.
Many lenders and real estate agents steer some of their VA-eligible clients into conventional loans because they think the VA process is slow and overly complicated. This is also untrue. On average, at NewDay we complete the loan process in 44 days. That's from the first phone call to settlement.
Still, despite their many benefits to both veteran borrowers and lenders, VA loans aren't perfect.
Veterans who use the program can't negotiate certain fees, which puts them at a disadvantage when bidding on homes.
There are limits on loan sizes, too. That's one of the biggest problems--especially in high-priced states and urban areas, where a preponderance of veterans live. But the industry, led by the Chicago-based National Association of Realtors[R] (NAR) and other groups, is working with Congress and the VA to try to make the program more flexible.
Few products, in fact, enable lenders to do well even as they're doing good. A lot of veterans are short of cash, and a VA refinance makes so much financial sense. Nothing is more rewarding than to provide debt-consolidation VA loans to veterans that enable them or their spouse to lower their monthly mortgage and debt payments by hundreds of dollars, empowering them to live a better life. In my mind, that's the least we can do to thank them for their service.
Joseph J. Murin is a member of the Board of Advisors of Fulton, Maryland-based NewDay USA, a leading nationwide VA mortgage lender focused on helping active-duty military personnel, veterans and their families achieve their financial and housing goals. Murin is also a former president of Ginnie Mae under both the Bush and Obama administrations and a veteran of the U.S. military.
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|Title Annotation:||COLUMNS: EXECUTIVE SUITE|
|Comment:||VA loans benefit more than just veterans.(COLUMNS: EXECUTIVE SUITE)|
|Author:||Murin, Joseph J.|
|Date:||Sep 1, 2016|
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