he Veterans Affairs (VA) Home Loan Guaranty
Program is an entitlement for active and honorably discharged military service members. Financing is available for up to 100 percent of a home’s
value for both purchase and refinance transactions.
For veterans with low credit, VA loans can be especially
beneficial as they provide additional flexibility and can be less
costly in comparison to conventional loan products. Unlike
conventional loans, the VA loan requires no mortgage insurance, making it a cost-effective option for buyers with smaller
There’s been one notable problem with the VA program
of late, however. Reports emerged more than a year ago about
VA lenders aggressively soliciting veterans to refinance their
loans as a way to generate fees. There’s been a push to stop
this and prevent it in the future. Those mortgage originators
and lenders who abide by the rules of VA loans, however, will
find a great program.
The price to originate a VA loan is called the funding fee
and can be financed on top of the base loan. It can range anywhere from 0.5 to 3. 3 percent of the loan amount, depending on product type and downpayment amount. A $100,000
mortgage would involve a funding fee of anywhere from $500
to $3,300, for example.
A funding fee of up to 3. 3 percent is charged for all VA
cash-out refinances — depending on the nature of the individual’s military service and whether it is the first use of the
program. Veterans using a VA purchase-loan program for
the first time pay up to a 2.4 percent funding fee (but less if
a downpayment of 5 percent or more is made), while subsequent uses of the program require up to a 3. 3 percent
funding fee (again, less if a downpayment is involved).
For recipients of VA disability compensation, the funding
fee is waived. This funding fee is nonrefundable and is held
in reserve by the VA as an insurance policy of sorts. When a
loan defaults, the VA taps into this reserve fund to help cover
Layers of security
Ginnie Mae provides liquidity to the government mortgage
market, including VA loans, in a similar way that Fannie Mae
or Freddie Mac does for the conventional loan market. Ginnie
Mae helps to reduce the costs of mortgages by guaranteeing
securities that are underpinned by VA and other government-backed mortgages.
Becoming a Ginnie Mae mortgage issuer is the apex for a
lender specializing in government loans, as it results in fewer
guideline overlays and, potentially, increased profitability.
After a lender has funded a mortgage, it gets packaged into
a loan security with other similar products and sold with
Ginnie Mae’s guarantee in the secondary market, with an
expectation of a profitable return for investors.
VA loans do not carry a high default rate and have historically been a lucrative capital-market investment. Active-duty
service members are paid a tax-free monthly basic allowance
for housing, which typically covers mortgage payments.
And the inherent risk of less equity or lower credit scores are
mitigated by the VA loan guarantee, which typically covers
25 percent of the borrowed money in case of default.
If a $200,000 mortgage defaults, the VA covers $50,000 of
the loss, thereby drastically reducing the loss exposure on a
per-loan basis. VA loans tend to be prone to quicker payoffs
because active-duty military borrowers may sell homes as a
result of being relocated. In these cases, however, it is likely
that active-duty service members will purchase another home
at their new location, once again using VA-backed financing.
For years, the mortgage industry has thrived in an environment of low interest rates, creating fertile origination
ground for legitimate rate-reduction opportunities. The post-recession era also opened its doors to lenders, and brokers,
searching for a new niche or identity in the marketplace, and
the VA loan provides that opportunity.
Many of the higher-rate mortgages that are targeted for
refinancing originate from lenders specializing in cash-out
VA mortgages. Veterans should be very careful in situations
such as these, as the rates on the new refi loan can be higher
and coupled with additional origination fees. A veteran could
end up paying thousands of dollars in fees to refinance a
loan that actually increases their current mortgage rate, for
example. These cash-out mortgages are typically on 30-year
loans which means the remaining loan term that is refinanced
also is re-amortized and extended 30 years.
The mortgage payments may increase by hundreds of dollars a month, but there can be a cumulative monthly payment reduction realized by paying off unsecured debt as well.
In other words, a mortgage payment may actually increase
$300, but credit cards costing $800 per month are paid off
with the cash taken out via the refi, resulting in a perceived
net payment reduction of $500 per month. The originating
lender may place emphasis on the latter, even advising that
the money saved on credit card debt be used to pay off the
VA lenders who pursue these practices typically charge
higher interest on these loans and originate at costs well
above average market rates. The lenders may point to their
borrower’s lower credit scores or zero equity mortgages as
reasoning for the pricing, but the higher rates also encourage
other lenders to pursue these loans.
Another type of loan that has been the target of an alleged
abuse, which is referred to as loan churning, is the VA Interest
Kraig Spence is manager of Churchill Mortgage’s Columbia, Maryland, branch. A full-service and financially sound leader in the mortgage industry, the company provides
conventional, Federal Housing Administration (FHA), U.S. Department of Veterans Affairs
(VA) and U.S. Department of Agriculture (USDA) residential mortgages across 44 states.
Reach Spence at firstname.lastname@example.org or (866) 853-6335, ext. 207.
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