Helping the mission for the ‘American dream’
VA loans thrive as younger vets pursue homeownership
An increasingly popular mortgage requires no money down with a lessthan-stellar credit score. Nonetheless, the loan has been far outperforming the Federal Housing Authority loan — meant to help Americans who have little saved for a down payment achieve homeownership — in terms of defaults. In fact, the percentage that typically fall seriously behind on payments are on par with that of conventional loans, which generally require significant money down.
The mortgage — offered through a Department of Veterans Affairs program established during World War II and available to those who have served in the military — offers a lesson in what home lending could be like.
The VA takes a different approach to assessing the risk of home loans, amodel that has the potential to make low downpayment mortgages more widely available through conventional lending and open the door to homeownership to many of the 40 percent of Houston households that rent. Homeownership is one of the main ways that families build wealth by channeling monthly housing costs into an asset that they own.
“It’s been such an incredible success in so many ways,” said Chris Birk, director of education at Veterans United Home Loans, which specializes in originating VA loans. “And it’s playing out among Millennials and Gen Zers the way it was intended to (when the program was established) 76 years ago. I don’t know many government programs that can say they’re doing that.”
The 2020 fiscal year was the most popular yet for VA loans, with the federal agency backing more than 1.2 million mortgages, more than the previous two fiscal years combined. The 17,000 VA loans made in the Houston area were more than double that of the previous year. Millennial and Gen Z veterans, roughly between the ages of 18 and 39, have notably capitalized on the program, accounting for 50 percent of all VA purchase loans.
Even when the recession began, pushing serious FHA loan
delinquencies (at least 90 days behind) to 8 percent by the end of the second quarter, serious delinquencies for the no moneydown VA mortgage remained around 4 percent according to the Mortgage Bankers’ Association, roughly in line with the rate for conventional mortgages (3.5 percent).
Special process
When Angel Tillman first heard about the VA loan, she was 24 and hadn’t thought buying a house was in the cards for her. But when the Navy veteran learned it would require nomoney down, she decided it made sense.
“It’s an opportunity to build wealth and have something that you own,” she said. “Especially as minorities, we don’t own a lot of property… My kids will have something one day that they can inherit and build wealth and have equity.” She said she sold the house in three years for roughly $50,000 more than she had bought it, and has since used a VA loan to purchase a home in Pearland.
Homeowners like Tillman who choose to use a VA loan experience a slightly different process than those pursuing conventional or FHA loans, Birk explained. While conventional and FHA loans focus on the percentage of a family’s income that goes toward debt each month — the rule of thumb is that it should not be more than 43 percent — VA loans also look at howmuch money borrowers typically have left after major monthly expenses.
That could helpmake underwriting loans to households with lower incomes safer, even if they put less money down, explained Karan Kaul, a senior research associate at the Urban Institute, a Washington think tank.
The debt-load approach becomes trickier for households with smaller incomes. A family earning $8,000 amonth can put 43 percent of that toward debt and still have $4,560 leftover to cover everyday expenses, but thatmargin shrinks for people with lower incomes.
A family earning $3,000 a month with debt of 43 percent of income could qualify for amortgage, but that would leave them with only $1,710 to cover food, gas, utilities and other expenses and put them at greater risk of default .
The VA program tries to make sure such households can safely take on amortgage by calculating howmuch money they’ll have leftover each month after paying not only debts but also expenses such as taxes and utilities. Larger families and families living in more expensive parts of the country are required to have higher residual incomes.
“The VA is prettymuch the only government agency that relies on the residual income test,” said Kaul. “Obviously it’s working. And it’s one of reasons why VA default rates are lower.” He said the discipline required to serve in the military could also contribute to lower default rates.
Post-crash popularity
While VA loans have been around since 1944, they’ve become more popular since legislation following the 2007 financial crisis wiped most other no money-down mortgages from the commercial market.
The Dodd-FrankWall Street Reform and Consumer Protection Act established the need for loan originators to establish a family’s ability to repay amortgage before selling it to them. Under the law, originators can consider either the percentage of a household’s income consumed by debt or their residual income to make a “reasonable” assessment of a consumer’s ability to repay.
But “reasonable” is a tricky standard that could open the door to legal risks, so Dodd-Frank also provided a clear-cut way for an originator to know that a loan would qualify under the law. It set the standard that household debt can’t exceed 43 percent of income. As a result, the vast majority of loans are underwritten according to this standard.
VA loan borrowers also escape monthly costs that accompany other low-downpayment loans. Unlike conventional or FHA loans, the low downpayment for VA loans comes without the requirement to purchase mortgage insurance, which protects the lender from losses in the case of a default. Mortgage insurance can add more than $100 to a homebuyer’s monthly costs.
And finally, if something does go wrong and a veteran with a VA loan falls behind on his or her loan, there’s a government agency to turn to. “The VA program (has) foreclosure specialists whose job is to advocate for veteran homeowners… and to have conversations with mortgage entities if need be, about forbearance rates and things like that,” Birk said.
Such an advocate could prove important during the pandemic, when the government has rolled out programs meant to keep families in place that not all homeowners or companies in charge of collecting mortgage debt may be aware of.
Derrick Stephenson, a Houston real estate agent who is also an Army veteran, says spends much of his time educating other veterans about the loan.
“It’s the most powerful thing you’ve got outside of your GI Bill,” he tells them. “The American dream of owning a home is so close, you can taste it.”