VAloans thrive as younger vets pursue homeownership

An increasingly popular mortgage requires no money down and will accept a less-than-stellar credit score.

Nonetheless, the loan has been far outperforming the Federal Housing Authority loan — meant to help Americans who have little for a down payment achieve homeownership — in terms of defaults.

In fact, the percentage of those who 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 duringWorldWar 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, a model that has the potential to make mortgages with low down payments more widely available through conventional lending and open the door to homeownership to renters. Homeownership is one of the main ways families build wealth by channeling housing costs into an asset 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. Millenial and Generation Z veterans, those roughly up to age 39, have capitalized on the program, accounting for 50 percent of all VA purchase loans.

Even when the recession began pushing serious FHA loan delinquencies — those at least 90 days behind — to 8 percent by the end of the second quarter, serious delinquencies for the nomoney-down 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 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 no money 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 after three years for roughly $50,000 more than she bought it for and has since used a VA loan to purchase a home in Pearland.

Homeowners who choose a VA loan go through 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 — it should not be more than 43 percent — VA loans also look at how much money borrowers typically have left after major monthly expenses.

That could help make 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 a month can put 43 percent of that toward debt and still have $4,560 left to cover everyday expenses, but that margin shrinks for people with lower incomes.

A family earning $3,000 a month with debt of 43 percent of income could qualify for a mortgage, 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 a mortgage by calculating how much money they’ll have each month after paying debts and 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 pretty much the only government agency that relies on the residual income test,” Kaul said. “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 also could contribute to lower default rates.

Post-crash popularity

While VA loans have been around since 1944, they’ve be

come more popular since legislation following the 2008 financial crisis wipedmost 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 assess a family’s ability to repay a mortgage 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 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 loans with low down payments. Unlike conventional or FHA loans, the low down payment for VA loans comes without the requirement to purchase mortgage insurance, which protects the lender fromlosses in the case of a default. Mortgage insurance can add more than $100 to a homebuyer’smonthly costs.

And, finally, if something does go wrong and a veteran with a VA loan falls behind on loan payments, 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 programsmeant to keep families in place that not all homeowners or companies in charge of collectingmortgage debtmay be aware of.

Derrick Stephenson, a Texas real estate agent and Army veteran, says he spendsmuch 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 dreamof owning a home is so close, you can taste it.”

Jon Shapley / Staff photographer Navy veteran Angel Tillman has purchased two homes with VA loans.

Jon Shapley / Staff photographer Angel Tillman’s home in Pearland is “an opportunity to build wealth,” she says. Until she learned about VA loans, she thought homeownership was not within her grasp.