Mortgage Choice for Veterans -
Mortages For Veteran Members
By John S. Wilson
Picture this: You're a veteran of the armed forces, and you have recently refinanced your home. You had a choice between two mortgages; both had 30-year terms, fixed interest rates and were being offered by the same lender. The difference lay in the interest rate. One mortgage was one percent higher. You chose the lesser rate but then you started having doubts. It had felt like it was an easy decision to make, though, didn't it? After all it wasn't even hidden. You didn't need to examine the requisite Good Faith Estimate that accompanies all mortgage offers and lays out the costs to realize one rate was higher than the other.
Your lender told you upfront. He then asked you to sign the dotted line. The higher rate loan was a VA loan and the other was a conventional loan, which is the industry standard. With the lower rate you figured you couldn't go wrong. But you did. The VA mortgage loan is specifically for veterans and current members of the armed forces. It's administered by the Veteran Affairs Department, hence the term VA loan, and allows for no down payment borrowing, low closing costs and a streamlined refinancing. Moreover, when veterans are having trouble making loan payments the Veterans Affairs Department willingly negotiates on veterans' behalf to modify the loan in case of default. These modifications relax the terms of the mortgage into a more favorable payment structure for the veteran. VA loans are thus safer than conventional loans and are less likely to enter foreclosure or default. Typically, because of the inherent benefits VA loans are priced one percent higher than conventional loans.
During 2003 and 2004, I drove over 100,000 miles throughout the state of Florida refinancing $20 million in VA mortgages. As I traveled, some of the veterans I spoke with were not even aware they no longer had a VA loan. Others had willingly accepted a conventional mortgage but had those nagging doubts I illustrated earlier. It wasn't until I drove to veterans' homes, pet their dogs and had cups of coffee with them at their kitchen table-which was dotted with mortgage documents-were they able to realize the significance of no longer having a VA loan. Some were hurt and angry but most were despondent. No longer were they guaranteed freedom from paying prepayment penalties (which would be triggered if veterans decided to refinance or sell their home) or from paying for private mortgage insurance (also known as PMI) or, more importantly, capable of receiving loan modification assistance from the Veterans Affairs Department if they fell behind on making their mortgage payments. So while conventional loans may seem less expensive, they cost a lot. Too much, in fact. As of December 2007, there were 2.2 million VA loans outstanding in the United States. Poor and relatively uninformed mortgage decisions are made by veterans all over the country. In addition, areas like California with its high concentration of veterans are disproportionately affected when an inherently riskier and less forgiving loan is the choice du jour-California alone has 2.2 million veterans, the largest population of any state. And according to US News & World Report, three out of four homes in nearby Stockton, which is roughly an hour east of Berkeley, are either in foreclosure or entering foreclosure.
Unfortunately, the Veterans Affairs Department does not track how many veterans "crossover" into conventional loans by way of refinance or initial purchase. But according to the Mortgage Bankers Association, in 2007 the foreclosure rate for all types of loans outstanding had nearly doubled to 1.69 percent from the year prior. That was the highest rate they had surveyed since 1986. Of those loans that entered foreclosure, 55 percent were subprime conventional loans (those made to the riskiest of borrowers), 36.3 percent were prime conventional loans (those made to the safest of borrowers), and only 8.7 percent constituted VA and FHA (Federal Housing Administration) loans. Conventional mortgage loans have increasingly become more "exotic," sporting adjustable rates that are set based on various indices that the majority of borrowers are not even familiar with. In 2003, the Consumer Federation of America found that "only two percent of Americans knew their credit score" and "only three percent could, unprompted, name the three major credit bureaus." So if consumers don't know their credit score, which directly impacts the interest rates they are offered on loans, how could they possibly keep track of the LIBOR (London Interbank Offered Rate), constant-maturity treasury or cost of funds indices? VA loans are inherently safer due to the Veterans Affairs Department insuring the majority of the loan. Unlike the rest of us civilians, veterans have an option and a lifeline in a VA loan and the Veterans Affairs Department. I spent two years ensuring they were aware of their benefits and how necessary it was that those benefits work for them. Veterans should never have to come home to a home that is no longer theirs.