NOTE: This guest post comes to you from James Kelley of VA Benefit Blog. A law school student at the University of Missouri, James Kelley works to educate the public on government financing options for home purchases.
Veterans looking to buy a home within the next couple of years are in for a shock. The VA loan, which usually boasts an easy and stress-free process, is about to become a lot harder to get.
The program’s best highlights, such as zero down payment option and lower closing costs, will remain the same. However, who the VA will cater to will become less diverse as credit restrictions become more intense.
Due to a recent influx in borrower defaults, lenders are placing more emphasis on credit standards in order to avoid possible future financial hardships within the industry.
A few years ago, a credit score of 615 probably would not have been such a big deal. Now, a lender might have to advise someone with a credit score that “low” to come back later. This could prove impossible for active duty service members who made financial errors in the past, but due to their present unpredictable schedules, cannot work on fixing those mistakes.
The crunch on lower credit scores also has made it more difficult for a veteran to refinance. Now, the buyer will have to cover an appraisal fee of $300. On top of that, if the refinance amount is more than the previous loan amount, the application will be denied.
There is a lot of debate surrounding the issue of these new restrictions. Most veterans that bought a home last year using the VA loan had excellent credit scores and kept up with their payments. That has left many questioning the new crunch on home loans for veterans.
So, “Why the big hullabaloo?” many are asking? Industry experts say it’s because of the number of defaults in the government-backed loan arena as a whole. For example, the FHA suffered an increase in the amount of defaults last year. In addition, the VA unlike the FHA and other loans only secures up to 25% of the purchase amount. The risk if a borrower defaults is a lot greater for the lender as opposed to the government. Lenders do not want to take a risk that will kick them in the butt a few years from now.
Even with all the tighter standards, the VA loan is still a popular option among veteran homebuyers and will continue to be as long as it offers the zero down, lower closings costs, flexible payment options and much more.
James Kelley, Guest Author from VA Benefit Blog