Challenges of VA Loans

Illinois Congressman Dan Lapinski once said, “On the battlefield, the military pledges to leave no soldier behind. As a nation, let it be our pledge that when they return home, we leave no veteran behind.” The American desire to take care of its veterans dates back to 1636. The Pilgrims were at war with the Pequot Indians, and they passed a law that their colony would take care of all disabled soldiers. And in this spirit, the Department of Veteran’s Affairs (VA) guarantees home loans for military men and women.

VA loans offer a multitude of advantages, including no down payment, 100 percent financing with no private mortgage insurance (PMI), a choice of repayment plans, and more lenient qualifying requirements than conventional mortgages. But even though the barriers to homeownership have been lowered, veterans still face obstacles when applying for a mortgage loan.

Five VA loan drawbacks

If you qualify for a VA loan, be prepared to deal with the following potential obstacles:

            1. Credit score tightening. The average credit score for the typical VA loan borrower in 2009 was just over 700, slightly below the national average of 750. But if you struggle with money, and have a credit score below 610, you’ll have difficulty finding a lender, even if you served in the military. If that’s your situation, improve your score by reducing debt and paying bills on time

     2. Restrictive lending policies. Even though VA borrowers have a default rate of only 2.6 percent, lower than the national average of 3.8 percent, lenders are currently being more restrictive granting loans. VA insurance only covers 25 percent of the mortgage amount if a veteran defaults, so the risk of non-payment is increasingly becoming a factor when banks consider lending policies.

     3. Appraisal challenges. You’ll need a little money in your pocket to take advantage of VA loans. Lenders are now requiring borrowers to pay for an appraisal, which can cost $300 or more. In addition, the Veteran’s Administration requires that banks use a qualified VA appraiser. These professionals are tougher than conventional appraisers, and may demand that small items be repaired. It’s the buyer’s responsibility to makes these repairs, and if he can’t afford it, the deal may not close.

     4. Prohibited fees. There are many fees that are charged by lenders, including escrow charges, title costs, and settlement expenses, that the VA prohibits the buyer from paying. Since someone has to pay it, the burden goes to the seller. But if the seller can’t afford it, a vet may not get his mortgage.

     5. Allowable (but costly) fees. All VA loans require an insurance fee that averages about 1.75 percent of the loan. There are exemptions to this rule, but only 25 percent of veterans qualify. If your loan amount is $300,00 that number is $5,250, which can be prohibitively steep for some veterans.      

VA home loans have been around since 1944. You’ve served your country well, so take advantage of the programs set up to serve you.