Dispelling VA Loan Myths that Veterans Believe
There’s a general belief that government-sponsored programs tend to be expensive, bloated and disorganized. But there is one that, for the most part, seems to have gotten it right. The VA home loan program provides government-backed loans to active duty military, veterans and their spouses. Last year, according to the Department of Veterans Affairs (VA), more than 1.4 million home loans were guaranteed by the VA — an increase of 16.5 percent from the previous year. Statistics for 2021 also reveal that the state with the highest number of VA-backed loans was California, followed by Texas.
While the number of veterans getting approved for government-guaranteed home loans has increased year over year, it’s not to say the program, which turned 78 at the end of June, hasn’t had its share of hiccups. Like a lot of government programs, education about benefits — such as how to apply and the amount applicants can be approved for — can be difficult to come by or confusing to understand. As a result, lenders who don’t specialize in VA home loans sometimes provide outdated information to clients. Some even talk vets and their families out of applying for VA-backed loans because they have the impression that the paperwork is too onerous.
Despite some common misconceptions, each year the VA loan program helps millions of qualified applicants buy a home, with no money down and with terms saddled with fewer fees and penalties. Clearly the benefits of the program outweigh legitimate and perceived downsides. For example, vets with full entitlement, or certain surviving spouses, often qualify for more funds than homebuyers in the market for a conventional loan. (A conventional mortgage means that it’s not secured by a government entity).
In 2020, the limit imposed by the VA for loans over $144,000 was lifted. So while the program may have some flaws, when it comes to repaying service members for their sacrifices and commitment to defending and protecting our country, there are few other gestures of appreciation that are as impactful as providing a feasible roadmap to homeownership.
An expert we spoke with agreed that misinformation is still a problem, but issues arise more often with loan officers who don’t specialize in VA home loans. This is important information for REALTORS because brokers and agents are oftentimes the ones who refer clients to lenders.
Before Chad Bowman became a loan officer, he experienced such a problem firsthand. Years ago when the Marine was in the process of purchasing his first home, a lender advised steering clear of a VA home loan. “I was actually talked out of it,” Bowman said. But something didn’t sit well. A little voice told him to check out the program himself. It turned out to be a life-changing decision. “When I looked at the numbers, my reaction was, this is the best program on the planet! Why would I not use this?” Today, Bowman dedicates his life to helping vets and surviving spouses secure VA-backed home loans. “Now you can’t get me to shut up about the program,” he said.
Bowman works with vets all the time who have their own run-ins with REALTORS and lenders who relay bad information about applying or qualifying for a VA home loan. He says to help industry insiders, which consequently helps vets, it’s important to attend continuing education classes. As more and more real estate professionals learn the ropes of government-backed VA loans and, importantly, squashes some persistent misconceptions.
Here are a few of the most common mistakes lenders make in regards to VA home loans:
Only combat veterans qualify for a VA home loan
Not true. All persons serving a uniformed branch of the military — Army, Navy, Air Force, Marines, and Space Force — must have two years of honorable active-duty service. Reservists and National Guard members must have six years of honorable active-duty service. During wartime (which includes the period between World War II and the present), eligibility is reduced to 90 consecutive days. Once applicants meet their minimum service requirements, they can get a Certificate of Eligibility (COE). There are a few ways that surviving spouses are eligible for a VA loan. A non-married partner can qualify for a certificate if their husband or wife died on duty, or during a service-related accident or injury. Also, if the veteran had a classified disability that led to their passing or, in certain scenarios, the veteran died from a cause unrelated to a disability, the surviving spouse may qualify for a COE. REALTORS who want to know all of the VA loan qualifications should go to the VA’s website, contact the VA, or speak with a VA-approved lender.
VA loan benefits are use-it or lose-it and can only be used one time
Not true. The Department of Veterans Affairs is partly responsible for this misinformation. Entitlement is a term that indicates how much of a benefit veterans are able to use. There’s a line at the bottom of every vet’s COE. It indicates the person’s “basic entitlement” benefits. If a certificate says “no entitlement” some loan officers mistakenly believe it means the applicant depleted their benefit. That’s something that happened to one of Bowman’s clients. “He called three lenders before talking to me. Three separate loan officers told him he couldn’t get a VA loan.” So Bowman requested to see the certificate and skipped down to the bottom of the page. As suspected, the client’s basic entitlement was tied up, however, the veteran qualified for a second-tier entitlement. In most cases, only a VA-approved lender with years of experience would solve a problem like that so quickly. That same day, the client was pre-approved for a VA home loan. “The thing about the VA program is that you need to do these loans on a regular basis,” said Bowman. “There are so many new things I still see every day.”
VA loans have too many fees and penalties
This is not only false, but the purpose of the program is to help vets afford home ownership. One of the biggest ways the program achieves this is by backing loans so that if the borrower defaults, the government guarantees payment. Also, vets are not required to take out private mortgage insurance (PMI), which is like a loan fee or default penalty. “Mortgage insurance is something you pay when you don’t put 20% down,” said Bowman. Since the government guarantees VA home loans, there’s no reason for vets to take out a PMI policy.
It’s hard to stress how significant this benefit is. According to Rocket Mortgage, a PMI premium costs about 0.5 to 1 percent of the loan amount. So for an average home in Pflugerville, at roughly $500,000, a mortgage insurance payment can cost about $100 to $300 per month. “Going VA instead of FHA (or U.S. Federal Housing Administration) can get a homebuyer 15 percent more buying power due to the removal of PMI,” says Bowman.
To qualify for a VA loan, applicants must have a good credit score
Not true. For conventional borrowers, the way to get a low-interest loan is by having a good credit score — which can range from 700 to 739. The same goes for VA-home-loan applicants. As for a credit score on the low end — around 620 — vets are more likely than ordinary borrowers to get a loan because the VA loan is backed by the government.
Since conventional mortgages don’t come with a guarantee, banks are reluctant to loan funds to applicants who have bad credit. Even some vets with really low credit scores — hovering over 500 — may get approved for a loan. Of course, they’ll pay a lot in interest. But it’s almost certain that a non-veteran applicant with a credit score lower than 620 will be turned down for a conventional loan.
When it comes to helping vets and their surviving spouses find the perfect home, REALTORS are on the front lines. So it’s really important that brokers and agents refer veterans to a VA-approved lender who has experience with VA home loans. There’s a level of experience that lenders who specialize in VA home loans have that makes all the difference.