What would you say about a mortgage that will allow home buyers to make a cash investment of ZERO on a purchase as high as $1 million, has no mortgage insurance, extremely forgiving credit requirements and debt to income ratios up to 55%?
A recipe for disaster, right? The type of irresponsible lending that led to the whole mortgage crisis? After all, you have to have some “skin in the game” (cash down payment) or else there’s nothing to keep you from walking at the slightest financial hiccup.
Surprise: the loan I have just described has been around since 1944. It was created by Congress as part of the Servicemen’s Readjustment Act, better known as the “GI Bill.” The loan available under the Bill is called a VA Loan. It allows a veteran to buy a home with a loan for 100% of the purchase price and no mortgage insurance. Mortgage insurance, which protects the lender if there is a default, can add over 1% to the effective interest rate. For a $400,00 purchase, mortgage insurance could add up to $375 per month to the payment.
The reason there is no mortgage insurance is that the Veterans Administration actually guarantees payment of the loan.
So how do these no-skin-in-the-game, uninsured loans perform? Quite well; according to the Mortgage Bankers Association, the 90 day delinquency rate is around 2% for VA loans, compared to 4.8% for other loans.
What’s behind this phenomenon? While some have told me that “Veterans are more responsible people than civilians,” I can assure them that, having spent 8 years in the military myself, this is simply not true. According to a recent article in the Washington Post, “…the key to the agency’s quiet success is its almost paternalistic emphasis on servicing its 1.5 million borrowers — moving early and quickly to intervene at the slightest hint of payment problems.”
Michael Frueh, the program’s director, says, “At the end of the day, we are the veteran’s advocates.” The agency’s goal is not only to provide the financing, but to provide a single point of contact for the borrower, rather than the anonymous multitudes and voice mail hell of other loan servicers. It is this service, which is built into the loan itself, that may be responsible for the remarkable success of this loan program.
If you are a veteran (or if you know a veteran), you should contact your favorite lender (preferably us!) to learn how this program can help you.
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