Understanding the VA Home Loan

THE BIG STORY

Understanding the VA Home Loan

The VA Home Loan is one of the best benefits a veteran who served honorably in the U.S. military earns.

The VA Home Loan is one of the more powerful benefits of which eligible veterans can take advantage. The government intended it as a way to incentivize and simplify home ownership for veterans who served honorably in the military, and as designed, for the most part, it delivers on that promise.

How does the VA Home Loan make home ownership more available to vets? Through two important mechanisms. First, the VA guarantees the qualified veteran’s loan, meaning banks can take (from their perspective) greater risks when it comes to issuing mortgages. This is not automatic and depends on a thorough evaluation of a veteran’s income and overall credit rating; a veteran making $80,000 a year would not be approved to buy a $1,000,000 home with no money down. A veteran making $85,000 a year would be qualified to buy a $375,000 home a few years ago. I know because that veteran was me!

The VA’s guarantee is the first and most powerful component of the VA Home Loan, and produces several secondary benefits as a result. The first is that buyers don’t need to put any money down — typically, 10%-20% of the payment for a house is required upfront. That can make a house more accessible to people with little in the way of savings, who nevertheless have a good job and a stable life. The second benefit is related to the first: certain closing costs on the house get waived for VA Home Loans, and one doesn’t need to carry private mortgage insurance.

Third, veterans automatically qualify for the lowest available interest rate. That qualification doesn’t vanish when one closes on the house; in fact, if the mortgage rate drops by a point, one automatically qualifies to refinance one’s home. I used this to go from 4.5% to 3.5% in 2019, and then from 3.5% to 2.25% in February of 2020 (pretty lucky timing). For each point of interest percentage that is reduced, a buyer ends up saving tens of thousands of dollars on their loan over its lifetime.

All of these add up to a really wonderful benefit for veterans — alongside the Post-9/11 GI Bill, a powerful incentive for people to serve, and a suitable thanks to those who did with honor (regardless of distinction). There is a vulnerability in the system, though — a drawback that emerges under certain market conditions such as those evident today.

When a real estate market heats up, and there is great competition between buyers for limited supply, people relying on the VA Home Loan often lose out in aggressive bidding wars. While the government sees this as protecting buyers from being exploited, it reflects a sluggish reaction to fluid markets.

An example of this, not uncommon, was when (a few years ago) a friend of mine with whom I served in Afghanistan was looking to buy a house in Austin, Texas. He’d moved there for work, expecting to settle down and raise his family. He was looking to use the VA Home Loan to find a place. Unfortunately, he was moving at the worst possible time; in 2021, homes were selling far above asking. It took him months to find a place.

No program is perfect, and a more flexible approach to issuing VA Home Loans could easily help destabilize a market, the way federal student loans have likely inflated the cost of higher education. If anyone can afford any house, real estate will become unaffordable to non-veterans, and that is not the intent of the VA Home Loan. As things stand, once the market cools off some, it’s likely that the number of VA Home Loans will begin increasing again.

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