The historic VA loan program, which was established by the GI Bill of 1944, is seeing an unprecedented amount of borrowing. In 2015, the VA backed more than 631,000 loans, a 19 percent increase over the previous year that bested a benchmark set in 2013. Keeping with the record-setting trend, the VA guaranteed about 322,000 loans to buy homes in 2015 – five years earlier, the VA guaranteed about 314,000 total loans.
What's driving the popularity of this program that got its start after World War II? Here are five reasons interest in the VA loan program is surging.
No Down Payment
While the American economy has slowly recovered since 2007 and 2008, the housing market is tighter, and securing a traditional home loan has become more difficult for many veterans. VA loans do not require a down payment, an important factor in why many military personnel are able to secure a home loan. This program frees veterans from years of saving for a down payment.
Lower Fees and Costs
Regardless of the size of the down payment, mortgage interest is always waived on VA loans, which can save the borrow hundreds or thousands of dollars per year. VA borrowers also tend to receive lower interest rates – as much as 40 percent lower than rates on conventional mortgages, according to Ellie Mae.
Forgiving Credit Rules
The rules are much more lax for VA loan applicants, which makes qualifying for a home loan much easier for military personnel. Borrowers usually need a credit score of about 620, which is much lower than what usually is required for a conventional loan, and lenders can be flexible when considering a borrower's debt-to-income ratio.
For years, the VA carried a reputation as being bogged down in bureaucracy. In recent years, the VA loan program has begun keeping up or surpassing the efficiency of traditional mortgage lenders.
Statistics back up the success of a no-down-payment loan. In 25 of the past 28 quarters, VA loans have registered the lowest foreclosure rate of all types of loans, according to information from the Mortgage Bankers Association.
Rules also limit how much buyers with VA loans are required to pay in closing costs.
VA borrowers who have faced foreclosure in the past don't have to wait as long to apply for a new mortgage. Sometimes lenders do not require a waiting period after a short sale, and borrowers typically only need to be two years away from a foreclosure or bankruptcy to qualify.
According to Ellie Mae, a VA purchase loan closed, on average, in 51 days in December 2015. That's only one day longer than the average conventional purchase during the same time period. VA loans also had the highest closing success rate in 2015 among the three major kinds of loans—conventional, VA and FHA.
The benefits of a VA home loan last beyond the loan's origination. If a lower interest rate becomes available any time after closing, military personnel can refinance through the VA's Interest Rate Reduction Refinance Loan (IRRRL). These loans made up about 30 percent of the VA mortgages in 2015, and they have no requirements other than a lower interest rate
As the VA loan program enters its eighth decade, it shows no sign of slowing down. With the young veteran population expected to increase over the next five years, a loan that requires zero money down and comes with an easy refinancing program will continue to be a powerful and desirable mortgage product.