Are VA Loans Recession Proof?

The U.S. economy has been in a recession since December 2007. In economic terms, a recession happens when the gross domestic product (GDP) shrinks for at least two consecutive quarters. For VA loans, the recession has had little effect. Is the VA Home Loan Guaranty Program recession proof?

There are several factors that have helped keep VA loans strong even in this recession: recent improvements in veterans’ benefits, the VA outreach program, and the abilities of private mortgage lenders to implement the VA benefits in a down economy.

 Guidelines under the Veterans’ Benefits Improvement Act of 2008, passed into law in October 2008, make VA home refinance loans very attractive to VA-eligible borrowers.  The maximum guaranty for cash-out refinance loans was made the same as that for purchase loans.  Also, eligible veterans can now refinance up to 100% of appraised property value as they have done for purchase loans.  And, the ceiling has been raised; unique county loan limits have been established for 2009 that maximize the VA guaranty for loans over $417,000.  Finally, the VA can continue to guarantee ARMs and Hybrid ARMs through September 30, 2012.

The VA Guaranty is endorsed by VA counselors who help veterans keep their homes even in the toughest economic times. VA outreach focuses on two groups: those with veterans’ loans and those without. The goal of this outreach is to keep veterans in their homes. VA counselors can help people with VA-guaranteed loans avoid foreclosure. And, they can steer VA-eligible borrowers who currently have other types of loans toward VA loans with safer more affordable terms.

VA outreach has special financing programs, repayment plans, forbearance and loan modifications that can assist veterans in financial trouble and help them keep their homes. Since 2000, VA counselors have helped abut 74,000 veterans, active-duty members and survivors keep their homes. The U.S. government has saved nearly $1.5 billion as a result.

The new law and counseling are great, but they can’t be all that make VA loans recession proof. There is another factor. VA home loans are originated and funded by VA-approved lenders. Each lender establishes its own requirements for making a loan. Of course, lenders must comply with VA income and credit standards when considering a veteran’s mortgage application; however, lenders may set more conservative lending policies. Lenders might be more apt to promote VA loans over other loans due to their lower risk from government backing.

It’s no doubt that the recession has seen a decline in conventional home loans. But, because of their recession-proof characteristics and lower interest rates, VA loans are on the rise.

As a result of the Wall Street bailout, billions of dollars are now pouring into the financial system. Many banks are ready to lend. Borrowers are a bit reluctant to incur more debt, though. And, many believe qualifying standards are so strict now that it’s next to impossible to even get a loan.

Not true for VA-eligible consumers. Since VA mortgages are backed by the Federal Government, a VA-approved lender can make VA home loans with more confidence even in the worst of times. County specific VA loan limits help VA-approved lending institutions take the guess work out of how much a qualifying veteran can borrow. And, a VA home loan is the only option left for zero-down, 100% refinancing.

In a recession, the VA Home Loan Guaranty Program can be resistant to many factors that drag the economy down. So, those VA-eligible borrowers (who may be in financial trouble due to their current subprime mortgages) may qualify for VA refinance loans with safer more reasonable VA terms.

The VA Home Loan Guaranty Program can make it very possible for VA-eligible borrowers to come out of this recession in good financial shape.

Veterans, like many Americans, may be feeling today’s economic crunch. And, many homeowners fear the dreaded F-word – FORECLOSURE. But, now that new and better conditions have been established by the Veterans’ Benefits Improvement Act of 2008, relief may here at last.

The bill sponsored by Senator Daniel Akaka (D- HI) and signed into law October 10, 2008, in part improves and enhances VA Loan Guaranty benefits. Understanding these impacts can help VA-eligible borrowers who qualify weather the current financial storm with better VA refinancing terms.

Benefits under the new law are designed to assist VA-eligible borrowers who qualify to maintain adequate or suitable housing and protect those who may fear foreclosure. The new and improved VA Home Loan Guaranty Program will provide a means to increase the loan-to-value ratios and raise maximum loan amounts.

VA loans closed between January 1, 2009 and December 31, 2011 are subject to an increase in the maximum loan guaranty amount. The VA guaranty loan limit, previously capped at $417,000, has been increased to as much as $729,750 depending on the location of the home for which the VA loan obtained. Under this loan limit increase, Veterans Affairs will now be able guaranty more loans for military personnel with subprime mortgages which will help them refinance into safer, more affordable, VA guaranteed loans. Though VA has never guaranteed subprime mortgages, Veterans experiencing financial distress because of their current subprime mortgages may perhaps benefit the most from this Act.

The loan limit increase as a result of the new law may just be the beginning. The new law may also result in unique county loan limits for VA. When combined with new locality-based Freddie Mac conforming loan limits in January 2009, VA’s maximum county “loan limit” may be as much as $1,094,625 ($1,642,037 in Alaska, Guam, Hawaii, and the Virgin Islands).

Finally, the new law extends VA’s authority to guaranty Adjustable Rate Mortgages (ARMs) and Hybrid ARMs was extended under the new law through September 30, 2012, originally set to expire this year. Requirements related to VA ARMs and VA hybrid ARMs are unchanged. What can represent a major benefit to veterans is the fact that unlike conventional ARMs and conventional hybrid ARMs, interest rates on VA guaranteed ARMs and VA guaranteed hybrid ARMs are limited each year, and for the life of the loans.

For many VA-eligible borrowers who qualify, VA home loans can be easier to obtain than conventional loans.  VA home loans do not require private mortgage insurance which alone can save hundreds of dollars each month.  Also, there is no down payment required with VA home loans; therefore, VA-eligible borrowers need not plunk down their life savings just to get a mortgage.  VA home loan qualifications can be less strict than other conventional loans. Ultimately, a VA home loan can give veterans feeling strangled by their finances some much needed breathing room.