Debunking VA Myths: Why You Should Work with a Veteran
This white paper aims to uncover facts about VA lending through data and, to the extent possible, clarify and dispel some of the myths about the VA loan. The paper is a collaboration of Vetted VA and Polygon Research. Our approach involves:
- Extensive data analysis of key data sets that inform our understanding of the VA loan described below, and
- Extensive use of the VA lending expertise of Vetted VA loan originators, many of whom are Veterans themselves.
Polygon Research maintains a single source of truth for all of its apps in its cloud-based technology stack and performs its analysis predominantly using this source of information, presenting the findings in tables and charts with the corresponding commentary. Vetted VA and its members added the domain expertise from a mortgage origination perspective. The Association of Independent Mortgage Experts (AIME) edited and published the report.
Note on Closing Costs
We used data from HMDA LAR (see description of the data source below) to compare VA loan costs to closing costs of other loan types. These closing costs are the sum of all costs that the borrower pays to close the loan. There are several components of the loan closing costs disclosed via the HMDA data. From the Closing Disclosure, these are:
- Box A: Origination charges – application, underwriting; and Discount points.
- Box D: Total loan costs, which includes costs for services that the borrower did not shop for (e.g. Appraisal fee, Credit Report fee, VA Funding fee, Flood, tax research, etc.) and costs for services that the borrower shopped for (e.g. Survey fee, Title fees – title closing fee, lender’s title insurance, title documentation, title examination fee, etc.).
- Lender Credits in Box J.
Excluded from the closing costs are costs such as recording fees, prepayments for home insurance and mortgage insurance premiums, prepaid interest, prepaid property taxes, escrow account payment, HOA fees, and owner’s title insurance.
The data describing VA lending dynamics and the VA market comes from several different sources. Each data set has its own limitations, but together these information sources and the analyses stemming from them contribute to a well-rounded, quantitative picture of the VA loan.
Home Mortgage Disclosure Act (HMDA): The main data source used to analyze various aspects of VA originations in comparison to other loan types is the HMDA LAR, which contains loan-level information about financial institutions’ lending activity for loans secured by a dwelling. HMDA is released annually on the 31st of March. Polygon Research ingests and updates the dataset quarterly and presents an interactive dashboard with 5-years of information comprising over 90 million loan-level transactions. The HMDA data gives an in-depth view into U.S. mortgage market activity, and we used it extensively for review of VA lending in the context of other loan types and geography. HMDA contains valuable data points around the closing costs the borrower pays (origination charges, discount points, closing costs, lender credits), the interest rate, and the rate spread. Polygon Research made this data usable in its app, HMDAVision, which was used to distill the analysis for the tables and charts. HMDA LAR gives the fullest and deepest picture of U.S. mortgage dynamics from application all the way through to sale and the secondary market. At the same time, it is limited in that the CFPB does not disclose the credit score, the data is annual, we do not have a more granular date stamp, and the information does not distinguish between existing and new homes.
Current Population Survey (CPS) Annual Socio-Economic Supplement (ASEC): CPS is a monthly survey of about 70,000 U.S. households. Information is gathered on each member of every household. Statistical techniques are used to extrapolate the results; the outcome is microdata weighted to represent the entire (civilian non-institutional) U.S. Key Dimensions of interest in the data are Race, Ethnicity, Sex, Age, Homeownership Status, Veteran Status, Education, Income, Industry, Occupation, Employment Status, Household Type, and Relocation. The demographics data about the size of the VA population, especially the information points around Veterans with a service-related disability, comes from the CPS ASEC. The most recent available data set is from March 2021. Polygon Research took the microdata (PUMS) data for five years of ASEC and monthly CPS data and activated demographics insights in its CPSVision app. The data is an excellent gauge at the national level, state, and large MSA, but we advise our users to be careful with smaller geographies.
American Community Survey (1-Year): ACS is an annual survey that goes out to about 3.5 million households annually. Polygon Research models the microdata in its app, CensusVision. The ACS universe includes both the civilian and military population in households and in group quarters (that is, the resident population). The group quarters population consists of the institutionalized (such as people in correctional institutions or nursing homes) and the non-institutionalized (most of whom are in college dormitories). Key Dimensions of interest in the data are Race, Ethnicity, Sex, Age, Homeownership Status, Veteran Status, Education, Income, Industry, Occupation, Employment Status, Household Type, and Relocation. The analysis can be performed from the state level to “neighborhood” (PUMA) level. We chose to include analysis from the ACS in order to make comparisons between rent payments and mortgage payments for Veterans and in the context of other populations and circumstances. The microdata does not allow analysis at the census tract level in order to preserve the anonymity of the respondents; for this, we use summarized 5YR ACS data available in HMDAVision.
Federal Reserve Board, Survey of Consumer Finances: Polygon tabulated the most recent SCF, considered the national gold standard for benchmarking household wealth. This is a triennial survey administered by the Board of Governors of the Federal Reserve System; the most current available year is 2019. The survey measures the net worth of American Primary Economic Units (households/families), with breakdown by Assets and Debts. Additionally, the survey goes out to about 5,800 families with statistical techniques to extrapolate to the entire U.S. Hundreds of questions are asked; the result is microdata weighted to represent the entire U.S. We included this information in our analysis because Veteran status is among the key dimensions (Race and Ethnicity; Age; Homeownership Status; Veteran Status; Education; Employment Status), and in this way, we could analyze and compare the wealth of Veterans/homeowners to non-Veterans. Moreover, among the thousands of data points in the SCF, there are a few that we analyzed to see the loan type preference pertaining to VA loans. Finally, the SCF is considered a leading indicator of household wealth in the U.S. All SCF analysis on veterans and non-veterans in this analysis was based on principal residence of house/townhouse/apartment/other, which excludes mobile homes, ranches, and farms.
What is a VA Loan?
The VA home loan is a benefit earned by Active Duty Service Members, Veterans, National Guard members, Reserve members, and eligible surviving spouses.
In 1944, Congress passed the Serviceman’s Readjustment Act, also known as the GI Bill. The Department of Veterans Affairs Loan Guaranty Program (VA loan) was established as part of the bill. Today, the VA home loan still exists as a financing option for qualified Active Duty Service Members, Veterans, National Guard members, Reserve members, and eligible surviving spouses for their purchase or refinancing of a home.
The Top VA Loan Myths
There are several misconceptions and myths about the VA loan, its use, benefits, and drawbacks in recent years.
In this detailed white paper, Vetted VA and Polygon Research examine the VA loan market from a well updated, federal underwriting perspective to address some of these misconceptions, thereby educating mortgage and real estate professionals.
This document explores seven common myths about the VA home loan, how Veterans perceive it, how it is used, and its role in the overall mission to improve homeownership. The most common myths regarding VA loans include:
- VA loans are denied at a higher rate (risk).
- VA loans are expensive for Veterans.
- People with weak financial backgrounds use VA loans and other “no down payment” mortgages to buy homes.
- FHA or Conventional loans are better for Veterans than VA loans.
- VA loan appraisals are slow to process and usually come back with low values.
- Sellers have to pay all closing costs.
- VA loans can only be used once.
Myth #1: VA loans are denied at a higher rate.
According to anecdotes from many sources, VA loans are harder to process.
The Lowest Denial Rate
We used Polygon Research’s HMDAVision1 to comb through the 2020 HMDA LAR data to gather granular insights into loan pull-through, the loan life cycle of every loan, and lender by country, state, county, and census tract, as well as borrower demographics and loan attributes. As shown in the table below, VA loan applications are denied by lenders 7.1% of the time, which is the lowest denial rate among all loan types.
VA Loan Origination Rates
In the following chart origination rate is the percentage of the loan applications taken in total.
As shown below, VA loans have an origination rate of 71.9%, which is 4.3 points higher than Conventional Loans and 4.5 percentage points higher than FHA Loans. Below is a breakdown of loan applications (applications) divided by loan originators (originated).
Myth #2: VA loans are expensive for Veterans.
VA policy aims to help Veterans utilize their home loan benefits. Therefore, VA regulations limit the fees that the Service Members and Veterans can pay to obtain a loan (see Chapter 8: Borrower Fees and Charges and the VA Funding Fee). According to VA lending guidelines, “lenders must strictly adhere to the limitations on borrower-paid fees and charges when making VA loans”2.
The Truth Regarding VA Loan Pricing
To get insight into pricing, we used the publicly disclosed data modeled in HMDAVision. In Table 3, we compare the pricing of the four major loan types by a variety of dimensions, including:
- Originations charges
- Interest rate
- Rate spread, and
- Closing costs (typically the costs shown on the Closing Disclosure – see Methodology)
Below, we highlight the closing costs and interest rate.
Comparative Pricing Analysis
The sum of all costs of the loan is comprised of discretionary and non-discretionary items. Looking first at the discretionary items, even though the VA purchase loan has 100% LTV, it still has the lowest origination charges(including appraisal and underwriting fees), the lowest interest rate, and the lowest rate spread. Regarding the non-discretionary items, see the discussion of the VA funding fee below.
Do VA Loans Require 100% LTV?
Veterans are not required to take 100% LTV loans, but many do because their monthly payments on 100% financing loans can be affordable (and are absent PMI). A Veteran who took out the median size conventional loan shown in the table above would have paid on average a down payment of $66,250 for a loan with a likelier higher interest rate.
Due to the timelines of Veteran or active duty borrowers for homeownership, as well as competing investment strategies for the cash that would otherwise go into a down payment (including but not limited to the support of residual income increasing borrowing stability), the size of the down payment can be an important factor in this scenario.
In fact, over the last 3 years, the share of VA purchase loans on 1-4 units has been between 17% and 20% as shown in the figure below.
VA Purchase Loans with Less than 100% CLTV
In 2021, the share of VA purchase loans with down payments equaling less than 100% CLTV was 18% of all VA purchase loans originated in the trailing 12 months (Source: Polygon Research: GovLoansVision, Ginnie Mae loan-level disclosure purchase, 1-4 units, data updated through January 2022).
Average CLTV with less than 100% CLTV
What is Included in VA Loan Closing Costs?
Closing costs are the sum of all fees that must be paid to close the loan.
VA loan closing costs include discretionary items such as origination charges, discount points, and fees, and non-discretionary items such as recording fees, title insurance, and the VA funding fee when it is not waived3.
Note: Borrowers can negotiate with the seller, so they pay some or all of their closing costs if they’d prefer to keep more money in their pocket. VA loans allow sellers to pay 4% of the loan amount as seller-paid costs, but lender fees are not covered. If any judgments or credit balances prevent a borrower from qualifying for their loan, the seller may pay the VA funding fee, prepaid property taxes, and insurance, plus discount points.
VA Loan Funding Fee
Funding fees are non-discretionary, one-time, upfront payments made by Veterans to the VA. The VA funding fee helps offset the costs of the VA loan program while also ensuring that borrowers continue to receive all the great benefits associated with VA loans, such as no mortgage insurance or down payment requirements.
It is important to note that the FHA loan also has an upfront fee of 1.75% of the loan amount for PMI (called UFMIP) that is paid at closing, whereas the VA Funding Fee is 2.3% for first-time use (or as applied with multi-use). Both the VA Funding Fee and the UFMIP for FHA are often added to the loan but can also be paid in full as a line item closing cost. However, a great differentiating factor is that a Veteran with a disability rating of 10% or over will have their funding fee waived for their VA Guaranteed loan.
In order to get a better sense of these costs, we compared closing costs for conventional-conforming purchase mortgages with the closing costs for VA purchase mortgages.
VA Loans Sometimes Offer Lower Closing Costs Than Conventional
As we’ve just seen, VA loans win hands down on discretionary charges. The non-discretionary funding fee is the biggest variable in the remaining cost of the loan. It is important to understand that the funding fee is waived for VA borrowers receiving compensation from the VA for service-related disabilities and surviving spouses. Net, VA loans frequently beat other loan types in total closing costs. See the chart below.
Closing Costs Distribution for VA and Conventional Purchase Mortgages, 1-4 Units
Closing costs also vary greatly by location. VA borrowers in Arkansas, for example, pay the lowest closing costs ($3,989). VA borrowers pay the highest closing costs in D.C., Hawaii, and the islands – upward of $14k.
INTEREST RATES AND RATE SPREAD
From the HMDA LAR data, we observe that VA loans have the lowest interest rate and the lowest rate spread. Rate spread is the difference between average rates offered to VA borrowers and the average prime offer rate offered for similar loans.
Pricing Statistics by Loan Type
Lenders and Veterans negotiate the interest rate and points. The VA pamphlet states the Veteran and the seller can negotiate for the seller to pay all or some of the points, and the points may not be financed in the loan except with Interest Rate Reduction Refinancing Loans (IRRRLs). In addition, from the VA pamphlet, the seller, lender, or any other party may pay fees and charges, including discount points, on behalf of the borrower. This makes the VA loan one of the strongest options for covering any and all closing costs.
No Private Mortgage Insurance on Any VA Loans
One of the many advantages of a VA loan is that the Veteran does not have to pay private mortgage insurance (PMI) (e.g., in the case of a conventional loan with a CLTV above 80%) or mortgage insurance premiums (e.g., in the case of an FHA loan). An important benefit of a VA loan is that it helps keep the monthly payments low for borrowers. Typically, PMI costs 0.5 – 1% of a loan amount per year, which can add up quickly.