Low interest rates and increased awareness of VA loan program benefits fueled a record volume of VA loans in the last two quarters of 2016, with refinancing spurring much of that growth.
VA loans in the third quarter of last year accounted for 8.8 percent of all mortgage loans during that period – the highest share of VA loans for a decade.
Though the number of VA loans dipped in the fourth quarter, they were still up 23 percent from the previous year.
By contrast, loans backed by the Federal Housing Administration (FHA) plummeted 21 percent from the third to the fourth quarters of 2016, hitting a two-year low.
It’s likely no coincidence that the popularity of VA loans is rising while FHA loans are dwindling.
In fact, VA loans might be gaining at the expense of FHA loans.
Until recently, some eligible veterans failed to take advantage of the VA loan program because they mistakenly thought VA loans were more costly and complicated than they really are.
But VA loans are easily the best mortgage option available. Home buyers that are eligible for a VA loan should always consider it as an option.
Refinances Lead the Way
Last year, the VA guaranteed more than 350,000 refinancing loans for veterans, up from less than 310,000 in 2015 and double the number issued in 2014.
As home prices have risen, so has the amount of the typical VA loan.
In 2016, the average VA loan was for $253,243 – up from $243,178 in 2015. This has help veterans afford homes as the housing market continues to grow.
Leading the surge in VA loans is the VA’s Interest-Rate Reduction Refinancing Loan (IRRRL), also known as the VA streamline refinance loan. In 2015, the VA backed 195,000 IRRLs. That figure rose to 215,000 in 2016.
What Are IRRRL Advantages?
The IRRRL is designed to help veterans lower their interest rates and monthly payments, letting them easily refinance into a new loan.
The IRRRL cuts through most of the red tape that delays and complicates many other types of refinance loans. For example, veterans don’t need to produce pay stubs, W2s or bank statements to apply, and closing costs can be incorporated into the loan.
Also, no home appraisal is required. This means that there is no loan-to-value limitation.
One necessity of the IRRRL is that the loan must lower monthly payments for the veteran. The only exceptions are when the borrower:
- Refinances an adjustable rate mortgage (ARM) to a fixed rate mortgage.
- Refinances into a shorter term loan.
- Uses the loan to finance energy efficient improvements.
Unless the veteran is refinancing from an ARM to a fixed rate, the IRRRL must cause the interest rate to decrease.
Fortunately for many current homeowners, rates today might be much lower than they were when they purchased their home. This means that refinancing could save them money on their monthly payments.
To qualify for an IRRRL, you must already have a VA loan, so you’ll need to have your lender obtain a Prior Loan Validation from the VA’s website to prove that you’re eligible.
Basic eligibility requirements for all VA loans can be found here.
Benefits of VA Loans
VA loans are intended for active-duty military personnel, veterans, reserve members, National Guard members and surviving spouses.
The biggest benefits of a VA loan are the basic entitlement and guaranty, which essentially serve as a downpayment on homes.
Everyone eligible for a VA loan receives a “basic entitlement” of $36,000, which is a sum the VA will guarantee on a home loan. Most lenders will approve a mortgage for four times that amount (or $144,000) without a downpayment.
Private mortgage lenders are usually willing to offer much more favorable terms to people who qualify for VA loans, including first-time buyers and, in some cases, people with less-than-ideal credit scores.
Other benefits include:
- No private mortgage insurance premiums (MIPs)
- An assumable mortgage (the buyer can take over the seller’s mortgage payments)
- The right to prepay the mortgage without penalties
- VA assistance to veterans who default because of financial hardship
- Cash Out Refinance loans for those who want cash from their home equity to pay off debt, make home improvements, pay for college, etc.
- Adapted Housing Grants that help veterans with a permanent or total service-connected disability to build a home (or modify an existing one) to accommodate their disability
- Native American Direct Loans, which help Native American veterans buy, construct or improve housing on Federal Trust Land, or reduce the interest rate on VA loans
Together, these benefits often help active service members and veterans obtain mortgages that would otherwise be beyond their reach.