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Government Help Made Simple
Ron Reagan used to josh that the most feared sentence in the English language was "Hi, I'm from the government, and I'm here to help you."
For most of the last 25 years, at least since the arrival of cheap and plentiful conventional loans, an equally worrisome sentence in real estate circles went like this: "I'm here with an offer on your home, and the buyer wants a VA loan."
Groan.
Like so many government assistance programs, Veterans Administration loans were terrific up to a point, but didn't know when to stop assisting, and added one last assistance wrinkle that undid half of the good stuff. That wrinkle has recently been removed, and VA groaning is no longer necessary.
The terrific parts were (and still are) miraculous. The leading miracle: VA loans require no down payment at all. VA buyers often leave their closings with a refund check because their earnest money exceeded the closing costs.
Qualifying is a forgiving process. Some borrowers can have total monthly debt payments approaching half their gross, pre-tax monthly income. Frugal buyers with no other debt can buy more house per dollar of income than with any other type of loan.
The extra wrinkle that caused all the trouble started in the 1940's with the thought that a GI coming home from the war ought to get a discount when buying a home. From that simple, reasonable idea came the mother of all wrinkles: the VA tried to build the veteran's discount into VA loans.
From the 1940's until last year, the Veterans Administration set an interest rate for VA loans, and always set the rate well below the rates for open market mortgages. As buyers today find on all loan types, a below market rate inevitably costs some "points" and maybe an "origination fee." The VA set and reset its rate as necessary to keep the "discount" points (Get it? "Discount?") somewhere between two and five.
Two VA rules were supposed to ensure that veterans got the benefit of this discount. In practice, the rules did more harm than the discount was worth, and from time to time made the loan program almost unusable. ("There is a right way, a wrong way, and the Army way.")
Rule Number One: the discount points could not under any circumstances be paid by the veteran. They could be paid by the seller (groan), builder (groan), employer (groan), or Realtor (groan, groan).
Rule Number Two: the veteran could never, ever take a higher rate than the current VA rate. No matter how helpful a no-point rate would be, the VA would not allow the veteran to waive this assistance wrinkle.
Rule One meant that someone selling a home to a veteran usually took a pretty good hit to equity. Many sellers are grateful to veterans for their national service, and eager to sell, but "Five points?!" were the last words said over many a VA offer.
When the VA changed its rate while a loan was in process, Rule Two led to some of the most complicated disasters in the history of real estate.
In the old days, let's say a veteran went under contract at 8.5% and two points, which the seller grudgingly agreed to pay. Ten days before closing the loan is approved, but there is a big rally in the bond market, and market rates fall. The Veterans Administration notices the decline, chews on the matter for a few days, and late on Friday reduces the VA lending rate to 8.00%.
The following Monday (the day before closing) is a disaster in the bond market, and rates go right back up. The Veterans Administration, not wanting to reverse itself too quickly, leaves the VA rate at 8.00%. Points for an 8.00% loan have skyrocketed to .... five. Rule Two said that the veteran could not have an 8.50% loan even if he wanted 8.50%, is locked at 8.50%, and approved at 8.50%. If the posted rate had been dropped to 8.00% he must take 8.00%. And, the seller must pay all five points if the deal is to close. Which it won't. (To paraphrase: it became necessary to destroy the loan in order to save it.)
Rules One and Two are gone: the VA no longer sets a rate. Veterans can select a "zero and zero" rate, or pay their own points if they wish. There is no undue burden on the seller, and all the good features of VAs are still in place.
In addition to the nothing down and easy qualifying noted above, there is more good stuff: on first time use, the "nothing down" loan amount is $184,000 (for subsequent use, it's still as high as $144,000). VA loans can be done on any project approved by the VA or FHA, which means that condos, hard to finance with low down payment conventional loans, are easy with VA loans. Also, the maximum VA loan is a lot bigger than the Boulder County maximum FHA, which is limited to $117,300.
A non-veteran spouse can add his or her income to the veteran's. VA loans are still assumable, which can make a house much easier to sell in a tough market. In a further sign of the modern world, there is even an adjustable rate VA loan.
Now that these loans have been unwrinkled, albeit two generations late, veterans should give them more consideration, and sellers no longer need to flinch.
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