No Money Down Loans Today? Really?
You may have heard about no money down mortgages a few years ago, and you may have also heard that they were part of the reason for the housing market crash at the start of the great recession in 2008. That is a correct statement, but when used properly, the no money down mortgage can actually be a smart financial tool, particularly for the lending institution. The Veterans Administration has perfected the art of using this type of mortgage to help veterans buy and stay in homes.
This type of loan offered by the VA is almost a novelty in the market any more. Ninety percent of people who use this program actually end up not making a down payment at all on loans worth up to $417,000. While this might sound incredibly risky, it actually translates to a program with the best (meaning lowest) foreclosure rate for any type of home loan over the last several years.
So why would the VA offer this type of loan? It means that they can help keep hundreds of thousands of people stay in their homes and be in a financial position to keep making their payments. The alternative costs the homeowner dearly, and the bank as well in fees for the foreclosure process, plus the time spent dealing with trying to sell a property.
Since the VA only loans to veterans, it is a bit of an exclusive program that not everyone can take advantage of. Veterans are a different type of borrower, too, trained and disciplined in ways the average borrower is not.
Because many banks became restrictive during the recession, it meant that fewer people were able to obtain a home loan. In stepped the VA. Their loans were more accommodating, offering even veterans with less than perfect credit a chance to own their own homes. The most appealing part was the ability to get into a house with no money down.
How can the VA offer these loans and not have so many default? One big reason is the income requirement the VA has. After paying expenses including the mortgage, borrowers must be able to demonstrate that they will have money left over. The exact amount varies by geographical location, since the cost of living is vastly different in each region. The VA also uses a debt to income ratio to determine suitability. For those who carry a lot of existing debt, over 41% debt to income, they must demonstrate that they have at least 20% of their income left over after all bills are paid.
Fantastic Benefit…Well Deserved!
What this proves is that borrowers are not maxed out and also not on the brink of financial ruin each month. Should an emergency arise, the VA borrowers are far better able to weather the storm. The program has been so successful that market watchers have encouraged other banks to do the same.
If someone does find himself struggling to make payments, the VA has an entire team of people dedicated to helping that homeowner find relief. They can even act on the homeowner’s behalf if need be, and they are notified rather quickly to be better able to help the homeowner before things get out of control. Their goal is to resolve the issue and not have the matter lead to foreclosure. This can even include loan modification plans.
Because the VA vets their veteran borrowers so well, they put themselves in a better position. If the unthinkable does happen, however, the borrowers will pay a higher price for the default than a standard lender does, because the VA only guarantees part of the loan amount.
Thanks to careful planning and screening, the VA is able to offer loans to veterans that are affordable and set up in such a way as to allow the borrowers to stay in their homes. Instead of being a strange business model, the VA has made no money down mortgages a success story.
Video: Using Your VA Home Loan Benefit – Working With Realtor & Lenders
