Real Estate News

New Law Is Changing How Veterans and Service Members Pay for Homes.

By Katy McLaughlin WSJ

Buyers of luxury homes no longer need a down payment on their non-conforming VA loan

In January, a new law governing mortgages guaranteed by the Department of Veterans Affairs took effect. Among the most significant changes? Today, borrowers using VA loans can borrow any amount of money—as long as they qualify—with no down payment. Previously, zero down payment loans were capped at the same level as conforming loans.

Buyers of luxury homes no longer need a down payment on their non-conforming VA loan

It is big news in expensive real-estate markets with lots of current and former service members.

Timothy Colletti, who served as a Navy operations specialist from 1983 until 1989, was looking for a house this fall in Rancho Cucamonga, Calif. When he reached out to Veterans United Home Loans, a lender based in Columbia, Mo., that specializes in VA loans, the loan officer told him that the zero down payment loan limit in his area was $484,350. The homes he was looking at cost around $1 million. The way the VA loan program worked before the change meant that, while he could get a VA loan for the whole amount, he would need a down payment equal to at least 25% of the difference between the zero down loan limit and the house price, which in this case was about $120,000.

“We could always afford the note,” said Mr. Colletti, today a 56-year-old filmmaker. “It was getting the down payment that was the problem.”

The loan officer explained that if he waited until the law changed in January, he wouldn’t have to put any money down. In January, Mr. Colletti and his wife, Rachel Ewing Colletti, closed with no money down on a $965,000 house.

The new rules also affect refinances. Evan Banning, president of California Housing and Lending, a real-estate brokerage and mortgage firm in San Diego, said he refinanced a loan for a vet and active reservist in mid-January. The client had purchased a house for $1.7 million a few years earlier with 10% down, but didn’t use a VA loan. Under the prior VA rules, refinancing would have required his client to boost his home equity. Instead, Mr. Banning provided a refinance of $1.62 million with no additional money down. He lowered the rate from 4.125% to 3.25%, he said.

Soldier Holding a Model of House

In 2019, about 10% of all loans written for home purchases were VA loans—up from about 2% before the recession, said John Bell III, deputy director of the home loan program for the Department of Veterans Affairs. The increase in usage is partly due to improvements in the way the program works. Loans take only a day or two longer to close than conventional loans, Mr. Bell said.

Loan officers say many vets are surprised to learn they can use the program.

“It’s heartbreaking, but I hear from vets who say they are retiring and they are finally ready to use their VA loan,” said Chris Birk, director of education at Veterans United Home Loans. “They thought it was a one-time thing.” Some vets think they don’t qualify because they served too long ago or never saw direct combat, other loan officers said. In fact, the majority of today’s 1.34 million active military personnel and 18 million veterans qualify, said Mr. Bell. Vets can use the VA loan program each time they buy a primary residence and also to refinance.

Rates are 1/8 to 1/4 point lower than conventional loans, said Mr. Bell, and don’t require private mortgage insurance. They generally have more flexible debt-to-income standards than conventional loans, said Mr. Birk.

In Colorado Springs, a buyer coming into a deal with a VA loan “is generally seen as a big positive,” said Brian L.A. Wess, broker and owner of Infinite Horizons Realty. Roughly 80% of his clientele are either in active service or are vets, he said.

In San Diego, however, particularly in a competitive bidding situation where agents aren’t familiar with VA loans, “you might be looked over if you have a VA loan,” said Loren Uber, owner of real estate and mortgage broker Uber Co. Homes must pass a VA-loan appraisal, which has stricter criteria than a conventional home-loan appraisal, a process some sellers fear.

By Katy McLaughlin WSJ