Predatory lending. Churning. Taking advantage of borrowers. These are words and phrases that should be only distant memories of the pre-housing crash mortgage market of the early 2000s. Unfortunately though, they’ve all been brought up in today’s marketplace as well, specifically when it comes to VA mortgage loans and recent actions taken by Ginnie Mae (the government corporation that insures mortgage backed securities on government loan products like VA mortgage loans, FHA loans, and USDA loans). Fines have been levied, warnings have been handed out, and now guidelines are tightening up (not as a direct response, but in the bigger picture plan to protect this piece of the mortgage market).
Until now, VA Mortgage loans allowed qualifying veterans to borrow up to 100% of their home value – so there has been no down payment needed for a home purchase for most vets, and even when it came to tapping into home equity, veteran home owners have been allowed to access 100% of their home’s value in cash to refinance. Now though, Ginnie Mae has decided to change that guideline (keep in mind, for refinances only!) to allow home owners to only access up to 90% of their home’s value through a cash out refinance. Likewise, on FHA loans Ginnie has reduced the amount of cash out a consumer can pull from their home to 80% (previously 85%) of the home’s value.
The tightening of loan to values for VA mortgage loans comes after many investors have recently changed the pricing structure on VA loans – in the past, VA loans have offered generous rebates to buyers in higher rate buckets – for example, a borrower could get a 4% at “par”, or the rate that neither costs the borrower any points, but also comes with no rebate/credit toward closing costs. But a 4.25% may have offered a full point or more in a credit to a borrower. Many lenders used this rebate to begin offering VA mortgage borrowers higher rates with the intention of refinancing them into a lower rate later, effectively getting 2 loans (and strapping borrowers with 2 sets of closing costs), or sometimes more.
Investors have changed their pricing structures to incentivize lower rates for borrowers to prevent churning – which is good news, but unfortunately also makes it tougher for borrowers who are short on funds that in the past could have relied on lender rebates to pay for closing costs. A borrower’s best bet is to work with a lender they can trust. A loan officer should advise clients on their best options and what makes the most sense for their unique situation, and should also be able to answer any questions borrowers have along the way. Veterans especially need this guidance, because the VA mortgage loan program is one of the most beneficial loan products on the market – with no down payment requirements, no monthly mortgage insurance (PMI), and low rates, vets that can use their VA mortgage loan entitlement should always be given the option, and the proper guidance to get the best loan.
For now, borrowers have a short window of time to close on VA mortgage loans under current guidelines, but any loans that close and fund after 10/31/19 are subject to the new loan to value restrictions of using only 90% of their home value for cash out refinances (purchase loans will still be offered with 0% down payment required for qualifying veterans).
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