Tips & Special Topics
Recession and VA Loans
Added December 10, 2008
It’s official! President George W. Bush acknowledged for the first time on November 28, 2008, that the US economy is in a recession. According to data by expert economists, America is in a recession. In economic terms, a recession happens when the gross domestic product (GDP) shrinks for at least two consecutive quarters.
By definition, U.S. economy has been in a recession since December 2007. So, what does that mean for VA loans? Is the VA Home Loan Guaranty Program resilient in an economic slump? And, like conventional loans, are there fewer VA loans now or more? Because the Program is resilient, there are more VA loans being made now.
In fact, there are several factors that have helped keep VA loans strong even in this recession: recent improvements in veterans’ benefits, the VA outreach program, and the abilities of private mortgage lenders to implement the VA benefits in a down economy.
Since the Veterans’ Benefits Improvement Act of 2008 was passed into law in October 2008, the guidelines under which VA-eligible borrowers can obtain a home refinance loan are more attractive than ever. First, the maximum guaranty for cash-out refinance loans has been made the same as that for purchase loans. Qualified veterans can now refinance up to 100% of appraised property value. And, the ceiling has been raised for VA’s refinance loan up to $729,750; provided that the loan does not exceed the maximum county limits established. Also, the VA’s authority to guaranty ARMs and Hybrid ARMs has been extended to September 30, 2012.
To protect the Federal Government’s guaranty, the VA has counselors to help veterans keep their homes even in the toughest economic situations. The VA’s outreach program focuses on two groups: those who use the VA loan guaranty program and those who don’t. The purpose of this outreach is to keep veterans in their homes. VA counselors can assist people with VA-guarantied loans to avoid foreclosure. And, they can advise VA-eligible borrowers with other types of loans about the benefits of refinancing to safer and more affordable loan terms associated with VA loans.
With VA outreach, there are special financing programs, repayment plans, forbearance and loan modifications that can help a veteran in financial distress keep a home. Since 2000, VA counselors have helped abut 74,000 veterans, active-duty members and survivors keep their homes. This represents a savings to the U.S. government of nearly $1.5 billion.
Are the VA Home Loan Guaranty Program’s improved benefits and counseling enough to stand up to a recession? A VA home loan is originated and funded by a VA-approved private lender. It’s up to the lender to establish its requirements for making a loan. Lenders must comply with VA income and credit standards when considering a VA home loan application; however, lenders may establish more conservative lending policies. That said, a VA home loan is still one of the only options left for zero-down, 100% refinancing.
With billions of dollars pouring into the financial system as a result of the Wall Street bailout, credit belts are loosening, and many banks are ready to lend. But, due to the year-long recession, there has been a big decline in the number people seeking loans according to an article published by the Los Angeles Times. Consumers are nervous to incur more debt. And, it’s the perception of many that changes have been made to qualifying standards for all loans as a result of the Fannie Mae/Freddie Mac mortgage mess, and that such changes have made it next to impossible to even get a loan.
But, for VA-eligible consumers, the situation may be different. Because VA loans are backed by the Federal Government, a VA-approved lender can make VA home loans to VA-eligible borrowers even in the worst of times. VA loan limit guidelines help VA-approved lending institutions determine how much a qualifying veteran can borrow.
In a recession, the VA Home Loan Guaranty Program can be resistant to many factors that drag the economy down. So, those VA-eligible borrowers (who may be in financial trouble due to their current high-rate mortgages) may qualify for VA refinance loans with safer more affordable VA terms.
It’s no doubt that there is a decline in conventional home loans. But, because of their recession-resistant traits, VA home loans may be on the rise. The VA Home Loan Guaranty Program can make it very possible for VA-eligible borrowers to emerge from even the worst economic stench smelling like a rose.
