This is a guest post by Robert Stretch of VA Benefit Blog.
Military veterans and active duty service members have long reaped the benefits of an easy mortgage process, thanks to the Department of Veterans Affairs VA home loan program, which provides mortgages to veterans and active duty service members at low interest rates even if the borrower has a low credit score or little to no cash for a down payment.
However, thanks in part to a shaky economy and increased lending regulations, mortgages have become more difficult to obtain and subject to more intense financial scrutiny and it seems that VA loans have fallen victim to many of the same cutbacks as traditional loan programs.
Lenders will still be providing VA loans, even to those borrowers who take advantage of the zero down payment option, but the credit score requirements have gotten much more stringent in recent years.
Major lenders like JPMorgan Chase, Citigroup, and Bank of America typically do not provide VA loans to applicants who have credit scores below 610. Wells Fargo is even more strict, with a cutoff score of 600 (the average credit score for all borrowers is 750, while the average for VA loans is 700).
These credit score policies also apply to the Streamline Refinance program, which allows borrowers with a current VA loan to refinance into another VA loan with very little paperwork (and as a result, less money due to fewer fees, etc). However, for the first time, many lenders are requiring borrowers to pay for an appraisal during the streamlined refinance process, which costs at least $300. If the appraisal of the home results in a finding that the loan value is higher than the home value, the application will most likely be rejected.
As a result of the new trend towards tighter lending requirements, total VA loan volume has fallen in 2010 while the country’s overall loan volume has risen nearly 20%. While increasingly rigorous lending regulation is perhaps an inevitability following a period of “anything goes” lending as we saw in the early part of the decade, it’s important to note that the overall default rate for VA loans is lower than any other mortgage program at around 2.6% of all VA loans made, which indicates that perhaps VA loans do not represent the risk lenders believe they might.