Lenders are making it more difficult for veterans to obtain Department of Veterans Affairs (VA) loans. Previously, veterans with no downpayment or low credit scores were typically able to get VA loans – in a large part because the Department of Veterans Affairs insures a quarter of the loan amount.

However, while all the major lenders are still willing to offer VA loans without a downpayment, Bank of America, Citigroup and JPMorgan Chase will now only offer VA loans to veterans with credit scores above 610. The cutoff for Wells Fargo is 600.

Veterans are also being turned away from the VA Streamline Refinance program as those policies have also become stricter. The refinance program allowed veterans to rollover VA loans with little paperwork and no appraisal – until recently.

VA lenders now require an appraisal of the property when refinancing. If the home’s new appraised value is less than the loan amount, it is highly unlikely that the application will be approved.

As long as a veteran has completed 24 months of continuous active military duty (and is not dishonorably discharged), he may apply for a VA loan. Once the veteran qualifies, he can presently borrow at rates of 4.75% on a 30-year fixed rate mortgage (FRM). The nationwide average for all FRMs is around 4.70%.

first tuesday take: VA loans are designed to reward the men and women who served our country in the military. These new regulations might be logical if veterans were notorious for defaulting on loans or typically had much lower credit scores than the average borrower. However, that is not true.

VA loans generally have a lower default rate than regular mortgage loans, 2.6% versus 3.4% respectively. VA borrowers have an average credit score of 700, while all borrowers have an average credit score of 750.

The 50-point credit score difference is probably not the reason lenders are cracking down on VA loans. VA lenders have little risk of financial loss, as our government guarantees 25% of these loans. It is more likely the lenders do not want to service these loans, since the lender’s failure to properly manage these loans will adversely affects the lender servicing them, as well it should.

This is an example of government regulators allowing lenders (whom they now feed and always will) to tighten their belts at exactly the wrong time, which is going to keep this recovery flat, jobless and deflationary – all unacceptable results.

A veteran with a high enough credit score need to be advised by his agent negotiating the purchase of a home to simply get pre-approved and apply for a conventional loan. VA loans, once originated, place more restrictions on veterans than conventional loans, but then chaotic CalVet loans are far worse for vets as they are high-cost ARMs with patently unacceptable restrictions on ownership. [For more information on why the CalVet loan program should be abolished, see the first tuesday Recommended Legislation.]

Re: VA Loans Get Harder from the New York Times