It’s been said that nothing worth having comes easy. That can certainly be true when it comes to buying a home. Some people recoil at the thought of applying for a loan. However, certain aspects of VA loans like competitive interest rates, generous loan-to-value and DTI with wiggle room may make VA loans more appealing to some borrowers.
When you apply for a mortgage of any kind, your credit, income and assets will all be under examination. When it comes to approval, VA-eligible borrowers may currently have a slight edge. New Data from the Origination Insight Report from Ellie Mae compares VA and conventional loans processed with Ellie Mae’s software. In the report, borrowers who are approved for VA loans qualify for their mortgages though they have lower average credit scores, higher DTI ratios, and lower interest rates. To boot, VA loans have a higher closing rate.
Less-than-perfect FICO Scores are Okay for VA Loan
The VA asks approved lenders like Veterans First to vet a borrower’s credit, income and debt for loan approval. The VA has guidelines for lenders to follow and often lenders have additional guidelines such as minimum credit score. Lenders vary, but a score of 620 or above is pretty typical for VA loan approval.
According to the Ellie Mae data from May 2016 to April 2017, VA borrowers had average scores below 710, while conventional hovered above 750. This graph shows a side-by-side comparison of average FICO scores for closed VA and conventional borrowers. The spread is consistently about 50 points.
VA and Conventional Borrower's FICO Score Comparison
VA Borrowers can be Approved with Maximum Debt
Credit score is just one thing your lender will examine. Another is your debt-to-income or DTI ratio. Your DTI ratio is a personal finance measure that weighs your monthly debt payments against the money you bring in. Front- and back-end DTI ratios for conventional loans were 23% and 35%, while VA numbers were 25% and 41% in March of 2017.
VA and Conventional DTI Comparison
The average VA borrower is approved with slightly more debt, but still within qualifying guidelines.
It’s important to note that the Veterans’ loan program does not allow for more debt. Conventional loans follow qualified mortgage (QM) standards, which require a DTI of 43% or less. The VA number is 41% or less. The VA standard for DTI seems slightly more rigid than QM. But the VA rule is not cut in stone. If a borrower can show excess residual income or other compensating factors, then it’s possible to be approved with a DTI higher than 41%.
VA Interest Rates Show No Penalty for Lower Qualifying Numbers
While VA borrowers are closing with good-to-fair credit averages, they don’t seem to be punished with higher interest rates. In fact, the opposite seems true. VA interest rates for the government-backed home loans in the Ellie Mae sample are consistently lower than conventional. Just look at this chart comparing interest rates for VA and conventional loans for one year. The spread ranges between .27 and .41 percent. Just that small fraction of a point can save eligible borrowers up to $75 per month on an average loan of $260,000.
VA and Conventional Mortgage Interest Rates Comparison
Fewer Liquid Assets Needed for a VA Mortgage
When you consider the costs involved in buying a home, it’s reassuring that one loan program generally requires less cash out-of-pocket than the rest. The Department of Veterans Affairs will back about 25% of a VA mortgage for the lender up to conforming loan limits. In most cases, the backing secures enough of the loan so that the lender doesn’t need a down payment. Most, not all, VA loans are obtained without a down payment. Three scenarios for down payment VA loans exist:
- Home is priced over the loan limit
- Borrower's entitlement is less than 25% of the loan
- Borrower opts for a down payment
The average down payment for closed VA loans is just 2%. The conventional average in the Ellie Mae data is 20%. Cash put toward a down payment ultimately reduces the loan principal. A comparison of the principal to the home’s value is known as loan-to-value or LTV. While VA loans allow for 100% LTV, the conventional max is 97%.
Look at the charts and see the difference between VA and conventional LTVs:
Mortgage LTV and Down Payment Comparison
Closing Rates Better for VA Home Loans
Could it be true that eligible borrowers are more likely to be approved for VA home loans? When you consider closing rates for VA and conventional loans, the numbers don’t lie. Take a look at the percentage of loans closed for each program in a 90 day cycle ending March, 31 2017. VA loans have a slightly better closing rate.
Mortgage Closing Rate Comparison
The VA has stated that Veterans have more access to home ownership through the VA Home Loan Guaranty Program, and the most recent data seems to confirm it.
If you’d like to start your VA loan, please get in touch with us today at 800-217-1729.