When my boyfriend and I—both Navy veterans—decided to buy a home, we were able to do so with no money down and minimal risk. Though this may seem like a millennial's dream in today's housing market, it was actually a hard-earned benefit for our service. Our story is not uncommon—since 1944, more than 22 million service members and veterans have bought homes with what are now known as VA Loans. For those that don't know much about VA loans, you'll be surprised at the way it has affected how many Americans live—even today.
VA Loan History
Our story begins on June 22, 1944—just a handful of days after D-Day—when, after heated debate, President Franklin D. Roosevelt signed the Servicemen's Readjustment Act into law. Since so many Americans were fighting in World War II, the government knew that there might be a surge of unemployment when the 15 million service members returned home. To help mitigate the effects on the economy and give veterans a chance to financially catch up to those back home, the act, also known as the GI Bill, allowed the Department of Veteran Affairs ("the VA") to offer tuition and unemployment funds to those who had fought in the war.
The bill also introduced what came to be known as the VA loan: To help service members obtain housing, it was decided that the government would guarantee a portion of no-money-down, low-interest mortgages.
Back then—and still today—the VA does not issue the loans, but rather insures them, issuing a "guaranty"—or a promise to the bank that they will repay a portion of the loan if it goes into default. In 1944, the guaranty was limited to 50 percent of the loan, and could not exceed $2,000 (the average home cost less than $9,000 then). Only WWII veterans qualified, and prospective buyers must have served 90 days in the war. Veterans also had to apply within two years of separating from the military.
For many, the first round was a success: 2.2 million VA loans were doled out between 1944 and 1952. However, there were growing pains that needed to be addressed. There were rising house prices, so the guaranty was boosted to 60 percent of the loan, but could not exceed $7,500 in the 1950s. The original loan term of 20 years made housing prices unaffordable, so it was extended to 30 years. Spouses of veterans who had died in service were shut-out of the benefits, so it was eventually extended to them, too. Additionally, the mortgage industry was passing on fees and costs to the homebuyer, driving prices up, so the VA was given the authorization to regulate who could pay what.
Because the federal government didn't issue the loans, this lead to some huge, lasting problems. This meant that black veterans still had to be approved for the loan through their local banks. These requests were consistently denied because of discriminatory redlining, or the historical federal policy of coding minority neighborhoods as too "unsafe" to insure mortgages, as well as Jim Crow-era laws that kept African American families out of affordable housing in the suburbs. According to a 2006 article by Edward Humes in The Journal of Blacks in Higher Education, in 1947 Mississippi, only two out of 3,000 VA loans went to black veterans. These issues weren't explicitly addressed until the Fair Housing Act of 1968, but—still to this day—have a lasting effect on the demographic makeup of who lives where.
Over the years, as the population of veterans grew with each war, Congress made more veterans eligible for the program. Additionally, the VA loan has been adapted to better meet the evolving needs of veterans: The guaranty was raised as housing prices climbed, expiry dates were removed, loans became eligible for refinancing and cash-out equity, the definition of eligible homes was expanded to include condos and mobile homes, and eco-friendly improvements were championed. Additionally, measures like the "funding fee" (a small percentage of the mortgage in place of PMI that helps cover losses in the event of a default) implemented in the 1960s and exemptions from budget sequestrations have been put in place so the program can benefit veterans for years to come.
VA loans today
Since its inception, the VA loan has helped many achieve the "American Dream" in exchange for their service. Because of this, it has created tremendous lasting power. In 2016, a new record was set with more than 700,000 home loan guarantees. The reason it remains such an important and popular fixture for the military community is because it can be hard for military members to obtain conventional financing for a home—for many of the same reasons it was hard in the past. In fact, a new study from Apartment List found that veterans have higher homeownership rates than non-veterans (76 percent vs 62 percent).
However, it's not as easy for veterans to gain homeownership as it once was. The Apartment List study found that the most recent veterans (those who served in the Post-9/11 era) are 35 percent more cost burdened in terms of their housing than their predecessors and even their non-veteran peers. This is true even as they're earning more, on average, than non-veterans. These young vets only have a homeownership rate of around 40 percent—which is still higher than the overall millennial rate of 32.2 percent, according to data by the Urban Institute. This all signals that it might be time for Congress to update the bill again.
Though its power may have weakened in the past few years, VA loans have made—and continue to make—homeownership possible for thousands of veterans. For many service-members and veterans, it is the only type of loan they could qualify for.
And since service-members move so frequently, moving costs quickly add up beyond what they're given moving allowances for. The VA loan can help minimize out-of-pocket moving expenses, such as security deposits and down payments.
VA loan requirements
Today, in order to qualify for a VA loan, veterans must have at least 90 consecutive days of active duty during wartime, 181 days active duty during peacetime, six years in the Reserves or National Guard, or be the surviving spouse of a veteran or service member that passed in the line of duty or because of a service-connected disability. Once a veteran gains eligibility, they have it for life and can apply for as many VA loans as they'd like. However, they can only have one active mortgage at a time and must move into their home within 60 days of purchase.
The VA guarantees a quarter of the conforming loan limit for loans above $144,000 (this number can change yearly). Funding fees vary depending on house price, down payment, and homebuyer status. The average credit score required for most lenders remains as low as 620, and veterans are able to qualify even with a high debt-to-income ratio. Both requirements are less strict than what is required for military buyers seeking FHA and conventional loans. However, housing inspection and appraisal requirements are stricter than with a conventional mortgage.
VA loan experience
"I was surprised at how simple it was to purchase our home," says Justin B., a service-member currently living in Jacksonville, Florida. He just closed on his home he purchased on a VA loan after moving to his new duty station. "My Realtor and lender worked together so well that all I had to do was prove my eligibility and sign papers. I didn't have a down payment and, at closing, I even received a check for my closing costs."
Like many of the veterans that have used the program before us, my boyfriend and I had a great experience and were able to purchase a home when we otherwise would not have been able to do so. Due to skyrocketing rent prices around military installations, we are even saving money every month by owning a home instead! With many families facing financial uncertainties, the VA loan program has become an essential benefit for veterans. Our veterans work hard ensuring that the freedoms we enjoy every day continue to exist, and I'm grateful there is a program out there to help veterans and their families make ends meet a little easier.