There’s a big mortgage debate in Washington and vets are very much in the middle. The question is whether home loans should require at least 20 percent down.
Under new Wall Street Reform rules enacted last year in Washington borrowers in some cases will need 20 percent down.
You can see how this is scary stuff. Homeownership is a traditional part of the American dream. Asking for 20 percent down — including 20 percent down from first time buyers — would make ownership impossible for many households and delay it for most others. As to VA loans, imagine what would happen if the minimum down payment requirement went from zero to 20 percent of a home’s purchase price?
So how is it possible that such a woeful idea crept into legislation designed to stop bad lending practices on Wall Street?
How Things Work In Washington
You’ve probably heard a lot about the coming requirement for 20 percent down. But for virtually all borrowers, including VA borrowers, it’s a non-issue.
Here’s why: Go back to Wall Street reform. It says loans that are not defined as “Qualified Residential Mortgage,” or QRM, will indeed require 20 percent down. The catch is that most loans are automatically defined as QRMs and therefore do NOT require 20 percent up front.
Which loans are QRMs?
- Conventional mortgages sold to Fannie Mae and Freddie Mac
- FHA loans
- Mortgages originated by lenders and held in their portfolios
- VA mortgages
Under the new rules, a QRM is generally defined as an FHA, VA or conventional mortgage with a fully documented loan application and points and charges of less than 3 percent of the mortgage amount. These loans represent around 95 percent of all available home financing.
In other words, VA loans with nothing down remain in place today and will remain in place tomorrow. VA application standards will not change. Instead, much of the mortgage marketplace will adopt the requirements long used by the VA and with great success.
VA Loan Benefits Are Safe
But what about the new “requirement” for financing with 20 percent down? Indeed such a requirement exists for a small fragment of the marketplace — and with good reason.
A major cause of the mortgage meltdown was the introduction of “affordability” loan products such as option adjustable-rate mortgages and the use of no-document and low-document loan applications. To assure such practices and products are not re-introduced, Wall Street reform says lenders can make such loans — but only with 20 percent down and only if they set aside a 5 percent reserve to account for the expected high level of losses.
Since there are a few QRM definitions that were not finalized by Wall Street reform, some lenders and stock brokers — but not all — want to expand the QRM definition to include riskier loans. To gain public support they talk about the 20-percent down required for such products but say little or nothing about the vast majority of safe and financially sane loans with no such requirement.
So the next time someone heatedly says your VA mortgage benefit could be in danger, explain that nobody is touching the VA loan program. It’s just another day in Washington and another special interest trying to twist the rules with rumors and tall tales.