VA Loan Losing Its Benefits--and Appeal

The federal veterans home loan guaranty program has become far less favorable for veterans over the years due to changes and amendments to the original 1944 GI Bill of Rights, which established the buy-a-home program, Bankrate.com reported.

The net effect is that veterans now have no reason to choose a VA loan over a fixed-rate loan, Bankrate.com said.

Originally, veterans were able to get mortgages with zero down payment, favorable interest rates and rate caps and no fees other than closing costs under the program.

The loans were backed by the Department of Veterans Affairs to encourage lenders to approve vets’ mortgage applications.

But that was then. Today’s program has lower loan amount guarantees, market-based interest rates, no rate caps, a funding fee on zero-down mortgages, smaller loan amounts, on average, and barriers against refinancing, Bankrate.com said.

The required paperwork is prohibitive for some veterans, and better deals are available in the conventional mortgage market, according to Bankrate.com.

The discontinuation of below-market interest rates has a dramatic impact. Rather than sticking with a fixed interest rate, the veteran and the lender negotiate an interest rate without the VA’s involvement. The result is that vets don’t receive a discounted rate and often are charged higher rates than those for similar non-VA-backed mortgages.

In 1980, 9% of mortgages in the country were VA-guaranteed. In 1999, that proportion dropped to 4.5%, according to the Mortgage Banker’s Assn. of America.