This Government Mortgage Program Helps Veterans With Spotty Credit History and Gets Better Results

Tammie Sohnrey

Greg Sohnrey came home from Iraq in 2010 so badly injured the Veterans Administration said the then-30-year-old would never work again.

But for Sohnrey, that experience paled next to losing a baby daughter, then watching two young sons go under a surgeon’s knife to repair holes in their hearts.

Although it meant more upheaval, Sohnrey and his wife, Tammie, decided to move their family to Seattle from Texas, for what they believed would be better-quality pediatric care. And once there, they decided to become homeowners. As Sohnrey put it, “We just didn’t want to move around anymore, Just wanted to settle down into a house and not pay rent.”

With a spotty credit history, only about $500 in the bank, and monthly benefits his only income, Sohnrey may not seem like the kind of borrower any lender would want to take a chance on. But there’s a government mortgage program specifically designed for people like him. And Veterans Administration mortgages aren’t just niche products that help a handful of people through a laborious, bespoke process. They’re a large and growing part of the mortgage market, and one that boasts lower delinquencies than the national average.

A look at VA mortgages compared to all mortgages.

Mortgage Bankers Association

“The financing VA provides to veterans is absolutely critical,” said Karan Kaul, a researcher with the Urban Institute. “We have a lot of veterans, and we have to house them, and the VA is doing a phenomenal job of meeting their needs.”

Take-up of VA mortgages has surged since the financial crisis, in large part because many of the lenders that focused on less-than-prime borrowers are now out of business. In 2007, VA mortgages totalled $24.2 billion; in 2017, that was about seven times higher: $177.8 billion.

Mortgage analysts like Kaul applaud the VA’s approach to underwriting, a methodology the administration calls “residual income.” By emphasizing how much cash flow a homeowner will have for monthly expenses above and beyond housing, the VA believes residual income is a more holistic way of assessing a borrower’s ability to pay than the credit scoring approach most conventional mortgages employ. An unconventional approach may be necessary for the unusual circumstances of many vets’ lives: they may not have bad credit, so much as no credit, if they went off to service straight from school, for example.

Ed Robinson is head of mortgage lending for USAA. A veteran himself, Robinson thinks that VA loans are in many ways akin to an “affordability” mortgage or one designed for first-time homebuyers. But with most of those products, Robinson said, “it’s harder to gauge creditworthiness.” In contrast, with VA loans, Robinson thinks the borrower’s background acts as a kind of “creditworthiness by proxy.” Vets tend to have “what I would say is a loyalty to service and paying back.”

Although he generally focuses on numbers, not personality traits, Kaul agrees. “You’re talking about a segment of the population that have that element of discipline and wanting to stay current on their debt and do the right thing. That’s a soft element, but it plays a role.”

There was a flurry of mortgage delinquencies among VA loans last year in the wake of Hurricanes Harvey and Irma, and mortgage data companies are closely watching the impact of Hurricane Florence on the North Carolina communities surrounding Fort Bragg, Camp Lejeune, and other areas where veterans tend to settle. Black Knight, a real estate data company, in October noted that VA loans make up 5% of the national total, but in areas affected by Florence, they account for 20% of all mortgages.

Black Knight confirmed for MarketWatch that although many VA loans became briefly delinquent after last year’s storms, they “cured,” or became current, at the same pace as the wider population. “Delinquencies peaked three months following the storm and then began a consistent, continual trend of improvement,” a Black Knight spokesman said in an email. Less than 1% remained delinquent after 11 months, he added.

Randy Hopper, senior vice president of mortgage lending at Navy Federal Credit Union, believes that life events like storms are another reason to consider VA mortgages. The mortgages can be taken out with little or no down payment, “allowing (borrowers) to save for a rainy day,” Hopper said. Also, because the government guarantees 25% of every VA loan, lenders are usually able to offer borrowers a better interest rate than they could otherwise obtain.

Like many people who lend to vets, Hopper is concerned not just with getting them into a house, but getting them into sustainable homeownership. “Having that residual income left over after the mortgage payment is a cornerstone of responsible financial management,” he told MarketWatch.

Hopper and Robinson both argue that vets may be best-served by working with a lender that specializes in VA mortgages. For USAA and Navy Federal, VA mortgages make up 60% and 55% of their overall home loan portfolio, respectively. While that may sound like salesmen talking their book, Sohnrey said he had trouble with many companies that purported to understand VA lending. The family had a brief scare when they bid on a house, putting down $500 in earnest money – basically all they had in the bank at the time. That lender took too long to get the mortgage started and the house went to another buyer.

Luckily, the money was returned to the Sohnreys, and Greg reached out to Carrington Mortgage. Carrington’s loan officer, Jared Robbins, worked fast and knew the drill, Sohnrey said, “and they helped us even though we were calling every day to see how it was going. We were anxious to get it done and know if we were going to get this house.”

Now they’re settled, in a sun-drenched bright blue house with a huge lot for the boys, who are five, two, and one.

“Now we’re kind of not stressing on how to make it through the month,” Sohnrey said.

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Source: Housing Trends Feed