Since World War II, the agency now known as the Department of Veterans Affairs (VA) has supported home ownership by veterans through its home loan guaranty program. This program allows a veteran to obtain a home loan from a private lender on more favorable terms than usual (for example, without a required down payment).(1) When foreclosure occurs, VA's guaranty reduces the lender's potential loss.(2) The proportion of the loan principal that is guaranteed varies with the size of the mortgage loan (but it cannot be more than $46,000).(3) In 1992, the Bush administration estimated the program's net federal outlays (loan fees received as compared with foreclosures and program operating costs) at $740 million.(4)
Until 1982, the government assumed the full cost of the program, and at that time, established a one-time VA loan funding fee.(5) Currently, the fee is 2 percent of the mortgage amount for loans with down payments of less than 5 percent, 1.5 percent for loans with down payments ranging from 5 percent up to 10 percent, and 1.25 percent for loans with down payments of 10 percent or more. VA home loans are often obtained with no money down. In addition, the VA fees may be paid in cash at closing or included in the loan amount and financed by the veteran over the life of the mortgage.
Prospective homeowners are unable to purchase homes with conventional or Federal Housing Administration (FHA) financing without down payments (5 percent minimum generally applies to conventional mortgages and 3 percent to FHA mortgages). FHA, however, permits closing costs to be included in the loan amount, while VA does not.(6) The FHA loan results in a maximum loan that is not far from a zero down payment.(7)
When FHA or conventional financing is obtained, an insurance premium is charged. For example, FHA requires a 3 percent fee up front, plus a monthly fee based on an annual rate of 0.5 percent of the loan amount (the fee can generally be terminated when the value of the property exceeds 80 percent of the mortgage amount). The rates charged by private mortgage insurers vary from company to company. One private insurance company quoted a 1 percent up-front fee that cannot be financed by the buyer (but can be paid by the seller at closing in some circumstances), and an annual fee of 0.44 percent of the loan amount paid on a monthly basis, until the lender no longer requires the insurance (generally, when the loan amount falls below 80 percent of the value of the home and the borrower applies for release of the insurance obligation). The VA home loan program does not charge an insurance premium.
In addition to lower loan costs and the ability to obtain no-money- down loans, VA qualifying criteria are more lenient than other programs. Consequently, veterans receive a substantial benefit when compared to other home buyers who use FHA or conventional financing.
A provision in the recently enacted Omnibus Budget Reconciliation Act (OBRA) of 1993 (codified at Section 3729 in Title 38 of the United States Code) increased the fee from 1.25 percent to 2 percent. VA estimates that this increase will cost the veteran with no down payment about $4.50 a month (based on the average loan amount of $86,000, at an annual interest rate of approximately 7.5 percent, and the assumption that the veteran has chosen to finance the entire funding fee).
An option prepared by the Congressional Budget Office (CBO) outlines a higher schedule of fees. For example, loan fees would increase to 3 percent for down payments of less than 5 percent; to 2 percent for loans with down payments of 5 to 10 percent; and to 1.5 percent for loans with down payments of at least 10 percent.(8) It is estimated that this CBO-proposed increase will cost the veteran with no down payment an additional $6 a month, compared to the recent statutory increase. Table 1 illustrates the effects of the OBRA provision and the CBO option.
The Department of Veterans Affairs should work with Congress to amend Section 3729 of Title 38 of the United States Code to conform to the CBO option of increasing VA home loan funding fees.
While requiring fairly modest increases in monthly payments for the average home-buying veteran, the VA program would continue to provide benefits (e.g., lower loan fees, zero down payments and more lenient qualification criteria) over and above what is available in the current market place.
Cumulative six-year savings that would result from implementing this proposal are estimated at approximately $811.4 million. These savings are dependent upon the enactment of legislation.
Table 1 ******* VA Guaranteed Home Loan Charges Less than 5% 5 to 10% More than Down Down 10% Down Payment Payment Payment ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Pre-OBRA 1.25% 0.75% 0.50% Post-OBRA 2.00% 1.50% 1.25% CBO Option 3.00% 2.00% 1.50% Budget Authority (BA) and Outlays (Dollars in Millions) Fiscal Year 1994 1995 1996 1997 1998 1999 Total ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ BA 0.0 -162.6 -163.7 -160.8 -162.3 -162.0 -811.4 Outlays 0.0 -162.6 -163.7 -160.8 -162.3 -162.0 -811.4 Change in FTEs 0 0 0 0 0 0 0
1. U.S. Congress, Congressional Budget Office (CBO), Reducing the Deficit: Spending and Revenue Options (Washington, D.C., February 1993), p. 329.
6. Facsimile transmission from Alan Schneider, Deputy Director of the Loan Guaranty Service, Department of Veterans Affairs, July 27, 1993.
8. CBO, p. 329.
Who We Are |||Latest Additions |||Initiatives |||Customer Service |||News Room |||Accomplishments |||Awards |||"How To" Tools |||Library |||Web Links