Aug 16, 2021
VA loans were created to help returning U.S. service members achieve the dream of homeownership after World War II.
But now, instead of serving as a ticket to the middle class, the home loans backed by the Department of Veterans Affairs, or VA, have become a "lucrative opportunity for financial predators" and leave borrowers worse off financially, says U.S. Rep. Katie Porter.
Advertisement
The California Democrat has released a report denouncing the practices of a few lenders that specialize in these no-money-down loans for active-duty service members, veterans and their families.
Thanks for subscribing!
Read the best of Moneywise in 5 minutes or less.
By signing up, you accept Moneywise Terms of Use, Subscription Agreement, and Privacy Policy.
Borrowers need to understand the risks — and protect themselves.
New VA loans are on the rise — and so are scams
Since 1944, the VA has guaranteed more than 25 million home loans. In its 2020 fiscal year, which ended last Sept. 30, the department guaranteed a record-breaking 1.2 million mortgages, totaling more than $363 billion.
That averages out to about 3,200 loans per day, according to the VA.
Porter, a longtime consumer advocate, says as more of these loans are being originated, reports are on the rise of predatory lending practices related to loan churning and cash-out refinances.
In churning, lenders pressure borrowers into refinancing early, to extract another set of closing costs. A refi at today's historically low mortgage rates can be a great deal, but only if the homeowner comes out ahead.
Churning with VA loans often involves cash-out refinancing, which provides a homeowner with money from the home's equity. The congresswoman says the arrangements take value out of homes and often have bad terms for the borrower, resulting in the consumer ending up financially worse off.
Advertisement
Must Read
- The ultra-rich use these 5 real estate strategies to build wealth while they sleep — you can start with just $100
- Here’s the average income of Americans by age in 2026. Are you keeping up or falling behind?
- Insurance companies profit most from drivers who auto-renew without shopping around. Comparing 100+ quotes takes 2 minutes and costs nothing
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Ending the 'bad behavior'
U.S. Rep. Katie Porter, D-California.
A report from Porter's office says churning added as much as 0.07% to the cost of VA loans in 2019, based on estimates from the Urban Institute.
While that may not sound like much, it is "significant as a percentage of the largest purchase most consumers will ever make," the report says.
And because these loans are guaranteed by the government, it's risky for the VA when veterans take on expensive loans — because the department will be on the hook if borrowers default.
The report calls on the government to bar certain lenders involved in these practices from the VA loan program, and to make changes to the program so it's easier for the government to provide effective oversight.
"This bad behavior must stop, especially as Americans build back better from the worst economic crisis in generations," says Porter in the report.
What consumers can do to protect themselves
Advertisement
VA loans, with no down payment required and often low interest rates, offer a valuable benefit to veterans, service members and military families. But when borrowers are pressured into refinancing too soon and are subjected to another round of expensive closing costs, that benefit can become an expensive burden.
VA loan applicants need to be alert — including when it comes to the rates they're offered. In the research, Porter's office found one lender was charging interest rates of more than 4.7% on VA loans, while no other banks, financial institutions or credit unions had rates averaging more than 4.1%.
If you've got a solid credit score, you should be able to score a low mortgage rate. If you haven't seen your score in a while, you can easily check your credit score for free to see if you need to pay down debt and take other steps to boost your rating.
Whether you’re thinking about refinancing or taking out a new loan, the best way to be certain you get the best possible rate is to shop around and compare offers from a few lenders.
Comparing rates will primarily help you save money. But, as a secondary benefit, it should help you steer clear of predatory lending practices.
You May Also Like
- JP Morgan sees gold hitting $6,000/oz before 2027 — and a Gold IRA lets you hold the physical metal while deferring the tax bill. Get your free guide from Priority Gold
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Millionaires under 43 are reshaping investing — just 25% of their portfolios are in stocks. Here’s where their money is going
Sigrid is a deputy editor on the Moneywise team, where she has also worked in a number of editing and reporting roles. She has 5 years experience writing about personal finance and takes great pride in demystifying complex financial issues and finding the personal in personal finance topics.
Mortgages • Feb 17
