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.
Ending the 'bad behavior'
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
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.