VA Home Loans not Affected by CFPB’s Qualfied Mortgage (QM) or Ability to Repay Rules
You might have heard about new regulations rolled out on January 10, 2014 by the Consumer Financial Protection Bureau (CFPB) called the Qualified Mortgage rule – or QM – and also the Ability to Repay rule.
While these new standards may limit credit availability for home buyers and those looking to refinance with conventional loans or other loan types, the rules won’t affect VA home loans.
Why? Simply because VA home loans already abide by make-sense underwriting standards, so there’s no need to apply further scrutiny on them.
On January 9, the Veterans Benefits Administration (VBA) released a Circular stating that “all loans made in compliance with existing VA requirements will continue to be guaranteed by VA, regardless of their QM status.”
What is a QM loan?
To be considered a “Qualified Mortgage” the CFPB requires the loan to have a debt-to-income ratio of 43% or less. In other words, a borrowers’ total monthly expenses and house payment must be, at the most, 43% of their gross income. But with VA’s underwriting standards for purchase and cash out loans that verify the borrower’s residual income, as well as credit and other important underwriting criteria, the VA determined the same standards should not be imposed on loans for Veterans.
In addition, a QM loan may not have exotic loan features like interest-only payments or negative amortization – both of which could leave the borrower in the loan for a long time without any of the loan balance being paid off. Also, a QM loan can’t have a scheduled payoff timeframe of more than 30 years.
But VA loans have never allowed exotic loan features or loan terms longer than 30 years. Yes, borrowers can obtain a 15 year VA loan, but not one that takes longer than 30 years to pay off. In many ways, VA loans had QM standards built into them before the CFPB even formulated QM standards.
Ability to Repay rule
The CFPB’s other new rule, Ability to Repay, states that the lender must verify the borrower’s income, employment, credit, and other aspects of the loan to make sure the borrower can repay the loan.
So technically, the popular streamline refinance program does not meet these standards, since a borrower who currently has a VA loan can qualify without providing income documentation.
But still, these loans are not affected by the new rules. The lender has verified income, assets, credit, and debt-to-income ratio on the VA loan that was originally opened. The VA has established that the income and credit checks on the original loan is sufficient to approve the streamline refinance.
CFPB writes in a loophole to new rules for VA loans.
Although VA home loans don’t meet QM standards if the borrower doesn’t have a 43% debt-to-income ratio, the CFPB wrote in a loophole that essentially makes all VA loans QM loans as well.
According to the CFPB’s Basic Guide for Lenders, “Any loan that meets the product feature requirements and is eligible for purchase, guarantee, or insurance by a GSE, FHA, VA, or USDA is QM regardless of the debt-to-income ratio.” In other words, VA loans qualify as QM loans.
The same notice says this exception to QM stands until January 10, 2021, seven years from QM going into effect, or when the VA establishes its own QM standards.
Will VA’s QM standard change VA home loans?
According to the VBA Circular, lenders must adhere to current VA loan requirements until the VA sets its own version of the QM rule. It’s too early to tell what, if anything, will change about the VA home loan qualification process when VA comes out with its own QM standard.
The only hint is the Circular’s statement that the information on it is rescinded as of January 1, 2015. The inference is that the VA will establish its own QM rule sometime in 2014.
But don’t expect too much change from current VA lending standards. Veteran loans have proven themselves year after year to be a safe, effective, low risk way to get Veterans into homes with fewer of the traditional roadblocks to homeownership.
VA loans default less frequently
There is strong evidence that VA home loans have, from day one, been some of the most faithfully repaid loan types in the mortgage market.
According to a press release from the Mortgage Bankers Association (MBA) in November 2013, VA loans had their lowest delinquency rate since 1980 at the end of the third quarter of 2013.
An MBA report recapping 2012 statistics showed that 5.97% of all VA home loans were delinquent. Compare that with 11.17% of all FHA loans.
The foreclosure rate for VA loans also points to the safety of this loan product. Just 2.08% of all VA loans were in foreclosure, while 3.85% of FHA loans – almost double – were somewhere in the foreclosure process. What’s more, prime conventional loans that typically require a 20% down payment have a higher foreclosure rate than VA loans at 2.10%.
That’s odd, because with most loan types, the amount of equity a person has in the home is the biggest indicator of default, according to a New York Times article. So a big down payment should mean lower default rates. Not so with VA loans. Although VA loans don’t require a down payment at all – meaning zero equity in the home – default rates are incredibly low.
VA loan rates another indicator of the safety of VA home loans
VA home loans – both streamline refinances and VA loans to buy a home – continue to have some of the lowest interest rates compared with other loan types.
Interest rates are a great indicator of how risky a loan appears to banks and investors. A loan that is likely to default will have a high interest rate.
But VA loans have low interest rates and fees. VA 30-year fixed rates are typically much lower than those of 30-year fixed conventional loans.
Eligible for a VA loan?
If you’re eligible for a VA home loan, consider yourself fortunate. Your service has earned you a way to obtain a purchase or refinance loan without the extra requirements of the CFPB’s new rules.
Contact one of our VA-approved lenders to get started on your home buying or refinancing goals.