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Veterans overpay for home mortgages: study

·2 min read
US Marine Female Soldier at Home with Real Estate Paperwork.
US Marine Female Soldier at Home with Real Estate Paperwork.

Veterans are paying more than $14,000 in “unnecessary” fees and interest on their mortgage loans, according to a new study.

U.S. veterans are eligible for VA loans, a government-backed mortgage that is intended to boost homeownership among veterans. But lenders set higher profit margins and origination fees for VA loans than traditional loans, mitigating the advantage designed by the program for American service people, according to an analysis by Boston-based digital mortgage marketplace Own Up.

“A lot of veterans think that since VA loans are a government product, every lender must offer the same rates and fees,” said Patrick Boyaggi, co-founder and CEO of Own Up. “This has big financial ramifications for veterans, so they should not settle for the first lender they’re introduced to or think that because it’s a VA loan, every lender is the same.”

On average, lenders make 67% more net profit on VA loans than they do on conventional loans, increasing mortgage rates for veterans by 0.25 percentage points and adding $13,000 to the lifetime of the average veteran’s mortgage (for the median $254,000 veteran home), the report estimated. Lenders also charge double the average origination fee on VA loans, adding about $1,105 upfront to the typical veteran’s loan, according to the report.

“It’s a wonderful notion that we’d create a financial product for our vets. It’s a wonderful financial product if it’s used properly,” said Boyaggi. “But the biggest problem in the mortgage industry is lack of transparency. It is challenging to get access to or understand what is available.”

Lenders hike up VA loan rates and fees because federally-backed loans — like FHA loans for low-income buyers — are, on average, at higher risk of default than conventional loan types. But VA loan default rates more closely resemble those of conventional loans, and actually performed better than conventional loans during the Great Recession.

In the second quarter of 2020, only 3.98% of VA loans were seriously delinquent (at least 90 days), comparable to the 3.49% serious delinquency of conventional loans — and far below the 7.96% serious delinquency rate of FHA loans, according to the MBA.

"VA loans just are not going delinquent in the same way that an FHA loan is," said Boyaggi. “More risk justifies more cost, but the data is just not showing out. And who suffers? Veterans do. You can’t just bundle them and say all government loans are harder because they are distinct products for distinct demographics. If you analyze them separately, you can’t justify additional cost. It’s time for it to change.”

Sarah Paynter is a reporter at Yahoo Finance.

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