As America’s finest return from years spent serving our country overseas, the prospect of finally having a place to call their own is an attractive one for members of all military branches. After all, homeownership is one measure of success in achieving the American dream. Owning a home provides a number of financial benefits, such as the ability to accrue wealth and access credit through building home equity.
Buying a home can be a daunting task for anyone, but the difficulties faced by veterans are compounded by a number of factors, including a lack of experience on the part of the buyer and also by real estate agents and mortgage originators who may not have much experience with U.S. Department of Veterans Affairs (VA) home loans.
Fortunately, taking the time to understand VA home loans is worth it — and not only to the veterans transitioning to civilian life. A close examination of industry trends shows that veterans are proving to be an increasingly attractive demographic to mortgage originators.
Consistent and constant
Predictably, first-time homebuyers as a share of all new home purchases saw a sharp decrease in the wake of the housing crisis from 2008 to 2011, dropping from 16 percent to 13 percent, and only rising back to 14 percent since then, the Consumer Financial Protection Bureau (CFPB) reported. During the same time frame, conversely, service members as a share of all first-time homebuyers have seen an increase.
Throughout the housing crisis, the share of service members buying their first home held steady at 7.3 percent and slightly increased to 7.5 percent from 2012 to 2016, according to the CFPB. This tells us something every mortgage originator should keep in mind: Service members aren’t going anywhere. Although market fluctuations may impact other demographics, service members represent a level of client consistency and constancy rarely found in most industries.
A recent Federal Reserve report highlighted a growing homeownership gap between millennials and past generations. From 2005 to 2014, the homeownership rate for the crucial 24 to 32 age range dropped by 8.8 percentage points, while the rate for the overall U.S. population dropped by only 3.9 percentage points. That service member rates have stayed constant despite such a generational shift further highlights the increasing importance of lending to service members.
For prospective mortgage lenders, payment delinquency rates are especially important. In 2006, the delinquency rate for service members using nonprime conventional loans was roughly 13 percent. That number now sits at about 2 percent — a staggering reduction. During the same time frame, delinquency rates for prime conventional loans to service members also have dropped, from roughly 2 percent to 1 percent.
What makes these statistics especially impressive is that the trends were unaffected by the housing crisis. In other words, these declines don’t seem to be motivated by economic or financial concerns. Regardless of what you attribute these reductions to, the outcome for mortgage lenders and originators seems to be the same: Service members are increasingly dependable clients, and their reliability appears to be entirely independent of the economy as a whole.
It is encouraging that service members have increasingly preferred VA loans over conventional loans. Prior to 2007, only about 30 percent of first-time homebuyer service members utilized the VA, compared to more than 60 percent that used conventional sources. Within three years, those numbers flipped, and the disparity has only increased since then.
VA loans now account for 78 percent of service-member loans to first-time buyers, while the share of conventional loans has fallen to about 13 percent. The VA offers competitive loans to service members, and these are veteran’s benefits earned through service and dedication to our country. It’s no surprise that VA loans have been able to garner greater market share as these loans require no downpayments or private mortgage insurance, and VA interest rates averaged a quarter percentage point less than conventional loans in 2016, Ellie Mae reported.
Another trend to note is the increase in median VA loan amounts. Since 2006, the median VA loan amount has increased for first-time homebuyers from $156,000 to $212,000, well above the inflation rate, which would have put the 2006 median loan at $197,700 in 2019 dollars.
During the same time frame, the median conventional loan amount for service members has increased from about $137,000 to about $154,000 — far lower than expected, given that the 2019 inflation-adjusted rate of the 2006 median loan would be nearly $174,000. Given that the majority of service members are now using VA loans, and that these VA loans tend to finance more expensive home purchases, it stands to reason that median loan amounts, in general, are on the rise.
What’s more, since current conventional loans tend to finance homes on the cheaper end of the spectrum, this provides added incentive for mortgage originators to increase their efforts to serve military families. Mortgage originators need to ensure this demographic has access to responsible financial solutions that meet the needs of service members and their families.
In many ways, these trends are encouraging. Today’s service members are continuing to prove themselves as reliable borrowers. Resilient and adaptable, the military has ingrained qualities in veterans that allow them to properly handle stress and last-minute changes. Many carry with them the self-discipline instilled throughout their time in the military.
On the other hand, there are some areas in which there are serious opportunities for mortgage originators. The fact that so much of the conventional loan market share has been lost suggests that originators will need to find ways to make themselves more competitive and learn to court service members.
Our service members certainly deserve it — they’ve proven themselves to be extremely reliable borrowers. They truly are America’s best, and anything that can be done to better provide for them, those who have done so much for us, should be welcomed with open arms.