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Reviewing 70 Years of the VA Mortgage Program

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The VA home loan program celebrates a historic milestone later this month: 70 years of serving those who have served our nation. The Loan Guaranty program was created as part of the original Servicemen's Readjustment Act, better known as the GI Bill of Rights, which President Roosevelt signed into law on June 22, 1944.

VA loans were created to help level the playing field for service members who sacrificed so much, including an opportunity to build credit and savings. Today, this no-down payment mortgage program is more important than ever.

VA loan volume has skyrocketed 370 percent since 2007, spurred mostly by a tighter lending climate and historically low interest rates. For many military borrowers it's the most powerful mortgage option on the market, if not their only realistic path to affordable homeownership.

Let's take a look back at how the VA mortgage program has helped millions of veterans over the past seven decades.

A New Beginning: 1944-45

The first set of VA loan program eligibility requirements were exclusively focused on World War II veterans. The government wanted to help returning service members get a financial foothold. Instead of providing home loans or a cash bonus to help veterans buy a home, the VA decided to insure the loans on their behalf.

In 1944, the average price of a home was about $8,600. The VA guaranty was limited to 50 percent of the loan amount and couldn't exceed $2,000 or a 20-year term. At this time, loans had a 4 percent interest cap and required VA approval.

To be eligible for the VA loan, borrowers had to have served at least 90 days between Sept. 16, 1940, and Sept. 2, 1945. The VA originally planned to stop guarantying loans after Sept. 16, 1950, giving prospective homebuyers about five years from the official end of World War II to use their benefit.

Home prices began to rise in the wake of the war, which put veterans at a market disadvantage. In 1945, Congress amended the program to not only increase the guaranty to $4,000 but to also extend the loan term and purchasing window to 10 years.

"It was now a long-range housing program for veterans," states the VA's official history of the loan program. "Nearly all changes have been designed to help the veteran become a homeowner by extending the terms, making mortgage money available, protecting him/her from excessive charges and faulty construction."

Opportunity Expansion: 1950s-1960s

In the spring of 1950, Congress made changes to the VA loan program to benefit even more service members. Some of those changes included:

  • Increasing the maximum guaranty amount from 50 percent of the loan amount but not to exceed $4,000 to 60 percent of the amount but not to exceed $75,000
  • Increasing maximum maturity of loans increased from 25 years to 30 years
  • Allowing unremarried widows of veterans who were killed in the line of duty or who died from a service-related injury or disease to utilize the program
  • Authorizing the VA to issue regulations on lender fees and charges

A new round of updates came as part of the Veterans Readjustment Benefits Act of 1966, better known as the Cold War GI Bill, which extended VA home loan benefits to post-Korean War veterans.

This is also when the VA Funding Fee was introduced to help cover losses in the event of default through a one-time charge of 0.5 percent of the loan.

The Era of Change: 1970s

President Nixon signed the Veterans Housing Act of 1970 into law, which helped pilot a new era for the VA home loan program. The biggest change was eliminating the expiration date on VA mortgage benefits, giving nearly 9 million World War II and Korean War veterans access to the program again.

Refinance loans were introduced at this time, allowing veterans who purchased homes when interest rates were high to take advantage of market changes. Qualified borrowers were presented with the opportunity to extract cash from their equity to help pay for things such as debt or home improvements.

In addition, the Veterans Housing Act of 1970 allowed veterans to use their VA mortgage benefits to buy condominium units and mobile homes.

Congress introduced more updates as part of the Veterans Housing Act of 1974, including allowing veterans to restore their full VA loan entitlement after selling a home or paying off the loan and disposing of the property.

This gave more than 4 million veterans the ability to obtain a new VA home loan.

Other changes included allowing lenders to automatically process VA loans that met department criteria; giving the VA power to approve condominium developments without action from the U.S. Department of Housing and Urban Development (HUD); and removing farm and business loans from the program.

In 1978, the guaranty level increased to $25,000.

Updates from Congress: 1980s

A handful of new updates were brought to the VA home loan program in the 1980s. New housing legislation allowed VA homeowners to refinance their loan into a lower interest rate without having to deal with any additional impacts on their entitlement.

In 1981, regulations regarding time in service requirements shifted. Military members who enlisted after Sept. 7, 1980, would need to complete the entire period when they were called to active duty or serve at least 24 continuous months. After a brief hiatus, the 0.5 percent VA Funding Fee was re-instituted in 1982 and rose to 1 percent in 1984.

In 1987, Congress raised the VA's guaranty to $36,000 and altered the VA's Streamline refinance option to require veterans to show previous occupancy of the property before obtaining the loan.

In addition to these changes, Public Law 100-198 set minimum qualification requirements for VA appraisers; ensured the VA home loan program would be exempt from sequestration; and required the government to use state data when determining residual income requirements.

In March 1989, the Veterans Administration officially became the Department of Veteran Affairs.

Big Changes: 1990s

The Persian Gulf War had an impact on the early part of the 1990s with benefits becoming available to Gulf War veterans on Aug. 2, 1990.

The Veterans Home Loan Program Amendments of 1992 brought a few major changes such as extending home loan eligibility to Reserves or National Guard members with at least six years of service; authorizing a three-year test of a VA adjustable-rate mortgage (ARM); and allowing veterans to add money to their mortgage for qualified energy-efficiency improvements.

A New Century of Making a Difference

The VA loan program has thrived in the wake of the housing market collapse. Veterans and service members have flocked to the program's more flexible and forgiving requirements.

Benefits like no down payment, no mortgage insurance and lower credit score requirements have helped make homeownership possible for scores of veterans who might otherwise struggle to secure financing.

The VA backed its 20 millionth home loan in 2012. A year later, the program guarantied 630,000 mortgages, an all-time record.

Today, with credit still tight and incomes continuing to stagnate, this long-cherished loan program is just as important as it was in 1944.

Chris Birk is director of communications for the VA Mortgage Center, which specializes in VA loans for veterans and active duty service members.