12/15/2010 09:45 am ET Updated May 25, 2011

Veterans Face Tougher Lending Environment in 2011

VA loans have thrived in the face of foreclosure. But they haven't been immune to the overall tightening that has recently reshaped the lending industry.

The result is that these flexible loans aren't quite as forgiving as they once were.

More restrictive credit and underwriting standards have no doubt kept thousands of military members from purchasing or refinancing a home in the past two years. VA-approved lenders nationwide have ratcheted up their requirements in the wake of the subprime meltdown. Qualified borrowers can still purchase a home with no money down, but veterans and active-duty service members without a credit score of at least 610 are finding it tough to find financing.

Lenders might start to loosen up a bit in the coming years, but in most cases a more conservative approach to home lending will continue to define the industry and govern the path to homeownership.

For America's service members, the reality is both stark and simple: Building a solid credit profile is more crucial than ever before.

Good Credit is the Gateway
The days of no-document and bad credit loans are gone. Regulations enacted in 2010 have added further layers of protection to the home-purchasing process.

Refinance policies have also become more restrictive. For years, service members could get an interest rate-reducing refinance loan without a credit check or an appraisal. Today, they're paying appraisal fees and seeing their credit scrutinized.

Now, more than ever before, military members and veterans have to keep close watch of their credit profiles, debt-to-income levels and discretionary spending. That can add new layers of stress during deployments, permanent changes of station and other challenging phases that civilian borrowers don't have to contend with. Increasingly, discipline, responsibility and self-control are going to serve as keys to landing a competitive home loan.

The VA Loan Guaranty program itself is stronger than ever. Not only does it remain a refuge for military borrowers, but the VA home loan program also continues to provide qualified borrowers with better rates, greater buying power and more security than they could find anywhere else today. VA loans have the lowest rate of foreclosure of any major lending option, according to the Mortgage Bankers Association.

In response to tighter lending restrictions, it's no surprise that VA loan volume trended downward in 2010. The agency guaranteed about 281,000 loans this fiscal year, nearly a 14-percent decrease from the year prior.

But a slight uptick might be on the horizon, as thousands of soldiers are set to return from Iraq, Afghanistan and other far-flung places in the coming months. Many will return home in search of more permanent housing.

Forecast for the Future
It's unclear exactly what kind of housing and mortgage climate will welcome them back. Those tighter credit and underwriting restrictions will most certainly be in place. At the same time, interest rates that have hovered near record lows for months will likely rise by the time many service members return.

In the short term, thousands will be able to capitalize on the government's landmark tax credits for first-time and existing home buyers, which helped prop up the flailing housing market through parts of 2009-10. Military borrowers who meet the requirements have until April 30, 2011, to purchase a home and until June 30, 2011, to close on the deal.

It's more difficult to forecast conditions for VA borrowers on the long term. The history of the VA Loan Guaranty program is marked in many ways by evolutionary change. It has served as a economic lifeline for military members and their families since 1944.

That isn't likely to change. But mortgage laws, lender regulations and underwriting expectations all do. That's why veterans and active-duty service members with any interest in homeownership -- not to mention those who already own homes -- need to make sure they understand the process, the importance of good credit and the array of benefits available to them.