All VA loans are backed by the U.S. Department of Veterans Affairs, but not all VA lenders offer veterans the same deal. A new study by mortgage technology firm Own Up finds wide disparities in interest rates on VA mortgages.
Own Up analyzed mortgages issued in 2019 by the 20 largest VA lenders. It found a large gap in interest rates between the lowest-cost lender and the highest-cost lender — fully 1.25 percentage points. However, the 18 other lenders in the survey fell into a much tighter range.
The gap between the second-cheapest and 19th-cheapest lender was just 0.47 percentage point, Own Up reported. Its findings were based on an analysis of Home Mortgage Disclosure Act data. Own Up analyzed the annual percentage rate, which takes into account not just the basic interest rate but also origination fees and other costs.
The stakes are high for VA borrowers: An interest rate that’s 1.25 percentage points higher on a $300,000 loan would mean more than $75,000 in additional costs over the life of a 30-year mortgage.
“Veterans often believe, ‘Well, it’s a VA loan, so everybody is going to treat me the same,'” Own Up co-founder and Chief Executive Patrick Boyaggi says. “There’s a wide variability.”
More evidence that it pays to shop around
When applying for a mortgage, the single most important move you can make is to shop around. Rates and fees vary widely from one lender to the next, not just for VA loans but for all types of mortgages.
By not comparing deals, Boyaggi says, “You are taking a chance that one lender is going to charge you a substantially higher rate than another lender. It’s imperative that you shop among a variety of lenders.”
Own Up says the disparate numbers are a result of “information asymmetry.” Lenders know everything there is to know about borrowers’ financial histories, but borrowers are bewildered by an unfamiliar process.
“Lenders have access to all this information, and consumers have access to very little,” Boyaggi says.
While veterans might mistakenly assume that all VA loans are the same, the mortgages are marketed and originated by private lenders that offer different rates and fees.
The best deals in 2019 came from the nonprofit Navy Federal Credit Union, Own Up says. Navy Federal’s rates on VA loans were 0.359 percentage point lower than average. Other low-rate lenders included United Shore Financial Services, Home Point Financial and PennyMac Servicing.
The highest rates were offered by New Day Financial, according to Own Up. Its rates were 0.889 percentage point above average.
New Day spokeswoman Pooja Bonsal disputed the study’s findings. “The data provided in the Own Up Report is misleading,” she says. “In 2020, New Day’s rates are among the lowest in the country for veterans purchasing and refinancing homes. In fact, our purchase rates are 2.25 percent for a 30-year fixed. In 2019, the data cited on our company is almost exclusively for VA Home Equity Loans, and it is universally understood that those rates are historically higher across the industry.”
Boyaggi says Own Up sliced and diced the numbers along a variety of variables and discovered similar trends. “What we found was that no matter what dimension you analyze this on, the same story holds true,” Boyaggi says.
For the sake of simplicity, he says, Own Up reported just the overall rate in its study. “We felt like that was the most clear way to explain the message we want to get across, which is that rates vary and it’s imperative to shop around.”
The pros and cons of VA loans
For veterans or for soldiers on active duty, VA loans come with a big selling point: No down payment is required. That feature distinguishes VA loans from Federal Housing Administration loans, which require 3.5 percent down, and “conforming” loans from Fannie Mae and Freddie Mac, which mandate at least 3 percent down, but typically require 20 percent down for the best rate.
VA loans further sweeten the pot by not requiring borrowers to pay mortgage insurance, the fee commonly collected on mortgages where the loan amount is more than 80 percent of the property’s value. That benefit is worth hundreds or thousands of dollars a year.
And, compared to conforming loans, credit standards are less stringent. You can qualify for a VA loan with a credit score as low as 620.
“VA doesn’t set a credit score requirement, so technically there isn’t one,” says Chris Birk, vice president at Veterans United Home Loans and author of “The Book on VA Loans.” “But most if not all lenders will have an overlay for credit score. Anywhere from 620 to 660 is pretty common.”
VA loans come with one notable downside. VA loans have an upfront funding fee of 1.25 percent to 3.3 percent of the loan amount.