The conventional market recaptured a lot of the first-time homebuyers it lost during the financial crisis, but service members instead have increasingly stuck with loans insured by the Department of Veterans Affairs.
“For non-service members, conventional mortgages have returned to their pre-2008 rank as the primary choice for first-time homebuyers. By contrast, for service members, VA mortgages have remained the most popular option,” according to a new Consumer Financial Protection Bureau report.
Less than one-third of service members buying their first homes used VA loans before 2007, but after the financial crisis nearly two-thirds were. More than three-fourths of all borrowers in this category were using VA loans as of 2016.
While the catalyst for the trend is unclear in the report, it likely lies in the greater potential flexibility in underwriting and relatively advantageous rates the VA offers first-time homebuyers in the service.
The share of first-time homebuyers using VA loans has climbed for borrowers with prime and nonprime credit scores, but the trend has been more pronounced among borrowers with nonprime credit, the report notes. First-time home buying activity last year was the highest it has been since the crisis.
While the conventional mortgage market currently dominated by Fannie Mae and Freddie Mac typically offer more advantageous rates than government-insured loans, VA loans made to first-time homebuyers can be an exception.
With the exception of 2006, VA loans generally have performed better than Federal Housing Administration-insured loans more typically made to non-service members, the report noted.
While the VA delinquency rate has ranged from 0.3% to 1.3%, the FHA delinquency rate has ranged from 0.6% to 2.3%.
Loans taken out by first-time home buying service members with nonprime credit scores performed more favorably if the service member was still on active duty, the report noted.
First-time homebuyers in the service who had nonprime credit scores and were on active duty had a 2.7% 60-day delinquency rate in 2016, compared with 3.6% for equivalent first-time homebuyers who took out a VA loan after separation from active-duty service.