Loans guaranteed by the governmentâ€™s Federal Housing Administration (FHA) have, between 2000 and 2012, faced higher default rates than loans partially guaranteed by the Department of Veterans Affairs (VA). When understanding the reason or reasons for the different default rates, one might assume it has to do with the type of borrowers the FHA lends to and the type of borrowers the VA lends to. That is not necessarily the case, however.
A recent study reported in the July 24, 2014 New York Times, states that slightly different loan approval processes might be responsible for the different default rates. Even when controlled for personal financial factors, FHA loans are more likely to be defaulted upon the VA loans. In fact, for mortgages originated in 2007, 36% of FHA loans were delinquent by at least 90 days. On the other hand, only 15% of VA mortgages also originated in that year were delinquent by at least 90 days.
Both agencies look at an applicantâ€™s debt-to-income ratio. This figure may be what causes a loan to be approved or denied. For example, if a person with a low income wanted to take out a mortgage on a very expensive home, he or she might not get a mortgage from the FHA or VA because the debt-to-income ratio would be high and would prove to the lenders that the mortgage could not be realistically paid back.
The VA also uses a residual income test when evaluating applicants, which must be active members of the armed forces or veterans. This residual income test looks at how much money an applicant will have after their anticipated living expenses. This test provides another, sometimes more effective, way to analyze if someone will be able successfully to repay their loan. One policy analyst says that the FHA might be able to reduce defaults by 20% if it used the VAâ€™s residual income test. The residual income test, however, can also be applied improperly. It might allow high-income borrowers to get a mortgage on a house that is more expensive than what they can really afford due to the nature of the test. It will be interesting to see what various agencies and banks learn from this study. Will they change the way they approve mortgage applications so that people are less likely to default?
If you are in difficult financial situation whether you are dealing with foreclosure or sky-high credit card bills, then you may wish to consider bankruptcy to eliminate debts. Jayson Lutzky is a Bronx, NY attorney with over 31 years of legal experience. He handles personal bankruptcy cases and offers free in person consultations. To set up a confidential appointment, call 718-329-9500 or visit www.MyNewYorkCityLawyer.com to learn more about Mr. Lutzky.