Are you considering applying for a loan to buy a home during a recession? The economy’s ups and downs can significantly impact whether individuals decide to move forward with applying for a loan and taking on a home mortgage. In uncertain times, it is hard to know what may be the best decision.
If you’re an active-duty service member, veteran, or surviving spouse, you may wonder if a VA loan is still good in a recession. Is it the best option for a lower interest rate mortgage? This article will provide you with the information you need to make a decision about whether this type of loan is best for you, your family, and your financial future.
What is a Recession?
A recession happens when there are two consecutive quarters of negative GDP growth. It is a significant and widespread event that causes a lengthy economic downturn from several months to years. We see evidence of a recession when the economy shrinks, and unemployment levels rise.
What is a VA Home Loan?
A VA home loan is different from conventional loans in that it is backed by the United States Department of Veterans Affairs (VA). Active-duty service members, veterans, and surviving spouses are all able to take advantage of this type of loan. It is an affordable option created in the 1940s that provides an opportunity for the individuals and families who have sacrificed for our country to build equity and a solid financial foundation for their future.
Although the VA backs the mortgage, the money for the loan actually comes from mortgage lenders. The VA’s role is to guarantee the loan in the event that the borrowers default and the home goes into foreclosure. This allows lenders to be more flexible with service members and their families as far as eligibility in qualifying for a home loan.
VA home loans were created to be a reliable way for service members and families to have access to the home they have always dreamed of, even in the midst of a recession.
What are the Pros of Utilizing a VA Loan?
Thanks to the VA’s cooperation with mortgage lenders, flexible eligibility makes a VA mortgage a better option than conventional mortgages, which are loans that the government does not back. Service members and their families can enjoy the following benefits when seeking a home loan that is backed by the VA:
- A down payment is not required.
- Mortgage insurance is not required.
- Access to competitive interest rates.
- Lower credit scores may still be approved.
- It never expires and has unlimited uses.
- More flexible refinance options for equity of up to 90% of the home value.
As home prices rise and fall, these benefits remain in place.
Are There Any Cons to Utilizing a VA Loan?
There is one cost involved with VA loans that some people may consider a con – funding fees. A funding fee is included in the loan amount. It allows the VA to continue to back home loans while still having enough funds to cover any delinquent loans.
However, there are strategies to get the funding fee lowered. One way is to make a down payment. Even a small 5% down payment can make a big difference in getting the funding fee lowered. Also, the funding fee is waived for life for service-connected veterans.
How Do VA and FHA Loans Differ?
FHA loans limit applicants by enforcing more strict requirements than VA loans. The primary similarity between these loan options is that they require the purchased property to be a primary residence. However, there are several requirements for FHA loan eligibility that the VA loan program doesn’t have:
- FHA loans require a 3.5% down payment, while VA loans do not require a down payment at all.
- Applicants are required to have a minimum credit score of 500 to apply for an FHA loan. The VA sets no minimum credit score requirement for a loan. However, VA loan lenders often set a minimum score requirement.
- FHA loans require applicants to have mortgage insurance, which is not a requirement with VA loans.
- While VA loans only require one upfront funding fee payment, FHA loans charge a monthly payment for mortgage insurance premiums.
As shown by this comparison, VA loans are certainly the more cost-effective route when seeking a home loan.
How Does a Recession Affect Real Estate Values?
Many people believe that a recession means a drop in the value of real estate, but that is actually not always the case. The real estate values from the last six recessions show that it is possible to see either a decrease or an increase. This makes this type of investment worth it even during an economic downturn. Take a look at this table showing the changes in real estate values in the United States:
| Recession Year | Increase or Decrease | Percentage |
| 1980 | Increase of | 6.1% |
| 1981 | Increase of | 3.5% |
| 1991 | Decrease of | 1.9% |
| 2001 | Decrease of | 6.6% |
| 2008 | Decrease of | 19.7% |
| 2020 | Decrease of | 6.0% |
This table shows that a recession doesn’t necessarily mean the values of homes will decline. As our country has weathered many recessions over time, real estate values have consistently increased. Whether our nation is in the middle of a recession or not, purchasing a new home is still one of the best financial decisions service members can make to invest in a strong future for themselves and for their families.
How Does a Recession Affect VA Loans?
Because the federal government backs this type of loan, it is often unaffected by economic turns such as a recession. The VA Home Loan Guaranty Program is able to remain resilient even through an economic downturn. This makes it a reliable option for financial assistance when purchasing a home.
Is a VA Loan the Best Option for Service Members During a Recession?
Taking advantage of a VA loan, rather than another type of loan, can help you maintain stability in your personal finances through a recession, as it does not require a down payment or monthly mortgage insurance payments. As we’ve seen, VA loans provide eligible applicants with the assistance they need to purchase new homes and refinance their existing homes. These benefits are virtually recession-resistant, as economic changes do not impact them.
If you are a service member in need of financial assistance to purchase or refinance your home, a VA loan may very well be the best option for you.
Are You Considering Applying for a VA Loan? Get Started Today!
VA Loans for Vets is here to support service members and their families purchase the home of their dreams. Our team can walk you through the entire process of applying for a VA loan. From reviewing eligibility requirements to obtaining the necessary documents and advising on loan limits for your county so you can get the maximum benefits.
We are honored to serve the service members and families who have sacrificed so much for our country. Contact us today to begin your journey to securing the home you deserve. We are here to help you make the best financial decision for your future.
