The idea of buying a house with no down payment and more buyer protections and inspections than traditional mortgage loans may seem like a fairy tale in today's market, but for U.S. military veterans, it's a real-world benefit of serving.
According to the American Legion, the Department of Veterans Affairs has guaranteed an estimated 26 million home loans since the original GI Bill was passed in 1944. In the decades since, it has become one of the most valuable -- and underutilized -- benefits available to former service members.
At the height of World War II, with victory for the Allies anything but assured, legislators were still looking for ways to reintegrate the more than 11 million men and women serving in the armed forces.
No one was entirely certain of the best way forward, but all agreed that something needed to be done for the veterans. They had learned a hard lesson from the aftermath of World War I, when veterans were discharged with $60 and a ticket home.
Years after that war ended, the World War Adjusted Compensation Act of 1924, also known as the "Bonus Act," promised them a monetary bonus based on their time in service. The bonus would not come until 1945, however. When the Great Depression hit, veterans were struggling, not just to make ends meet, but to survive.
More than 20,000 veterans of the Great War, calling themselves the "Bonus Army," marched on Washington in 1932, demanding an early payment. Congress denied their demands, but many refused to disperse. Instead they built a makeshift camp in the city, waiting to get paid. When the police clashed with them, President Herbert Hoover sent in the Army to force them to leave.
Gen. Douglas MacArthur assaulted the veterans with cavalry, tanks and infantry with fixed bayonets and tear gas. The crowd was scattered, and their "Hoovervilles" were burned to the ground; two people died, with 55 wounded. Congress eventually relented in 1936, paying the bonuses early.
Congress wanted to avoid a repeat of the Bonus Army fiasco. Many saw the end of the war as a potential flash point for another depression and were looking for ways to prevent another economic calamity while providing those who won the war with a sustainable future.
Harry W. Colmery was a World War I veteran, a lawyer and a former national commander of the American Legion. He drew up the first draft of The Servicemen's Readjustment Act of 1944. Moreover, he was a Republican who got the bill introduced in a Congress dominated by Democrats, which demonstrated the bipartisan nature of the need.
What it included was somewhat revolutionary. Before World War II, going to college was an advantage of the wealthy. Home ownership was a pipe dream for most Americans. The GI Bill, as the Servicemen's Readjustment Act came to be called, provided for the government to cover the cost of tuition at high schools, vocational schools and colleges, while providing for low-cost mortgages and low-interest loans to start businesses to any service member who was honorably discharged after serving 90 days or more.
The VA Home Loan benefit, in its original form, made the provision for the guarantee by the federal government of not to exceed 50% of loans made to veterans for the purchase or construction of homes. The VA doesn't issue the loan, but acts as an insurer, guaranteeing the loan if the buyer defaults. Service members had a two-year time limit to use the benefit after discharge.
Between 1944 and 1952, veterans used 2.2 million VA loans, but times and economic conditions began to change. Housing prices rose, and the VA was forced to raise its guarantee to 60% of the loan, not to exceed $7,500. The loan term in the 1940s was set to 20 years, which made the payments increasingly unaffordable, so the term was extended to 30 years.
When the mortgage industry began passing on its increasingly large fees to the buyers, the VA had to regulate who was to pay those costs.
Soon after, spouses of veterans who died in the war were granted VA loans, but it didn't work for everyone. Since the VA wasn't paying out the loan, veterans of color had to secure mortgages through local banks, whose policies could be -- and often were -- discriminatory. This wouldn't be addressed until the Fair Housing Act of 1968.
As the United States entered more wars, like those in Korea and Vietnam, the federal government began extending GI Bill benefits to those veterans as well. As time went on, housing prices rose further and the VA's guarantee of the loans rose with it. The expiration of the benefit was removed, as was the limit on the amount a veteran could borrow. Condominiums and mobile homes also became VA loan-eligible.
Today, veterans must still serve a 90-day term to be eligible for the home loan benefit, and must pay a funding fee when inking a new mortgage. Veterans still get favorable loan terms, an interest that is usually lower than the rates of other types of loans and can prepay without a penalty. It also comes with an appraisal and termite inspection.
With the VA loan, however, veterans must occupy the home within 60 days of purchase, the cost of the house can't exceed its value and vets must have a good credit score, although the bar can be much lower than other loans and veterans can have a higher debt-to-income ratio when receiving a VA home loan.
Although the veteran population in the United States is declining, the VA home loan program has ensured that veterans continue to have higher home ownership rates than non-veterans, and much of the reason is due to the VA home loan program.
-- Blake Stilwell can be reached at blake.stilwell@military.com. He can also be found on Twitter @blakestilwell or on Facebook.
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