Are Adjustable Rate VA Mortgages Still Available?
After the housing crisis of 2008, it’s not surprising that many borrowers are leery of adjustable rate mortgages. But in spite of the reluctance of some VA loan applicants to consider a VA guaranteed mortgage or ARM loan, these products are still available to qualified borrowers and some do consider applying for VA loans featuring adjustable interest rates.
What are the rules on VA adjustable rate mortgages? The VA will not approve loans for ARMs that don’t meet a set of requirements including controls on interest rate adjustments. According to VA regulations, interest rate changes on adjustable rate mortgages must happen no earlier than once per year, and those changes must, according to the Department of Veterans Affairs, “correspond to changes in the weekly average yield on one year (52 week) Treasury bills adjusted to a constant maturity.”
The first interest rate adjustment can occur one year to 18 months from the first mortgage payment, and those rate changes “may only be implemented through adjustments to the borrower’s monthly payments.”
The introductory rate of an ARM loan must be negotiated between borrower and lender and the rate must reflect industry standards for ARM loans. All interest rate adjustments over the lifetime of the loan must be consistent over the life of the loan; borrower’s can’t be subjected to a sudden spike in the amount of the adjustment from one year to the next.
In addition to that rule, the VA also requires the interest rate change to be limited to a single percentage point in either direction from the previous year. VA guaranteed ARM loans are also limited to a maximum of five percentage points from the introductory rate.
The VA’s pre-disclosure rules are quite clear—lenders must “explain fully” to the borrower—all terms and obligations must be spelled out and the buyer must certify (in writing) they understand those terms. This must happen the day the loan officer gives the applicant an ARM application—the buyer must not commit until they know the terms, the rules and possible changes to the ARM loan interest rate.