Who Sets The Interest Rates On VA Home Loans?
One VA loan myth that is quickly dispelled once a borrower begins the VA loan process concerns the interest rates on VA insured mortgages.
People unfamiliar with the VA loan program might assume that the Department of Veterans Affairs somehow sets or regulates the interest rates on these loans, but VA rules state that the VA has nothing to do with the interest rate negotiated between the lender and the buyer, except that the rates must be reasonable and customary.
When borrowers apply for a VA insured mortgage with a fixed interest rate, once that rate is agreed upon, it will not change–over the lifetime of the original VA loan as agreed upon. But the interest rate is subject to change if the home owner decides to refinance the mortgage or otherwise re-work the loan agreement (such as for a loan modification or other changes).
What happens when the buyer and lender agree upon the interest rate during the purchase phase? Can that rate be changed?
Any binding agreement must be honored, including interest rate lock-ins and other details. According to the Department of Veterans Affairs, “The lender and borrower are expected to honor any lock-in or other agreements they have entered into which impact the interest rate on the loan. VA does not object to changes in the agreed upon rate, as long as no lender/borrower agreements are violated.”
If an interest rate change is agreed upon by both parties and meets the VA requirement for not violating the borrower/lender agreement, there are still conditions which must be met for any interest rate changes that result in an increase of more than one percent. The borrower be must be evaluated once more to insure the “continued ability to qualify for the loan”. Any changes to the interest rate must be fully documented, and the VA also requires either a new or modified Uniform Residential Loan Application with all changes acknowledged by the borrower in writing.
When it comes to adjustable rate mortgages the interest rates will increase or decrease according to the terms of the loan and those fluctuations do not require additional paperwork.
Those changes have already been documented in the loan agreement. In the event a borrower and lender want to change the interest rates in that contract and agree to do so, the procedures listed above must be followed including re-evaluating the borrower and insuring all changes to the loan are properly documented and agreed upon in writing by the borrower.