Personal Home Loan Mortages

In my last article I discussed some of the history of the VA Home Loan and how the program works. In this article I want to get into more detail regarding underwriting of the VA loan and how to prepare to use this very important benefit.  As I mentioned in the last article VA does not lend the money to the end user of the loan. They act as a guarantor of the loan against default. In other words they are there to say to the lender, if you make this loan to our Veteran, we will make sure you get paid back the money the veteran borrowed if he/she should not repay the loan.  However it is still up to the lender to do their due diligence to insure the veteran qualifies based on guidance set up by the VA Administration. There are some very tricky things in the VA program regarding underwriting the loan that are not normally seen in “conventional” or “FHA” government insured loans.

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The VA loan only has one “debt ratio”. The debt ratio is a calculation that divides the gross debts of the borrower into their gross income to give the “percentage of debt to the income”. For conventional and FHA loans this is done with only the mortgage payment and then the mortgage payment and all other debts remaining at time of settlement. They call this a front ratio (the mortgage payment divided by gross income) and the total ratio (the mortgage payment plus all debts divided by gross income). With VA however the ratio is only based on the mortgage payment and all debts divided by gross income. It would be really simple if things stopped there but of course that’s not the way things work. After determining the debt to income ratio for the loan, (in the case of VA the ratio for approval purposes is 41%), then the underwriter has to determine something called residual income. This is a very complicated calculation involving the number of persons living in the home, the loan amount and the region of the country you are purchasing your home in. This is called Residual Income for Family Support.  There are charts which show the division of the residual amounts. There is a chart which can be found on the VA website which will give you specifically how much residual income is needed based on the above criteria. The chart can be found on VA’s website, along with a prequalification matrix.  The website address is: http://www.vba.va.gov/ro/cleveland/steps_to_va_loan.htm#Determining%20Eligibility. You can either click on the link or copy the link and paste it in your URL to go to the website.

Although this sounds a little complicated it is still a great benefit to using your VA Eligibility for purchasing a home. As is stated by VA “VA guaranteed home loans benefit veterans because they do not need to make a down payment and there is no upper limit or required cap on the income of the borrower.  Without a down payment as security against foreclosure, lenders receive a certificate of guaranty from VA.  In essence, as gratitude for honorable military service, the government is vouching for the veteran’s trustworthiness to repay his/her debt.”

  

The steps to take in taking advantage of your VA benefit are as follow:

1.       Determine your eligibility. You can do this by completing VA Form 26-1880, which is a 2 page form and sending it along with your DD-Form 214 (statement of active duty or proof of service participation) to the VA Eligibility Center. The address to send the request is PO Box 20729, Winston- Salem NC 27210. Based on length of service and type of service, VA issues a certificate for each person determined eligible to apply for a VA guaranteed home loan.

 

2.       Get prequalified. Getting prequalified is very important step before going out to look at property. The prequalification process will tell you how much home you are able to purchase (purchasing power), as well as what documentation will be required by your selected lender. Many real estate agents will want to know you are prequalified prior to taking you out to visit potential homes. Prequalification saves you time and energy in the home selection process. To get prequalified you will need to provide the loan originator with your W-2’s for the most recent 2 years, a copy of your LES or pay stubs for the most recent 2 months, 2 months bank statements with all pages, any asset statements, such as savings, IRA or 401K’s, ect. Remember the more assets you can show the lender, the easier it will be to obtain your approval, even if the “debt ratio” is a little higher than the guidelines allow. Assets can also help if you fall short on the residual income requirement. In addition, the lender will require a credit report usually from the three credit bureaus, Equifax, Trans Union and Experian, with a credit score. If you do not have credit or a credit score then you may be able to use alternative credit to establish a history of repayment of debt. For this you may need to provide the lender with your rental history for 12 months, your utility bills if you are paying those, car loan history, if it’s not reported on your credit report, or even your car or cell phone bill can sometimes be used to establish credit where none exist. If you have additional income from other sources be ready to disclose the income and provide the lender with proof of it’s stability and the likelihood that the income will continue for a minimum of three years. This can include disability income, child support payments, retirement income or social security income to name a few.

3.       Viewing and selecting a home. This process is usually the fun part of the process. Most homebuyers will engage a real estate agent to work on their behalf. Keep in mind there are buyer’s agents and sellers’ agents and/or listing agents. The difference is determined by whom the agent represents. The listing agent may just be one that lists the home for the seller but may not be actively involved until there is a contract to present to the seller. The listing agent or selling agent will usually represent the seller in the transaction and will not be actively working on the behalf of the purchaser. A buyers’ agent will be one that actively works with the buyer in helping them select the home, write the purchase offer contract and negotiate with the seller or the sellers’ representative in determining the terms of sale. You may want to interview a few agents before selecting one to work with but it is suggested that you engage a buyers’ agent to represent your interest in the negotiation process. Home buyers who wish to obtain a VA guaranteed loan should make sure that the sales contract includes a phrase, sometimes called a financing contingency, making the contract subject to approval for a VA guaranteed loan.

4.       Once you have determined a home you wish to purchase then the contract must be written and ratified (terms agreed upon by all interested parties). Then the contract is submitted to the lender along with a request for an appraisal of the property. Again here is where the VA loan differs from the conventional or FHA loan process. The VA Appraisal can only be assigned and preformed through VA unless the lender participates in the VA Lender Appraisal Processing Program. This is a change from the past when all VA appraisals were done directly through VA itself. Now the lender does not have to send paperwork on the appraisal to VA until after the home purchase transaction is closed. Not all lenders participate in this program so you should check with your prospective lending institution to see if they do participate. This can save you lots of time on the purchase transaction if the lender does participate in the program. The appraisal of the property is not to be confused with a “Home Inspection”. In the appraisal process the appraiser is determining if the property is sufficient collateral for the loan. The “Home Inspection” is used to determine the working order of major systems and the condition of the home overall. An appraisal is required by the lender, whereas the home inspection is an option. However it is highly recommended that if you are buying a home a home inspection be obtained from a qualified and licensed home inspector. Your real estate agent will usually be able to provide you with a list of home inspectors to choose from.

5.       Closing the sale. Once the home and loan have been approved by the lender, the home buyer will need to contact a licensed insurance agent to obtain home owners insurance on the property. This insurance is designed to protect the lender and homeowner against from property damage and loss. Remember the security for your home loan is the property itself so the lender wants insurance that the property can be replaced should a tragedy occur. This will be a requirement for the lender, but the choice of a home owner’s insurance company is the choice of the purchaser. Shop around and make sure you are getting the best policy for your money. After all this is done you are now ready to go to settlement. Again the settlement process is simply where the transaction is consummated between the seller and the buyer. Settlement is where the legal transfer of the property takes place and the process can differ from state to state or legal jurisdiction. Choice of a settlement company or attorney is also strictly the choice of the home buyer and is governed by Federal law know as the Real Estate Settlement and Procedures Act. This law is designed to protect the buyer from paying more than they should for this service or from Realtors or Lenders “steering “the buyer to a particular settlement company for undo gain.

Now you are a homeowner. Remember you are buying a home first and an investment second so make sure the property meets your personal short term and long term goals. Also remember that VA is a great program.

If you wish to contact me about the information in this article you may email me at michaelcookdoesloans@gmail.com or call me at (443) 852-1584. Happy Home Ownership!

 

Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy

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One of the benefits of military service is the VA home loan. Although this is a very good benefit, many active and non-active military personnel don’t understand how the benefit works or what steps they need to take to use the benefit. Over the next several weeks I want to explain the benefit, how it works, what the pros and cons of the VA home loan are, and how you may qualify for a home using this important program. Firs t, let’s take a look at the history of the VA Home loan program.

After World War II many soldiers returning from the war were injured while fighting over seas both physically and emotionally. This was also a time when the country was coming out of a depression. The capital markets had been in a prolonged downturn, and home ownership was stagnant. The economy needed to be stimulated.  The Serviceman’s Readjustment Act of 1944 was designed to both award the returning warriors and act as a stimulus for the economy at the time.

The maximum amount of the benefit at that time was limited to 50% of the loan not to exceed $2,000.00, loans were limited to 20 years and the maximum interest rate was 4%. Wow, how times have changed. Home loans could be used for purchase, construction costs including repair or improvement of a residential property which a veteran intended to occupy as their home. The initial enactment of the law gave the veteran between 2 and five years to use the benefit.

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Immediately it was recognized there were serious shortcomings with the initial bill. These shortcomings were addressed in law one year later. The guarantee was increased to $4,000.00. The loan terms went to 25 years and 40 years for farm loans. Also the VA began to make direct loans in areas where VA loans could not be guaranteed. This practice remained until 1980 when VA revised the direct loan program to only be available in connection with specially adapted housing grants for veterans with certain severe disabilities. It should be noted that there was a time limit on how long a veteran had to use their benefits. It varied depending on the length of service and which war or conflict the veteran was involved in and if the veteran had a “severe disability” as determined by the VA.

By 1970 the laws governing the VA housing benefit had evolved a great deal. The president signed a new VA housing bill which eliminated the time limit on the use of the benefit. In essence the bill of 1970 revitalized the entire VA housing benefit program and insured it would remain a viable option for Veterans from that time forward.

One area that confuses many veterans is the idea of guarantee, entitlement, and eligibility. I had a veteran in one of my home buyer seminars. She brought her entitlement papers with her but thought that she could only get a home for $36,000.00 because that’s what the guaranteed amount stated. I want to take the last part of this article to explain how the entitlement works.

The VA program is not an insurance program like FHA. In the FHA program the loan is insured against the borrower defaulting. VA losses are not offset by insurance premiums. VA does collect a Funding Fee to offset administrative expenses. The VA only guarantees a portion of the mortgage against default. If the loss in a foreclosure process exceeds the amount of the VA mortgage guaranty, the lender is at risk for the difference. When a VA mortgage goes into default, VA has the option of taking over the problem by auctioning the house and paying off the lender, or remitting to the lender the amount of the guaranty in cash and letting the lender dispose of the property. VA lending is more risky for lenders because the lender is at risk for future losses beyond the guaranteed amount. Because of this lenders may charge higher points for VA mortgages as compared to say FHA or conventional loans. Also lenders may add qualification standards that exceed those set by VA.

So how much home can someone purchase using the VA guaranty program? Well the answer is VA does not actually set a limit on how much mortgage a beneficiary can have. It only limits the amount of the guaranty they will extend for each mortgage. This guaranty allows for no down payment loans of up to the conforming limit as of January 2005. Conforming limits are higher in some areas than in others. For instance, the conforming limits in Alaska, Hawaii, Guam and the Virgin Islands are higher than those in Maryland. Here is an example of how the VA guaranty works.

Let say the veteran wants to purchase a home for $350,000.00. If the loan amount is any amount up to $41700.00 the Veteran can purchase the home for 100% or in other words with no money down. This means the seller can pay normal closing costs origination and up to 2 discount points. (I will discuss points and fees in an upcoming article.) Let’s say the veteran wants to purchase a home above the $417,000.00 amount, would the veteran still be able to use the VA benefit in this instance. The answer is yes, however the veteran would in this case have to put a down payment. The key here is the loan amount, not the purchase price. Here’s an example:

                                $500,000.00 Sales price

                                $ 10,750.00 Funding Fee (Based on First Time use)

                                $510,750.00

                                -$417,000.00 (Conforming Loan Limit)

                                    93,750.00 (Amount over the maximum loan)

                                          X25% (VA Guarantee when loan amount is over conforming limit)

                                $ 23,437.50 (Amount of down payment needed by Veteran

 

As you may see from the example this can be a little complex at first glance, which is why you want to consult your mortgage professional to get your questions answered or you can email me at michaelcookdoesloans@gmail.com or call my office at 888-637-3339.  

 

 

Michael D. Cook, Sr. is a mortgage a mortgage originator with over 15 years experience in the industry. He has a reputation for educating his clients so they make the best choices about the financing for their personal needs. More than that, he has resources to assist those with credit and income issues to begin to position themselves for home ownership. Michael believes we have too much debt in our country and has joined the crusade to stamp out financial illiteracy.  Don’t hesitate to call Michael or visit his websites:

 www.1800yeshome.net

 

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