VA Loans

A VA loan is unique in that it is currently the only loan program by which a borrower (eligible veteran) can obtain 100% financing, moreover at fixed rate of 5.0% on a 30 yr. term (for conforming amounts of $417,000 or less). At present, the maximum purchase money loan amount with 100% financing is now $697,500.

The mechanics of obtaining a VA loan are relatively simple. The VA acts, in effect, as a guarantor, co-signing the loan for an eligible veteran. Because the U.S. Government guarantees 25% of a veteran's loan, from the lender's point of view the borrower is in effect putting up a 25% down payment at the time of purchase, thus no cash is required of the borrower to get the mortgage. While the Department of Veteran's Affairs (VA) guarantees a portion of the loan (in the event that the borrower defaults) it does not make VA loans, private parties such as banks, savings & loans, or mortgage companies make the actual loans.

THE MAXIMUM VA INSURABLE LOAN
VA loans do not have a maximum dollar amount, but Ginnie Mae (Government National Mortgage Association) the government sponsored enterprise that provides funding for VA loans requires that its exposure be limited to 75%. Hence, for loans above $697,500 the veteran must contribute 25% of the difference between the sales price and $697,500. To determine a veteran's maximum loan, one simply subtracts $697,500 from the sales price and divide the difference by 4 to determine the down payment required.

Then, subtract the down payment from the sales price to arrive at the maximum insurable loan amount. Thus, if the sales price is $797,500 the veteran must put $25,000 (797,500-697,500 = 100,000/4 = $25,000). In this example, the veteran could obtain a loan of $772,500 ($797,500- $25,000 down payment from the borrower) with a 97% LTV. Although VA loans do not have a maximum dollar amount, the secondary market has maximum limits so different lenders may quote different maximum limits in different areas. The program is, however, restricted to owner occupied purchases by eligible veterans.

WHO IS ELIGIBLE FOR A VA LOAN?

Approximately a quarter of the nation's population is eligible for VA benefits and services because they are veterans, family members or survivors of veterans. There are 24 million veterans currently. Among those eligible are individuals who are or have:

* Active Duty Military (now only 6 months of active duty required)
* Honorable Discharge
* Selected Reserves & National Guard
* Completed 6 years as Member of Active Unit
* Honorable Discharged & Retired
* Service Connected Disability
* Un-Remarried Spouse Who died while In Service
* Spouse of Service Person MIA or POW
* Discharged for Service Connected Disability

Getting a VA mortgage starts with making a call to the VA's Certificate of Eligibility Center at 888-244-6711 to secure the certificate authorizing the mortgage. The center keeps track of whether the veteran used all or part of his or her eligibility in the past. The veteran MUST have this original form to close on a new VA loan.

ENTITLEMENT BENEFIT
The VA Guaranty program is a kind of employee benefit program. The idea is to help veterans buy homes. The government guarantees an entitlement benefit of as much as $174,375 toward an owner-occupied purchase which is 25% of the government-sponsored enterprises' (GSE) loan limit of $697,500.

Under the recently passed Housing Bill, some areas qualify for even higher government guarantee limits. The VA lending limits are the same as those used for FHA loans, but more readily accessible.

Most banks are more than willing to make these loans because of the government guarantee. Plus, VA loans are made with more lenient income and credit standards than banks are currently demanding of conventional borrowers. The amount of this benefit has increased with time as home prices have increased. The entitlement is never exhausted. It may be utilized to guaranty a loan on a veteran*s home, but as soon as that home is sold and the loan is paid off the veteran has that portion of the entitlement back to use again. This is important because of the issue of partial entitlement and the potential for a veteran to have remaining entitlement even though they may still have a previous home loan guaranteed by the VA. The only way to restore eligibility is to sell the home or have the loan assumed by an eligible veteran who substitutes their eligibility for the original veteran.

BENEFITS

* No down payment (unless required by the lender or the purchase price is
  more than the reasonable value of the property).
* Buyer informed of reasonable value
* Negotiable interest rate
* Ability to finance the VA funding fee (plus reduced funding fees with a down
  payment of at least 5% and exemption for veterans receiving VA
  compensation)
* Seller contributions up to 6% for closing costs
* 100% of gift funds allowed
* No monthly mortgage insurance premiums
* Not limited to first time homebuyers
* Veteran can use entitlement many times
* Fixed rate assumable loan
* Right to prepay without penalty
* VA assistance to veteran borrowers in default due to temporary financial     
   difficulty
* Manual and automated underwriting
* Citizenship is not required

WHAT KIND OF PROPERTIES ARE ELIGIBLE FOR A VA LOAN?

* Purchases
* Rate & term refinance
* 90% LTV cash out
* Interest Rate Reduction Refinancing Loans (IRRRL)
* Owner occupied only
* Single Family Residence
* Planned Unit Development
* Condos (need project approved and 75% sold)
* 2-4 units (75%)
* New construction
* Leased land (need lease approved)

THE FUNDING FEE
There is a small origination fee paid to the VA, which is rolled into the mortgage itself. The VA Funding Fee is not an insurance premium but a one time charge. It is tantamount to a user fee. VA allows the funding fee to be financed, or added to the base maximum loan amount up to the maximum GNMA Loan Limit, or $697,500. In addition, newly eligible borrowers specifically reservists*pay a higher premium (2.4%) than active duty (2.15%). Disabled Veterans are exempt from payment of the Funding Fee. The Funding Fee for a subsequent user is 3.3%. The Fee can be financed, paid in cash or split. It can be paid by either the veteran or the seller. If it is paid by the seller, the maximum seller contribution is limited to 6% of the purchase price.

CLOSING COSTS
There are additional benefits to using a VA loan, if you qualify. Veterans may be required to pay for the following fees: credit report, origination, discount points, the Funding Fee, recording and title insurance, all of which are typically rolled into the loan.

* Veterans can pay all reasonable & customary costs:
* 1% loan origination fee
* Reasonable Discount Points (defined as 2%)
* Title Insurance
* Appraisal

But veterans cannot pay for....
* Application fee
* Appraisal review
* Document preparation
* Escrow fee
* Sub-escrow fee
* Inspection
* Notary
* Processing fee
* Tax service fee
* Termite report fee
* Underwriting fee
* Warehouse fee
* Wire fees

The seller or the lender must pay all escrow fees and non-allowable charges. The seller may pay 4% over and above all the closing costs. Note: Closing costs are not considered seller contributions, so the seller can still contribute another 4% to the veteran to buy down the interest rate or pay the funding fee.

REFINANCING
VA loans may not as beneficial for those seeking to refinance, because in a "refi" the loan-to-value ratio is not 100%, but only 90%. As with conventional loans there are two types of refinances: 1) cash out and the more affordable 2) rate & term (or Interest Rate Reduction Refinances Loans IRRRLs). With a cash out refi the premium is 2.15% for first-time cash-out refinancing. But for subsequent cash-out refinances the funding fee is a stiff 3.3% and the same documentation is required as with a purchase. For IRRRLs the funding fee is a nominal 0.5%. The documentation is less rigorous, there is no appraisal, no credit report, no underwriting & no qualifying are required on an IRRRL.

Generally, all that is needed is:

* 12 Month Payment History Current Mortgage
* Uniform Residential Loan Application
* Current Appraisal to Document Property Value has not deteriorated. This
   may not be required if the loan amount is not being increased over the  
   current loan amount.
* Verification of any funds needed to complete the closing and evidence of 1
   month's PITI (principal/interest/taxes/insurance) in reserve.
 

Copyright 2020 Rod Haase.  All rights reserved.