Financing Residential Real Estate. Lesson 12: VA-Guaranteed Loans

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1 Financing Residential Real Estate Lesson 12: VA-Guaranteed Loans

2 Introduction In this lesson we will cover: characteristics of VA loans, eligibility requirements, VA guaranty, VA loan amounts, and underwriting guidelines for VA loans.

3 Introduction VA loan program was established to help veterans finance the purchase of their homes. Offers many advantages over conventional financing.

4 Characteristics of VA Loans VA-guaranteed loans are made by institutional lenders, but a portion of loan is guaranteed by Department of Veterans Affairs. Protects lender against losses from default.

5 Characteristics of VA Loans VA loans may be used to financed purchase or construction of a one- to four-unit residences. Does not guaranty investor loans. Veteran must occupy home.

6 Characteristics of VA Loans Key characteristics of VA loans: No downpayment required. No maximum loan amount. No maximum income limits. Least stringent qualifying standards. Can be fixed-rate or ARM loans. No mortgage insurance required.

7 No maximum interest rate. Lender may charge flat fee of no more than 1% for administrative costs. No prepayment penalties. Forbearance extended to veterans with financial difficulties. Can be assumed by creditworthy buyer, veteran or non-veteran.

8 Characteristics of VA Loans Funding fees VA borrowers must pay VA a funding fee, instead of paying insurance premiums. Amount of funding fee is percentage of loan amount.

9 Characteristics of VA Loans Funding fees Regular military veteran: 2.15% of loan amount. Reduced if downpayment 5%. Reserves or National Guard: 2.4% of loan amount. 1.75% if downpayment between 5% and 10%. 1.5% if downpayment 10%.

10 Characteristics of VA Loans Funding fees Certain parties are exempt from funding fee requirement: veterans entitled to receive VA compensation for service-related disabilities, veterans receiving retirement pay who are entitled to receive disability compensation, surviving spouses of veterans who died in service or from service-related disabilities.

11 Eligibility for VA Loans Eligibility for VA loans is based on length of continuous active duty service in U.S. armed forces.

12 Eligibility for VA Loans VA issues Certificate of Eligibility, which veteran uses to apply for a VA loan. Veteran must apply for certificate and submit most recent discharge/separation papers.

13 Summary VA Loan Characteristics Funding fee Downpayment Owner occupancy Eligibility Spousal eligibility

14 VA Guaranty Essential characteristic of VA loans is that they are guaranteed by U.S. Government. Guaranty amount available is called veteran s entitlement.

15 VA Guaranty Guaranty amount Guaranty amount is established by VA regulations and has been increased over the years. World War II guaranty was $4,000; increased on Sept. 1, 1951, to $7,500; increased on May 7, 1968, to $12,500; increased on Dec. 31, 1974, to $17,500; increased on Oct. 1, 1978, to $25,000;

16 increased on Feb. 1, 1988, to $36,000; increased on Jan. 1, 1990, to $46,000; increased on August 25, 1995, to $50,750; and increased on July 14, 2003, to $60,000.

17 VA Guaranty Guaranty amount Most recently the maximum amount was increased on December 10, It is no longer a fixed amount. It is now: 25% of Freddie Mac conforming loan limit for a single-family residence.

18 VA Guaranty Guaranty amount Veteran s guaranty entitlement doesn t expire. Available until used by veteran or surviving spouse.

19 VA Guaranty Guaranty amount Veteran s guaranty entitlement doesn t expire. Available until used by veteran or surviving spouse. If borrower sells property and repays loan, entitlement is restored.

20 VA Guaranty Guaranty amount Veteran s guaranty entitlement doesn t expire. Available until used by veteran or surviving spouse. If borrower sells property and repays loan, entitlement is restored. One-time restoration of entitlement also allowed to vet who pays off loan without selling property.

21 VA Guaranty Refinancing with a VA loan VA loan can be used to refinance any existing loan.

22 VA Guaranty Refinancing with a VA loan If refinancing VA loan, loan amount is limited to: old loan balance,

23 VA Guaranty Refinancing with a VA loan If refinancing VA loan, loan amount is limited to: old loan balance, closing costs,

24 VA Guaranty Refinancing with a VA loan If refinancing VA loan, loan amount is limited to: old loan balance, closing costs, up to two discount points,

25 VA Guaranty Refinancing with a VA loan If refinancing VA loan, loan amount is limited to: old loan balance, closing costs, up to two discount points, 0.5% funding fee, and

26 VA Guaranty Refinancing with a VA loan If refinancing VA loan, loan amount is limited to: old loan balance, closing costs, up to two discount points, 0.5% funding fee, and up to $6,000 for energy-efficiency improvements.

27 VA Guaranty Refinancing with a VA loan If refinancing non-va loan: guaranty entitlement must be used,

28 VA Guaranty Refinancing with a VA loan If refinancing non-va loan: guaranty entitlement must be used, generally can t exceed 90% of appraised value, and

29 VA Guaranty Refinancing with a VA loan If refinancing non-va loan: guaranty entitlement must be used, generally can t exceed 90% of appraised value, and 2.15% funding fee charged.

30 VA Guaranty Refinancing with a VA loan If refinancing non-va loan: guaranty entitlement must be used, generally can t exceed 90% of appraised value, and 2.15% funding fee charged. In some cases, veteran may receive cash from proceeds of new loan.

31 VA Loan Amounts VA doesn t set maximum loan amount. Instead, VA loan may not exceed appraised value of property.

32 VA Loan Amounts VA doesn t set maximum loan amount. Instead, VA loan may not exceed appraised value of property. VA-approved appraiser appraises property and VA issues a Notice of Value (NOV).

33 VA Loan Amounts Most lenders require guaranty to equal 25% of loan amount. No-downpayment loan over $359,650 unlikely.

34 Underwriting Guidelines Lenders use standards established by Department of Veterans Affairs to analyze veteran creditworthiness.

35 Underwriting Guidelines Lenders use standards established by Department of Veterans Affairs to analyze veteran creditworthiness. Two methods of income analysis for VA loans: income ratio method, and residual income method (cash flow).

36 Underwriting Guidelines Income ratio analysis VA uses total obligations to income ratio to analyze income ratio of potential borrower.

37 Underwriting Guidelines Income ratio analysis VA uses total obligations to income ratio to analyze income ratio of potential borrower. Ratio generally shouldn t exceed 41%.

38 Underwriting Guidelines Income ratio analysis VA uses total obligations to income ratio to analyze income ratio of potential borrower. Ratio generally shouldn t exceed 41%. Installment debts with more than 10 payments left are considered recurring obligations.

39 Underwriting Guidelines Residual income analysis Residual income analysis (cash flow analysis) is second method used to qualify loan applicant.

40 Underwriting Guidelines Residual income analysis Residual income analysis (cash flow analysis) is second method used to qualify loan applicant. Gross monthly income Taxes, recurring obligations, housing expense Residual income

41 Underwriting Guidelines Residual income analysis Vet s residual income should be at least one dollar more than VA s minimum requirement. Minimum requirement varies according to: region of the country, family size, and size of proposed loan.

42 Underwriting Guidelines Compensating factors VA underwriting standards are merely guidelines, not hard and fast rules. Compensating factors may allow loan approval in spite of application weaknesses.

43 Underwriting Guidelines Compensating factors Compensating factors include: excellent long-term credit history;

44 Underwriting Guidelines Compensating factors Compensating factors include: excellent long-term credit history; conservative use of consumer credit;

45 Underwriting Guidelines Compensating factors Compensating factors include: excellent long-term credit history; conservative use of consumer credit; minimal consumer debt;

46 Underwriting Guidelines Compensating factors Compensating factors include: excellent long-term credit history; conservative use of consumer credit; minimal consumer debt; long-term employment;

47 Underwriting Guidelines Compensating factors Compensating factors include: excellent long-term credit history; conservative use of consumer credit; minimal consumer debt; long-term employment; significant liquid assets;

48 Underwriting Guidelines Compensating factors Compensating factors include: excellent long-term credit history; conservative use of consumer credit; minimal consumer debt; long-term employment; significant liquid assets; a downpayment;

49 little or no increase in housing expense;

50 little or no increase in housing expense; military benefits;

51 little or no increase in housing expense; military benefits; satisfactory previous experience with home ownership;

52 little or no increase in housing expense; military benefits; satisfactory previous experience with home ownership; high residual income; and

53 little or no increase in housing expense; military benefits; satisfactory previous experience with home ownership; high residual income; and a low total obligations to income ratio.

54 Underwriting Guidelines Compensating factors Compensating factor must be relevant to weaknesses in application.

55 Underwriting Guidelines Income ratio exceptions Special rules for approving applicant whose income ratio is over 41%. Lender must submit detailed statement to VA, listing compensating factors.

56 Underwriting Guidelines Income ratio exceptions VA qualifying rules much more liberal than Fannie Mae/Freddie Mac rules.

57 Summary VA Loan Amounts and Underwriting Notice of Value Secondary financing Income ratio analysis Total obligations to income ratio Residual income analysis Compensating factors Income ratio exceptions

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