VA Overview (revised 7/20/2015)

VA Overview (revised 7/20/2015) 1

AFR Disclaimer At minimum, all VA must be met. The VA Web Automated Reference Material System (WARMS)can be found here: http://benefits.va.gov/warms/pam26_7.asp The AFR underwriter has the right to decline or suspend the file at their sole discretion for any reason allowed by law. These materials are intended for AFR internal use and client training procedures only. This is neither legal advice nor a substitute for Agency Guidelines/AFR investor overlays. Please do not reproduce, display, or distribute without the express written permission of AFR. This information is subject to change in AFR s sole discretion. Updated AFR guidelines may be accessed by: https://www.afrwholesale.com/programs/va/va-loans.html. All rights reserved. 2

Table of Contents AFR Overlays Wholesale Set Up Hard Stops Underwriting Method Borrower Eligibility Certificate of Eligibility & Entitlement Calculations Funding Fee (FF) Credit Income Assets Loan Identification Number (LIN) Eligible Properties & Appraisals Eligible Programs & Terms VA Allowable & Non-Allowable Fees 20 Q&A s on VA Loans Helpful Resources 3

AFR Overlays 620 minimum qualifying credit score. 2 credit scores are required. Lowest representative score from all borrowers will be used for qualification purposes. *See VA IRRRL LTV chart for FICO, LTV restrictions, reserves, and housing history requirements IRRRLs require an AVM. You can submit with an AVM from our list of approved companies and pay for it yourself or The AVM is pulled and paid for by AFR. Owner Occupied properties only (with the exception of IRRRLs) 1-2 Unit Primary Residences, VA approved condos, PUDs, Manufactured Housing AUS Approve/Eligible Manual underwrites also available. Gift funds are acceptable from immediate family members ONLY No new subordinate financing allowed Escrow waivers are not permitted Any purchase where the seller is an LLC or Corporation and/or title shows no mortgages or liens being paid off, AFR will require a VOD that is required and verified by AFR. Borrower may own a maximum of 4 financed properties 4

Age of Documents Appraisal: 120 days CPL: 60 days Certificate of Eligibility: 360 days Credit: 75 days to submission, 120 to closing Income/Assets: 120 days RESPA Documents: 120 days Title: 90 days Note: TX and LA 60 days Verbal Verification of Employment: 10 days within closing to be performed by AFR 5

Set Up HARDSTOPS VA Agent Approval TPO-C clients must have VA Agent Approval to send AFR VA loans under our VA Sponsorship. The VA box must be checked off and Notes must reflect VA approval from Broker Services prior to a file being scrubbed! VA loans cannot be worked on without this agent approval. See next slide for screenshot of VA Approval in Data Trac. Note: The current turn time for an agent approval from VA is 3-4 weeks from the point the client (TPO-C) has submitted the required paperwork and $100 check made payable to AFR. Certificate of Eligibility (COE) a COE must be in EVERY file!!! If the COE shows Contact RLC (Regional Loan Center) the scrubber must have the broker obtain the COE showing Exempt or Non-Exempt Status prior to proceeding with the file. See separate COE Power Point Presentation. Funding Fee (FF) The funding fee must be disclosed accurately in Block 3 of the GFE and included in the 10% RESPA tolerance calculations. The COE will reflect the appropriate funding fee. The funding fee, once determined, must also be entered accurately in Data Trac to calculate the correct loan amount. See the Funding Fee Matrix in the separate COE Power Point Presentation. Purchase Agreements ALL VA Purchases must have a fully executed legible purchase agreement in the file at the time of the file being accepted by AFR. Appraisals An appraisal should not be in a file for TPO-C client codes. Note: If a client code TPO-C submitted an appraisal the scrubber must verify through WebLGY that the appraisal is in the name of an VA Automatic Lender. The scrubber must note Data Trac for the AFR VA UW to have the appraisal and LIN# to transferred AFR. 6

Underwriting Method DU & LP (w/the exception of No-Income Qualifying IRRRLs) Approve/Eligible Manual Underwriting (Refers) Permitted Note: No-Income /Credit Qualifying IRRRLs require a FNMA 3.2. Files submitted with a TOTAL Scorecard (DU) on these loans cannot be accepted by AFR. Note: If both LP and DU AUS findings come back with a Refer risk classification, the loanmust be submitted to AFR s Credit Committee for an exception. 7

Borrower Eligibility 8

Basic Eligibility Requirements A veteran is eligible for VA home loan benefits if he or she served on active duty in the Army, Navy, Air Force, Marine Corps, or Coast Guard after September 15, 1940, and was discharged under conditions other than dishonorable after either: 90 days or more, any part of which occurred during wartime, or 181 continuous days or more (peacetime). 2 year requirement: A greater length of service is required for veterans who: Enlisted (and service began) after September 7, 1980, or Enlisted service as an officer after October 16, 1981. These veterans must have completed either: 24 continuous months of active duty, or The full period for which called or ordered to active duty, but not less than 90 days (any part during wartime) or 181 continuous days (peacetime). 9

Eligibility for Reserves and National Guard Members of the Reserves and National Guard who are not otherwise eligible for loan guaranty benefits are eligible upon completion of 6 years service in the Reserves or Guard (unless released earlier due to a service-connected disability). The applicant must have received an honorable (a general or under honorable conditions is not qualifying) discharge from such service unless he or she is either: in an inactive status awaiting final discharge, or still serving in the Reserves or Guard. 10

Eligibility for Spouses of Veterans Some spouses of veterans may have home loan eligibility. They are: the unmarried surviving spouse of a veteran who died as a result of service or serviceconnected causes, the surviving spouse of a veteran who dies on active duty or from service-connected causes, who remarries on or after age 57 and on or after December 16, 2003, and the spouse of an active duty member who is listed as MIA or a POW for at least 90 days. Eligibility under this MIA/POW provision is limited to onetime use only. surviving spouses of veterans who died from non-service connected causes may also be eligible if certain conditions are met. Those conditions are: the veteran was rated totally disabled for 10 years or more immediately preceding death; or was rated totally disabled for not less than 5 years from date of discharge or release from active duty to date of death, or the veteran was a former POW who died after September 30, 1999, and was rated totally disabled for not less than 1 year immediately preceding death. 11

Wartime and Peacetime Wartime Peacetime World War II 9/16/1940-7/25/1947 Korean conflict 6/27/1950-1/31/1955 Vietnam Era 8/5/1964-5/7/1965 (The Vietnam Era begins 2/28/1961 for those individuals who served in the Republic of Vietnam) Post World War II period 7/26/1947 6/26/1950 Post Korean period 2/1/1955-8/4/1964 Post Vietnam period 5/8/1975-8/1/1990 Persian Gulf War 8/2/1990 date to be determined 12

Certificate of Eligibility & Entitlement Calculations 13

Certificate of Eligibility (COE) Eligibility means the veteran meets the basic criteria of appropriate length and character of service to utilize the home loan benefit. Before processing and closing a loan for an applicant, the client (broker) must ensure the applicant is an eligible veteran. Veteran home loan eligibility is proven with the COE. A COE is the only reliable Proof of Eligibility for the home loan benefit. Note: Although eligible for the home loan benefit, veterans must still qualify based on income and credit before loan approval is granted. The client (broker) must use VA s online application to attempt to obtain the COE//Go to VA s Information Portal//Select WebLGY//Select Eligibility//Follow prompts. Note: If the COE cannot be obtained immediately, select the electronic application link. Veterans may also apply for a COE online at https://www.ebenefits.va.gov/ebenefits-portal/ebenefits.portal. 14

Certificate of Eligibility (COE) Surviving Spouses: If applying for the first time, surviving spouses must completed VA Form 26-1817, instead of VA Form 26-1880. Surviving Spouse COEs are not issued via an automated COE. In order to obtain a Surviving Spouse COE an electronic application is required. The client must upload a completed VA Form 26-1817 and supporting documentation into WebLGY, and complete the electronic application. Note: **AFR will not accept any loan without the COE reflecting the funding fee as either EXEMPT or NON EXEMPT. The COE must be in the file at the time of submission to the registration department. 15

Certificate of Eligibility (COE) The COE will confirm: The amount of entitlement (see Entitlement slide), and The funding fee (ff) exemption status (Exempt, Non Exempt or Contact RLC) Note: Regardless of the new Funding Fee (FF) status shown on the COE, lenders must be sure to read any and all statements appearing the Conditions field, which appears near the middle portion of the COE. 16

Certificate of Eligibility (COE) There are three types of certificate of eligibility: Veteran Annotated for Unmarried Surviving Spouse Reservist/ National Guard A different funding fee applies for each type of COE and whether or not the VA benefits has been used previously. 17

All VA transactions, excluding the VA IRRRLs, require a Certificate of Eligibility in order to determine that the veteran is eligible for a VA home loan benefit at time of underwrite. Although eligible for the home loan benefit, veterans still must qualify based on income and credit before a loan approval is granted. 18

Entitlement Entitlement is the amount available for use on a loan. The amount of available basic entitlement is $36,000. This may be reduced if the Veteran has used entitlement before which has not been restored. For example it may say: THIS VETERAN'S BASIC ENTITLEMENT IS $. TOTAL ENTITLEMENT CHARGED TO PREVIOUS VA LOANS IS $. For certain loans in excess of $144,000, additional entitlement may be available. For loans greater than $144,000, but less than $417,000, the maximum entitlement is 25% of $417,000, which equals $104,250. For loans greater than $417,000, the maximum entitlement is 25% of the appropriate loan limit which can vary by county, visit the VA Loan Limits webpage. Please note county limits can change yearly. VA will post limits each year on the website as they change. Even though the veteran may have entitlement for certain loans greater than $144,000, the COE will never reflect this potential extra entitlement. Instead, an asterisk by the word available refers to a note, which explains the possibility of additional entitlement. If the Veteran previously used entitlement, which has not been restored, available entitlement is reduced by the amount used on the prior loan(s). The lender has two options: Make the loan knowing that VA's guaranty is limited to the amount of available entitlement, or Have the veteran apply for restoration of previously used entitlement Note: The possible additional entitlement for certain loans in excess of $144,000 may be available even if the veteran has no entitlement or partial basic entitlement. However, in such cases, the lack of full entitlement may result in lenders receiving less than a 25% guaranty from VA. It is the lender's responsibility to ensure they receive a sufficient amount of guaranty to satisfy secondary market requirements. 19

Although VA s does not have a minimum guaranty amount and normally does grant a 25% guaranty, there may be times depending on the borrower s eligibility where the loan may not obtain a 25% guaranty from VA. AFR Secondary Requires 25% VA Guaranty on all VA loans. 20

How does VA s guaranty work? Basic Entitlement: $36,000 $36,000 x 4 = $144,000 *Loan amounts from $-0- to $144,000 Additional Entitlement*: $68250 $36,000 + $68250 = $104,250 $104,250 x 4 = $417,000 *Loan Amounts from $144,001 to $417,000 *The additional entitlement is not available for cash-out refinance loans. Only the basic entitlement may be used * Loan limits: http://www.benefits.va.gov/homeloans/purchaseco loan_limits.asp VA will issue a guaranty of 25% up to the county limit. 21

VA Guaranty Calculation Examples The following examples illustrate some common situations involving VA-guaranteed loans. Due to variations in the amount of entitlement available to an individual veteran, loan limits for individual counties, and purchase prices for homes, situations may arise which are not covered here. Example 1 Veteran has full entitlement available and is purchasing home for $300,000 where the county loan limit is $417,000. $417,000 x 25% = $104,250 maximum guaranty and available entitlement $300,000 x 25% = $75,000 guaranty and down payment combination required Since VA s guaranty is limited to the lesser of 25% of the county loan limit or 25% of the loan amount, VA will guaranty $75,000 on the veteran s $300,000 loan in this county. A down payment should not be required. Example 2 Veteran has used $48,000 entitlement on a prior loan, which may not be restored, and is purchasing a home for $320,000 where the county loan limit is $625,000. $625,000 x 25% = $156,250 maximum guaranty $156,250 - $48,000= $108,250 entitlement available $108,250 x 4= $433,000 maximum loan amount with 25% guaranty Since the proposed loan amount will be less than $433,000, the lender will receive 25% VA guaranty on the loan $320,000. A Down payment should not be required. 22

VA Guaranty Calculation Examples Example 3 Veteran has full entitlement available and is purchasing a home for $480,000 where the county loan limit is $417,000. $417,000 x 25% = $104,250 maximum guaranty and entitlement available $104,250/$480,000= 21.72% guaranty Since VA s guaranty will be less than 25%, a down payment will be required. $480,000 x 25% = $120,000 $120,000 - $104,250= $15,750 down payment Example 4 Veteran has used $27,500 of entitlement on a prior loan, which may not be restored, and is purchasing a home for $320,000 where the county loan limit is $417,000. $417,000 x 25% = $104,250 maximum guaranty $104,250 - $27500= $76,750 entitlement available $76,750/ $320,000= 23.98% guaranty $76,750 x 4= $307,000 maximum loan amount with 25% guaranty Since VA s guaranty will be less than 25%, a down payment will be required. $320,000 x 25% = $80,000 $80,000 - $76,750= $3,250 down payment 23

Entitlement Calculation Examples 24

Funding Fee 25

Funding Fee In order to defray the cost of administering the VA Home Loan program, each veteran must pay a funding fee to VA at loan closing. Congress may periodically change the funding fee rates to reflect changes in the cost of administering the program, or to assist a certain class of veterans. May be paid in cash or financed as part of the Mortgage The COE (or VA form 26-8937) will be used to document if the veteran is exempt from the funding fee If there is proof that the borrower is an unmarried surviving spouse of the Veteran, the spouse is exempt from paying the funding fee Amount charged based on LTV, Veteran status, transaction type, or prior use. Refer to the VA Lender's Handbook for guidance 26

Funding Fee Matrix First Time Use Subsequent Use Veteran Reservist/NG Veteran Reservist/NG *Cash - Out Refinance 2.15% 2.40% 3.30%** 3.30%** 0% down payment 2.15% 2.40% 3.30%** 3.30%** 5-9.99 % down payment 1.50% 1.75% 1.50% 1.75% 10 + % down payment 1.25% 1.50% 1.25% 1.50% IRRLs 0.5% 0.5% 0.5% 0.5% * Cash-out factors apply regardless of LTV * Rate and Term Refinances use the same chart as the Cash-Out Refinance * There are no reduced funding fees for regular refinances based on equity. Reduced fees only apply to purchase loans where a downpayment of at least 5% is made. ** The higher subsequent use fee does not apply to these loans if the veteran s only prior use of entitlement was for a manufactured home loan. 27

Who is Exempt from Paying The Funding Fee The following persons are exempt from paying the funding fee: Veterans receiving VA compensation for service-connected disabilities. Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay. Veterans who are rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating or on the basis of a pre-discharge review of existing medical evidence (including service medical and treatment records) that results in issuance of a memorandum rating. Veterans entitled to receive compensation, but who are not presently in receipt because they are on active duty. Surviving spouses of veterans who died in service or from service- connected disabilities (whether or not such surviving spouses are veterans with their own entitlement and whether or not they are using their own 28

Example of a COE showing the Veteran is exempt from the VA funding fee 29

How to Calculate the Funding Fee For all loans except IRRRLs, apply the appropriate percentage (from the funding fee table) to the loan amount. If the funding fee is to be paid from the loan proceeds, apply the percentage to the loan amount without the funding fee amount added to it. For IRRRLs, calculate the funding fee by completing VA Form 26-8923 IRRRL Worksheet 30

How to Use the Funding Fee Tables The lender must find the appropriate percentage in the tables using the following parameters: Is the veteran eligible for VA loan benefits through service in the regular military or the Reserves/National Guard? Examine the COE. For Reserves/National Guard, the COD bears the notation, RESERVES/NATIONAL GUARD INCREASED FUNDING FEE, and is buff-colored rather than green. Is the veteran a subsequent user of VA home loan benefits or obtaining his or her first VA loan? Examine the COE. An entitlement code of 5 indicates subsequent use, and does a loan number entered in the Loan Number column. What type of loan is the veteran obtaining? The funding fee varies depending upon whether the loan is a purchase, an IRRRL, or a cash-out refinancing loan. Is the veteran making a downpayment of at least 5 or 10%? Calculate what % of the sales price of the property the veteran is remitting as downpayment The downpayment can come from the veteran s own resources or a gift from an immediate family member. Except, if the purchase price exceeds the reasonable value of the property, the difference between the purchase price and the reasonable value must be paid by the veteran in cash from their own funds. No gift funds permitted. 31

Credit 32

CAIVRS CAIVRS must be pulled (via FHA Connection) on all borrowers. Note: Agency Type must be selected as Veterans Affairs AFR Lender ID: 5551980000 Defaulted CAIVRS are not permitted 33

Bankruptcy & Foreclosure Chapter 7 Must be discharged 2 years from date of application Borrower must have reestablished credit Chapter 13 Satisfactory performance for at least 1 year of pay out period and permission from the court to enter into the mortgage transaction Borrower must have reestablished credit Foreclosure The discharge date or the date the deficiency balance was paid must be 2 years prior to the application date For wet (escrow) states the date is based on the acknowledgement date of the document For dry states the date is based on the recorded date Note: If the foreclosure was on a VA loan, the Veteran may not have full entitlement available for the new loan. The VA Underwriter must ensure that the applicant's Certificate of Eligibility reflects sufficient entitlement. 34

Credit Overview Alimony Borrower must provide a copy of the filed divorce decree or filed separation agreement to document the amount of the liability; Document that the borrower has been satisfactorily been making payments As an alternative qualifying method, the monthly alimony can be deducted from the borrower s gross income in lieu of being included as a debt. Child Support The debt must be counted as a recurring obligation and may not be deducted from income; Obtain a copy of document mandating child support and verify that the borrower has satisfactorily been making payments. Collection Accounts Per VA Lender Handbook Section 4.7c: Isolated collection accounts do not necessarily have to be paid off as a condition for the loan approval. For example, a credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections. In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval. However, collection accounts must be considered as part of the borrower s overall credit history and unpaid collection accounts should be considered open, recent credit. Borrowers with a history collection accounts should have reestablished satisfactory credit in order to be considered a satisfactory credit risk. Note: The AFR Underwriter has sole discretion to decide whether or not this guideline has been met. 35

Credit Overview Consumer Credit Counseling Services (CCCS) Consumer Credit Counseling is permitted under VA guidelines where the following has been met: Borrowers must demonstrate a satisfactory 12 months history (0x30) CCCS Administrator must sign a letter allowing the borrower to seek financing Contingent Liabilities AFR Underwriter has sole discretion not to consider this debt if the borrower can provide evidence that the primary obligor has been making payments on a regular basis (12 months history) and does not have a history of delinquent payments on the loan over the past 12 months. Judgments Must be paid in full, or A satisfactory repayment play is in effect at time of application and there have been no late payments on the plan for 12 months 36

Community Property States VA recognizes community property states: (AK, AZ, CA, ID, LA, NV, NM, TX, WA, WI) The Non-Purchasing Spouse in a community property state does not appear on the Mortgage, Note or Deed unless State law requires non-purchasing spouse to either sign security instruments or present documentation evidencing that he/she is relinquishing all rights to the property Credit report must be ordered for non purchasing spouse. The borrower must qualify with the nonpurchase spouse s liabilities. The credit history and/or derogatory credit of the NPS is not considered in the borrower s creditworthiness review The non- purchasing spouse is not required to meet credit score requirements Note: If the borrower is legally separated, they will still be considered married and the non-purchasing spouse must provide a full credit report to be considered as the creditworthiness review of the file. 37

Housing History Purchase: A management VOR or cancelled checks is required regardless of the FICO and the AUS findings Exception if the Veteran is recently discharged and was living on a military base, VA will not require a housing history, but the file still must meet VA guidelines Rate and Term Refinance: 12 month housing history is required (0x30) Cash Out Refinance: 12 month housing history is required (0x30) IRRRL: 12 month housing history is required (0x30)An exception May be considered if the loan is no more than 1x30 in the first 6 months of The 12 month history 38

Maintenance & Utility Factors (All States) Veterans must qualify with the monthly maintenance and utility factors into the housing expense and residual income guidelines: $0.14 times the Gross Living Area (GLA) Example: 1500 square feet X.14 per square foot per month= $210.00 per month 39

Recurring Obligations (Debts) All monthly debts must be included in the qualifying ratio and residual income. Revolving accounts will be calculated on the greatest of: 5% of the balance; $10; or the actual payment. Any installment debt with less than 10 months remaining, but with a payment likely to cause hardship to borrower (at the discretion of the underwriter) must be included. 40

Short Sale Short Sale and Principal Forgiveness No mortgage late payments allowed on any loan modification/ short sales within the past 12 months. Note: If the short sale is on a VA-guaranteed loan, the mortgage is considered compromised. The Underwriter must confirm that the Veteran has sufficient entitlement as reflected on the certificate of eligibility (COE). Reminder: If the veteran does not have sufficient entitlement, the loan amount will need to be recalculated. Principal Forgiveness/Short Pay Off VA Loan Not permitted: If any mortgage on the property being refinanced is a VA-guaranteed loan, AFR will not permit a principal forgiveness/ short pay off. Non-VA Loan Permitted: If any mortgage on the property being refinanced is non VA-guaranteed loan (FHA, Fannie Mae, Freddie Mac, etc.), AFR will permit a principal forgiveness/ short pay off provided the following conditions are met: Mortgage must have no mortgage lates within the last 12 months; Mortgage must not report on credit with any derogatory annotations, such as comprised, modified, in dispute, foreclosure, etc. Mortgage pay off statement must reflect the amount of the principal forgiveness/short pay off. 41

Ratios 31/41% AFR will allow a 40/49.99% with DU Approve/Eligible and Veteran must have 1.5x the required residual income* *See Residual Income Requirements 42

Compensating Factors Excellent credit history Conservative use of consumer credit Minimal consumer debt Long-term employment Significant liquid assets Sizable down payment The existence of equity in refinancing loans Little or no increase in shelter expense High residual income Low Debt-to-Income ratio Tax credits for child care Tax benefits of home ownership 43

Compensating Factors can not be used to offset unsatisfactory and adverse credit. 44

Income 45

Employment history requirements for all borrowers: Income Examples The loan application must show a complete 2 year employment history. Note: Any gaps over 30 days must be addressed by the borrower with a detailed signed and dated letter of explanation. Note: All employment must be verified with CPA letter (self-employed borrowers), verbal verification of employment or a thoroughly completed verification of employment. Alimony/ Child Support Borrower must provide a copy of the filed divorce decree for filed separation agreement. Document that the payments have been received during the last 12 months and will continue for the next 3 years from the date of closing. Non-Taxable Income Reference current tax withholding tables with the IRS to determine an amount that can be prudently employed to adjust the borrower s actual income when grossing up. Tax free income can be grossed up for DTI purposes but not for residual income qualification. 46

Additional Sources Of Income Bonus/ Overtime Income Borrower must be receiving for prior two years and year to date (ytd). Employer must confirm that the overtime is likely to continue on the written verification of employment (VOE). The use of overtime will not be used to qualify if the overtime has declined. Commissioned Income Must be averaged during the past 2 years and year to date. Subtract any unreimbursed expenses from the gross. If received less than 2 years, it can be considered as effective income if the underwriter can provide rationale and can document that it will continue. Less than 1 year receipt of commissioned income is generally not permitted. Two years tax returns with a signed 4506-T is required. Self-Employed Borrowers 25% of greater ownership interest in a business. Must be self-employed for 2 years. 47

Additional Sources of Income Active Military Income and Recent Discharge or Voluntary Separation An original or certified copy of the applicant s Leave and Earnings Statement (LES) is required. The LES must furnish the same information as a verification of employment (VOE). The LES must be no more than 120 days old For loan closed automatically, the date of the LES must be within 120 days of the date the note is signed. Note: The Department of Defense provides service members access to a computer generated LES through mypay (formerly known as E/MSS- Employee Member Self Service). This type of LES is acceptable. In addition, identify service members who are within 12 months of release from active duty or end of contract term. Find the date of expiration of the applicant s current contract for active service on the LES (for an enlisted service member). For a National Guard or Reserve member, find the expiration date of the applicant s current contract. Service members who are within 12 months of release from active duty or at the end of their contract terms require additional information. Note: The ETS (expiration of term of service) or EAOS (Expiration of Active Obligated Service) date can be found on the LES for enlisted personnel or on an officer s orders. If release will be within 12 months of the anticipated closing date, one of the following is required: Evidence that the applicant has already re-enlisted or extended his or her period of active duty to a date 12 months beyond the date of closing, or Verification from a valid offer of local civilian employment, or A statement from the service member that he/she intends to reenlist or extend his or her active duty date beyond the 12 month period PLUS A statement from the applicant s commanding officer confirming that the applicant is eligible to reenlist or extend his or her active duty and has no reason to believe that such reenlistment or extension of active duty will not be granted. Note: Continuation of military allowances (flight pay, hazardous duty pay, etc.) must be determined to count as income. If continuation can not be determined, these allowances may be used to offset Intended short term for debts internal (24 months AFR use or less) only. This is 48

Income Taxes VA requires Federal, State, Social Security, and Medicare taxes to be taken out of all taxable income. 49

Income Taxes Tax tables: Federal: http://www.irs.gov/pub/irs-pdf/p15.pdf State: http://www.irsx.gov/businesses/small-businesses-&-self-employed/state-links-1 Social Security and Medicare rate is 6.2% for W2 employees and 13.3% for Self-Employed Borrowers Note: Tax tables CHANGE on a yearly basis Note: The following states do not have state taxes: Alaska Florida South Dakota Texas Washington Wyoming **New Hampshire and Tennessee limit their state income taxes to Dividend and Interest Income Only Note: Pension and Military Retirement Income is taxable for Federal and State, it is not taxable for Social Security and Medicare; Interest and dividend income, unemployment income, military base pay (except military BAH and BAS) is taxable for Federal, State, Social Security and Medicare. Note: AFR Underwriter must indicate on the VA Loan Analysis as to how the monthly Federal, State, Social Security and Medicare taxes were calculated. Note: AFR Underwriter can use the Pay Check Calculator to verify the monthly income deductions, but it can not be used to determine the actual deduction. AFR Underwriter must use the Federal, State, Social Security and Medicare tax rates as mandated by VA to determine the monthly deductions. 50

Residual Income Requirements Loan amounts of $79,999 and below: Family Size Northeast Midwest South West 1 390 382 382 425 2 654 641 641 713 3 788 772 772 859 4 888 868 868 967 5 921 902 902 1,004 Note: Over 5 in Family Size, add $75 for each additional family member up to a family of 7 Loan amounts of $80,000 and more: Family Size Northeast Midwest South West 1 450 441 441 491 2 755 738 738 823 3 909 889 889 990 4 1,025 1,003 1,003 1,117 5 1,062 1,039 1,039 1,158 Note: Over 5 in Family, add $80 for each additional member up to a family of 7 Active duty Veterans may reduce residual income requirements by 5% Non-qualifying spouse may be discounted from family size if income can be verified to show spouse can be self-supporting 51

Income Reminders Verify a minimum of two years employment (including previous jobs, if needed). Only verified income can be considered in qualifying for a VA loan. Income of a spouse who will be obligated on the loan must also be verified, if needed. Furnish original pay stub(s) covering the most recent 30-day period together with W2 forms for the previous 2 years. The employment verification should be compared with the pay stub for consistency. Generally, income from a 2 nd job should only be used after the applicant has 24 months experience of working two jobs. Generally, income from overtime or part-time work is not considered reliable income unless the borrower has received this income for 2 years. Temporary income such as VA educational allowances and unemployment compensation do not represent stable and reliable income and as a general rule, are not to be considered as income. Review the VA Loan Analysis carefully to verify the borrower meets VA Residual Income Guidelines. Review pay stubs for any undisclosed debts and make sure to address job related expenses and/or child care Review the borrower s income stability past employment record, training, education and qualifications, type of employment and employer s confirmation for continued employment. Short term employment in a present position combined with frequent job changes in recent past 2 years requires special attention. Were the changes for purpose of career advancement in same or related field? Increase in pay for same line of work or convenience of location? Any changes with no apparent betterment is not a positive factor which also includes changes from one line of work to another. Calculate the monthly income tax withholdings carefully based on IRS tax tables and State Tax Tables, including the monthly calculations must be noted on the VA Loan Summary. AFR requires 2 years tax transcripts on all income and credit qualifying streamlines. On self-employed borrowers, monthly income tax withholdings still apply. Tax free income can be grossed up for ratio guidelines, but not for residual income qualification. The difference between the grossed up amount and the actual tax Intended for free internal income AFR amount use only. must This be listed under other for the residual income purposes on the VA loan analysis and the underwriter must make a note. 52

Assets 53

Asset Documentation Two current and consecutive bank statements including all pages are required with the exception of VA IRRRL s. On all VA IRRRL s, a 30 day bank statement with all pages will be required verifying the cash to close from the veteran. All non-sufficient funds (NSF) and unusual deposits require a letter of explanation and paper trail. Note: Overdrafts are also considered as a borrower s ability to repay debts. *See Credit Slide Note: Additional documentation may be required at the underwriter s discretion. 54

Down Payment & Gift Funds Down Payment Not required unless: The purchase price exceeds the reasonable value for the property, or The Veteran does not have sufficient entitlement. Gift Funds Gift funds are acceptable from immediate family members only. Money must be verified as having been deposited in Veteran's account or given directly to closing agent Provide gift letter and source donor's ability with a bank statement, copy of the cancelled personal check or certified funds 55

Reserves If rental income is not needed to qualify: No reserves are required Any assets after closing are considered a compensating factor If rental income on a rental property other than the subject property is being used to qualify: 3 months PITI reserves for the rental property are required Must be liquid Note: Please refer to the VA IRRRL chart for reserve requirements. 56

Loan Identification Number (LIN) 57

LIN (Loan Identification Number) A 12 digit VA Loan Identification Number (LIN) is assigned to each loan by VA at the time the appraisal is requested. This number must be used electronically in VA systems or where requested on VA forms and other documents. IRRRLs A new LIN must be requested through The Appraisal System (TAS) without requesting an appraisal. 58

Ordering LINs for VA IRRRLs LINs must be assigned in WebLYG on VA IRRRLs. The first step in ordering an IRRRL is logging into WebLYG. After logging into WebLYG, select the Order IRRRL function. 59

Enter the veteran s social security number or the original VA loan number. Both fields are not required concurrently. The veteran s date of birth is the only required field on this page. Enter the veteran s date of birth in a two digit month, four digit year format. Click Submit. If the veteran has an active VA loan then WebLYG will return the final processing step page. If the veteran does not have an active VA loan, then it will return an error message. If you receive an error message, then check the Prior Loan Validation for an active VA loan. If you are unable to locate an active VA loan in WebLYG then contact the Regional Loan Center of jurisdiction for assistance in obtaining the correct active record for the veteran. 60

If an active VA loan is located in WebLYG will prompt the user to review the loan information. AFR s VA sponsor id number must be entered. AFR Lender ID: 5551980000. Review these items for accuracy. AFR Lender ID (Note: For Retail, AFR will be assigned as the Lender; Wholesale, AFR will be listed as the Sponsor Lender) Property Address Veteran Name If these items are correct, then click submit. 61

Once an IRRRL is ordered successfully, a summary page will be displayed. A successfully ordered message will appear at the top of the page. 62

Ordering a VA Appraisal VA Appraisals must be obtained in WebLYG for the LINs. The first step in ordering the VA Appraisal is logging into WebLYG. After logging into WebLYG, select the function. There are two links to the Request Appraisal page. Scroll the cursor over the Loan Link in the top menu which will activate the drop down menu, or there is the function to click on Request Appraisal link in the workspace area. 63

Select the Appraisal Type under the LAPP Lender Appraisal Processing Loans. Select Submit. ****Note: IRRRLs cannot be submitted with an appraisal! AFR requires an AVM that is ordered through DataVerify and paid by AFR. An IRRRL with an appraisal will be structured as a Regular Refinance Loan. 64

At the Verify Property Address screen, please enter the address of the property, and click on the Verify button. The verify property address checks the address, which was entered, against the United States Postal Service (USPS) mailing address record. If the property address entered does not match a USPS address, the system will return an error screen, stating that no match was found. If you receive this error message, please double check the address information entered to ensure no input errors were made. If the address is correct, please select close window icon to proceed. Note: VA guarantees the actual physical address of the property. USPS mailing addresses and physical addresses do not always match. 65

Carefully review the terms of responsibility. Click the acceptance of responsibility box, indicating that you agree and wish to submit the request for appraisal (VA Form 26-1805). Click submit to complete the appraisal request. 66

Eligible Properties & VA Appraisals 67

Eligible Properties Owner Occupied Primary Residences* Note: Condos and attached PUDs must be VA approved. VA approved condo s can be found by name, state, county and Regional Loan Center through the Veteran s Information Portal Condo PUD Search. *Defined as: PUDs, Approved VA Condos, Manufactured Housing (Singlewide, Doublewide, Triplewide), Attached and Detached 68

Ineligible Properties 3-4 Units Investment Properties (with the exception to IRRRLs) Second Homes Non-Approved Condominiums New Construction Any property in a Coastal Barrier area 69

Appraisals VA Appraisals MUST be ordered by AFR s AMD (Appraisal Management Desk) for the Retail Division. For the AFR Wholesale Division (TPO, WS, TF and C), the client will order the appraisal directly with VA. The appraisals must name AFR and must reflect AFR s VA ID #. AFR is responsible for the NOV (Notice of Value) to be completed by the VA SAR. If a loan is submitted with a VA appraisal, the appraisal will be accepted to proceed to an underwriting (the appraisal is still required to be reviewed for value and guideline requirements by an AFR SAR (Staff Appraisal Reviewer) if the named company on the appraisal is a VA Automatic Lender. The Set-Up department will be responsible to confirm this information and note the system. The AFR UW will contact the AMD to request the transfer of both the appraisal and LIN # to AFR. If the appraisal in the file is not a VA appraisal or in the name of a VA Automatic Lender, the appraisal will not be permitted to proceed and AFR will order an appraisal directly with the VA. ****Note: IRRRLs cannot be submitted with an appraisal! AFR requires an AVM that is ordered through DataVerify and paid by AFR. An IRRRL with an appraisal will be structured as a Regular Refinance Loan. 70

Manufactured Housing 71

Permitted Manufactured homes in a condominium project are not permitted All manufactured housing must comply with the following: Be constructed after June 15, 1976, in conformance with the Federal Manufactured Home Construction and Safety Standards, as evidenced by an affixed certification label in accordance with 24 CFR 3280.11 ( Manufactured homes produced prior to this date are ineligible for financing) Be classified as real estate (but not treated as real estate for purposes of state taxation) The mortgage must cover both the manufactured unit and its site and shall have a term of not more than 30 years from the date amortization begins Built and remains on a permanent chassis Designed to be used as a dwelling with a permanent foundation, and the finished grade elevation beneath the manufactured home, or if a basement is used, the grade beneath the basement floor shall be at or above the 100-year return frequency flood elevation Have a floor area of not less than 400 feet Have an engineer certificate completed by a licensed professional engineer or registered architect, who is licensed/registered in the state where the manufactured home is located When located in a flood zone must have an acceptable elevation certificate that is based on the finished construction and prepared by a state licensed/registered engineer or land surveyor and indicates that the finished grade beneath the manufactured home shall be at or above the 100-year return frequency flood elevation. An Engineer s Certification on Foundation Compliance with the PFGMH (Permanent Foundations Guide for Manufactured Housing) is required for all manufactured housing units and must be: completed by a licensed professional engineer or registered architect, who is licensed/registered in the state where the manufactured home is located site specific and contain the engineer s or registered architect s signature, seal, and/or state license/certification number. In states where seals are issued, the seal must be on the certification contained in both the lender s loan file and the insuring binder when submitting to FHA Note: An Engineer s Certification on Foundation Compliance is not required in the loan file or insuring binder for: Any VA-to- VA transaction provided that no modifications have been made to the foundation or structure from the date of the effective certification. Note: AFR will require a certification from the borrower stating if there has been any modifications and/or improvements to the existing structure. If there is any indication of modifications and/or improvements, AFR will require an engineer certification. 72

Notice of Value (NOV) Every appraisal made for VA purposes must be reviewed either by the lender's VA authorized staff appraisal reviewer (SAR) under the Lender Appraisal Processing Program (LAPP), or a VA staff appraiser in order to: Confirm that the photographs accurately reflect the appraiser's description of the subjects and comparable properties Verify that the appraisal report is fully complete, clear and prepared according to industry accepted appraisal techniques and VA instructions Determine that the appraiser's methodology is appropriate and that the appraiser's conclusions are consistent, sound, supportable, logical, and based upon data in the appraisal report Determine, through use of reasonably available information, that the appraiser's value recommendation and other conclusions are consistent with those in similar cases recently processed Identify all property related conditions and requirements that must be satisfactorily resolved before the property can become the security for a VA guaranteed loan, and issue a notice of value Under LAPP, the lender's VA authorized staff appraisal reviewer (SAR) must complete the standard notice of value form in TAS, or on: The lender's corporate letterhead, or Attached to a statement on that letterhead which references it 73

Eligible Loan Programs VA Loans VA Interest Rate Reduction Loan (IRRRL) 74

Eligible Loan Terms Fully Amortizing Fixed 10 Year 15 Year 20 Year 25 Year 30 Year Note: ARMs not permitted 75

Maximum Loan Amounts VA maximum loan amounts can be found here: http://www.benefits.va.gov/homeloans/documents/docs/2013_county_loan_limits.pdf ***The 2013 limit is $417,000 for all counties other than those listed in the chart located at the link above*** Note: The following factors may also impact the maximum loan amount and maximum LTV/CLTVs permitted: Co applicant that is not the veteran's spouse Amount of entitlement available for use by the Veteran Note: VA IRRRL s must use VA Form 26-8923, IRRRL Worksheet, to calculate the maximum loan amount **IMPORTANT AFR HAS NO MINIMUM LOAN AMOUNT** 76

Purchase VA base loan amount cannot exceed 100%/100%* Note: Total loan amount (base loan amount plus VA funding fee) cannot exceed county loan limits. The loan amount may include the VA funding fee but no other fees and charges or discount points may be included in the loan. *Note: The maximum LTV/CLTV for all Identity of Interest Transactions is 85%/85% with the exception of: Family members buying other family member's principal residence (Documentation verifying that the seller's mortgage is in good standing is required. If the seller's mortgage is in default, an identity of interest transaction is not allowed.) Builder's employee buying one of builder's homes as principal residence Tenant purchasing home he/she rented for six months preceding contract If the Buyer and Seller are related in any way, documentation verifying that the seller's mortgage is in good standing is required. If the seller's mortgage is in default, an identity of interest transaction is not allowed. 77

Property Flipping AFR Overlays- VA Purchases AFR does not accept property flipping and requires the contract to be executed by all parties at least 91 days or after the last transfer of the deed: For escrow (wet) states the 91 days starts from the date of the recording of the deed. For dry states the 91 days starts from the date of the deed execution. Any non-disclosure state transaction sold within 12 months will require a full 2 nd appraisal: A non-disclosure state is a state that does not disclose the property sale value Non-disclosure states- AK, ID, IN, KS, LA, ME, MS, MO, MT, ND, NM, TX, UT, and WY 78

Regular Refinance VA base loan amount cannot exceed 100%/100% Definition: A VA Regular Refinance is refinancing of an existing 1 st mortgage of any type (VA, FHA, USDA, Conventional, private, etc.). If the applicant has a 2 nd mortgage or a HELOC being paid off, the 2 nd lien must be purchase money mortgage. The HELOC cannot have any draws within the last 12 months up to $1000. No other liens or debts can be paid from this loan (same definition as a FHA Rate and Term ). Note: If the 2nd mortgage does not meet these requirements, the transaction cannot be considered a Regular Refinance and must follow the Cash Out Refinance guidelines below. Additional Guidelines: The total loan amount (base loan amount plus VA funding fee) cannot exceed county loan limits. The loan amount may include the funding fee and other allowable fees and charges and discount points. The maximum LTV/CLTVs listed are the maximums permitted by AFR VA policy; however, not all Veterans will be eligible for maximum financing. The LTV and CLTV limits are calculated using base loan amounts and do not include VA funding fee. The maximum cash back on a VA Regular Refinance is $500.00. Housing History = 0x30 history in the last 12 months. 79

Cash-Out Refinance VA base loan amount cannot exceed 90%/90% Definition: A Cash-Out Refinance is refinance of existing mortgage lien(s) of any type (VA, FHA, USDA, Conventional, private, etc.); and/or for the purpose of debt consolidation refinance or cash back. The lien(s) being paid off may be: Liabilities (revolving, installment, etc.) current or delinquent; and Derogatory credit (collection accounts, chargeoffs, taxes, judgments, etc. ); and, Any type of mortgage (VA, FHA, USDA, Fannie, Freddie, private,1 st lien, 2 nd lien, HELOC, etc.). Loan proceeds beyond the amount needed to pay off the lien(s) may be taken as cash by the borrower for any purpose acceptable to the Underwriter up to the maximum amount of $100,000. Additional Guidelines The Total loan amount (base loan amount plus VA funding fee) cannot exceed county loan limits. Only the VA funding fee can be added to increase the loan amount. The loan amount may include the funding fee and other allowable fees and charges and discount points. Allowable fees and charges and discount points* may be paid from cash proceeds of the loan. *Note: Any discount points must be typical and customary to the market. Underwriter must ensure that the discount points are reasonable for the loan amount. The Maximum LTV/CLTVs listed are the maximums permitted by AFR VA policy; however, not all Veterans will be eligible for maximum financing. The LTV and CLTV limits are calculated using base loan amounts and do not include VA funding fee. Housing History = 0x30 history in the last 12 months. 80

VA IRRRL (Interest Rate Reduction Loan) Definition: An IRRRL is a VA-guaranteed loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower principal and interest payments than the existing VA loan. An IRRRL cannot be used to take equity out of the property or pay off debts, other than the VA loan being refinanced. The borrower cannot receive cash proceeds from the loan, except for minor adjustments at the closing not to exceed $500. Note: If the new monthly payment (PITI) increases by more than 20% or more, the loan must be full income/credit qualifying and the UW must include a certification that the veteran qualifies for the new monthly payment which exceeds the previous payment by 20% or more. Any allowable fees and charges, including closing cots from the Itemized Fees and Charges list, the funding fee and the lender s flat charge may be included in the loan amount. However, while the borrower may pay any reasonable amount of discount points in cash, no more than 2 discount points can be included in the loan amount. An IRRRL must have a AVM in the file pulled by AFR. AFR will pull a Property Verify AVM through DataVerify. If the AVM results come in unfavorably or unavailable, a DU Property Inspection 2055 will be acceptable from the AMC the account is signed up for (Streetlinks, Nationwide or LandGorilla). If a drive-by report is ordered and received, that value will always be used to calculate the LTV. It is not permitted to use the higher of the drive-by or AVM. Note: AFR s minimum confidence level permitted on an AVM is 80%. Housing History = 0x30 history in the last 12 months. The maximum loan term is the original term of the VA loan being refinanced plus 10 years, but not to exceed 30 years and 32days. For example, if the old loan was made with a 15 year term, the term of the new loan cannot exceed 25 years. 81

IRRRL vs. Cash-Out Feature IRRRL Cash-out Refinancing Purpose To refinance an existing VA loan at a lower interest rate To pay off lien(s) of any type - can also provide cash to borrower Interest Rate Rate must be lower than on existing Any negotiated rate VA loan (unless existing loan is an ARM) Monthly Payment Amount Payment must be lower than that on an existing VA loan (unless the ARM is being refinanced, a term is shortened, or energy efficiency No requirement Discount Points Maximum Loan Maximum Guaranty improvements are being included) Reasonable points can be paid - only two of these points can be included in the loan amount Existing VA loan balance, plus allowable fees and charges, plus up to two discount points, plus the cost of any energy efficiency improvements, plus the VA funding fee Guaranty is at least 25 percent in all cases (See section 1, subsection h of this chapter) Reasonable points can be paid - if paid from loan proceeds 100 percent of the reasonable value of the property indicated on the NOV, plus the cost of any energy efficiency improvements, plus the VA funding fee Maximum guaranty is the same as for purchases 82

IRRRL vs. Cash-Out continued Feature IRRRL Cash-out Refinancing Entitlement Veteran re-uses the entitlement used on the existing VA loan - the IRRRL does not impact the amount of entitlement the veteran has in use Must have sufficient available entitlement - if existing VA loan on the same property is being refinanced, entitlement can be Fees and Charges in the Loan Cash to Borrower Lien/Ownership Refinance of Other Liens Maximum Loan Term Occupancy All allowable fees and charges, including up to two discount points, may be included in the loan Not permitted restored for the refinance Allowable fees and charges and points may be paid from the loan proceeds Borrower can receive cash for any purposes acceptable to the lender Must be secured by first lien - veteran Must be secured by first lien - must own property veteran must own property Cannot refinance other liens - can Can refinance any type of lien(s) only refinance the existing VA loan Existing VA loan term plus 10 years, 30 years + 32 days not to exceed 30 years + 32 days Veteran or spouse of an active duty Veteran or spouse of an active duty servicemember must certify to prior servicemember must certify as to occupancy intent to occupy Appraisal No appraisal is required Appraisal is required Credit No underwriting is required except in Full credit information and Underwriting certain cases underwriting are always required Automatic Authority All lenders can close IRRRLs automatically, except if the loan being refinanced loan is 30 days or more past due, prior approval is always required Only lenders with automatic authority can close these loans automatically Law 38 U.S.C. 3710(a)(8) 38 U.S.C. 3710(a)(5) 83

VA IRRRL Reminders A VA IRRRL must be for the same property that is secured on the loan to be refinanced. The Veteran must own the home securing the loan to be refinanced The Veteran does not have to be currently occupying the property. The occupancy requirement can be satisfied by certifying prior occupancy. A first mortgage and closing costs (allowable) can be paid off/rolled into the VA IRRRL. However, a VA IRRRL can not be used to pay off a 2 nd mortgage or any other lien(s). Maximum cash back permitted to the Veteran is $500.00 The new loan must be at a lesser rate then the old VA loan except when refinancing an existing ARM with a new fixed mortgage. The term of the IRRRL may not exceed the original loan term by more than 10 years. This is subject to a maximum term of 30 years and 32 days. For example, if the existing VA loan was made with a 15 year term the new VA IRRRL term can not exceed 25 years. If the Veteran dies, regardless of cause of death, the unmarried surviving spouse as a previous co owner is considered a Veteran for the purposes of refinancing under the VA IRRRL program. This does not apply to spouses who were not obligated on the initial loan. For all VA IRRRL loans, the payment (P&I) must be less than the payment of the VA loan being refinanced unless: An ARM is being refinanced by a fixed rate VA mortgage The term of the VA IRRRL is shorter than the term of the previous VA loan Energy efficient improvements are included on the VA IRRRL 84

Net Tangible Benefit ( NTB ) 85

AFR s NTB Policy AFR requires a net tangible benefit on all refinances, regardless of the program. The Underwriter must specifically notate the VA Loan Summary with the net tangible benefit to the borrower at the time of loan decision. The Underwriter must ensure that the loan maintains a net tangible benefit through loan closing. AFR s NTB Requirement For all refinances, the borrower s total costs must be recouped from the monthly savings within 36 months from the date of closing. Note: Massachusetts has a requirement for the borrower to recoup the total costs within 24 months from the date of closing. 86

*Colorado, Illinois, Maryland, Massachusetts and South Carolina have state specific Net Benefit Worksheets. The Underwriter must use these state specific forms. See below: Colorado: http://www.afrwholesale.com/uploads/colorado_tangible_net_benefit_disclosure.pdf Illinois: http://www.afrwholesale.com/uploads/il-nm-ok_tangnet_benefit_worksheet.pdf Maryland: http://www.afrwholesale.com/uploads/maryland_net_tangible_benefit_worksheet.pdf Massachusetts: http://www.afrwholesale.com/uploads/website/a252/s1/mass_borrower_interest_worksheet.pdf South Carolina: http://www.afrwholesale.com/uploads/sc_borrowertangible%20net_benefit_worksheet.pdf All Other States must use the Multi-State Borrower Benefit Worksheet: http://www.afrwholesale.com/uploads/multi_state_borrower_benefit_worksheet.pdf 87

*Colorado, Illinois, Maryland, Massachusetts and South Carolina have state specific Net Benefit Worksheets. The Underwriter must use these state specific forms. See below: Colorado: http://www.afrwholesale.com/uploads/colorado_tangible_net_benefit_disclosure.pdf Illinois: http://www.afrwholesale.com/uploads/il-nm-ok_tangnet_benefit_worksheet.pdf Maryland: http://www.afrwholesale.com/uploads/maryland_net_tangible_benefit_worksheet.pdf Massachusetts: http://www.afrwholesale.com/uploads/website/a252/s1/mass_borrower_interest_worksheet.pdf South Carolina: http://www.afrwholesale.com/uploads/sc_borrowertangible%20net_benefit_worksheet.pdf All Other States must use the Multi-State Borrower Benefit Worksheet: http://www.afrwholesale.com/uploads/multi_state_borrower_benefit_worksheet.pdf 88

VA Allowable & Non Allowable Fees 89

VA Allowable and Non-Allowable Fees The VA Home Loan program involves a veteran s benefit. VA Policy has evolved around the objective of helping the veteran to use his or her home loan benefit. Therefore, VA regulations limit the fees that the Veteran can pay to obtain a loan. Each Veteran must pay a funding fee to VA at time of loan closing. The VA Regional Office determines which fees are allowable to be paid by the Veteran or are not allowable. The veteran can pay a maximum of: reasonable and customary amount for any and all of the Itemized Fees and Charges designated by VA, plus a 1% flat charge by the lender, plus reasonable discount points The VA Lender Handbook, Chapter 8, Borrower Fees and Charges and the VA Funding Fee, for further information. http://www.benefits.va.gov/warms/docs/admin26/handbook/chapterlendershanbookchapter8.pdf 90

Fees and Charges the Borrower can pay The veteran may pay any or all of the following itemized fees and charges in amounts that are reasonable and customary: Appraisal Fee (for both 1 st and 2 nd appraisals) Note: The Veteran can pay for a 2 nd appraisal ONLY if he/she is requesting reconsideration of value. If the 2 nd appraisal is required by any other party, the Veteran cannot pay for it. Compliance Inspections Recording Fees Credit Report Pre-Paid Items (taxes, assessments, title insurance) Hazard Insurance Flood Insurance, if required Flood Certificate Survey Title Examination Title Insurance Special Mailing Fees (for refinancing loans ONLY) VA Funding Fee MERS Fee Fees authorized by VA (Note: additional fees attributable to local variances may be charged to the Veteran only if specifically authorized by VA. The lender may submit a written request to the Regional Loan Center for approval if the fee is normally paid by the borrower. 1% Origination Charge (Note: Calculate the one percent on the principal amount after adding the funding fee to the loan, if the funding fee is paid from loan proceeds) 91

Fees that cannot be charged to a Veteran as an Itemized Fees and Charges The lender must cover any cost of these items out of its flat fee. These flat fees are included in the 1% Origination Charge allowed. See following slides on how to calculate. Lender s Appraisals Lender s inspections (except in construction loan cases) Loan closing or settlement fees Document preparation fees Conveyance fees Attorney services other than for title work Photographs Interest rate lock-in fees Postage and other mailing charges, stationary, telephone calls, and other overhead Amortization schedules, pass books, and membership fees or entrance fees Escrow fees or charges Notary fees Commitment fees or marketing fees of any secondary purchaser of the mortgage and preparation and recording of assignment of mortgage to such purchaser Trustee s fees or charges Loan application or processing fees Fees for preparation of the Truth-in-Lending disclosure statement Fees charged by loan brokers, finders or other third parties whether affiliated to the lender or not, and Tax service fees Note: Whenever the charge relates to services performed by a third party, the amount paid by the borrower must be limited to the actual charge of that third party. **The VA cannot provide an exhaustive list of unallowable itemized fees and charges because the types of fees vary widely by lender and area of the country. If an origination fee is not charged, the lender may assess other fees as long as the aggregate amount does not exceed 1% of the loan. 92

Fees and Charges the Borrower cannot pay A veteran cannot by charged a duplicate fee for services that have already been paid for by another party Example: One veteran attempts to purchase a house and an appraisal and NOV is completed. Veteran decides not to proceed with the purchase. Another veteran is now attempting to purchase the same house. The new Veteran cannot be charged for a new appraisal. Attorney s fees charged by the lender Brokerage fee(s) fees or commissions charged by a real estate agent or broker in connection with the VA loan Prepayment Penalties HUD/FHA Inspection fees for builders 93

1% Origination Charge Fee VA only permits the Veteran to pay a maximum 1% origination charge that includes the following: Lender s Appraisals Lender s inspections (except in construction loan cases) Loan closing or settlement fees Document preparation fees Conveyance fees Attorney fees for services other than for title work* Photographs Interest rate lock-in fees Postage and other mailing charges, stationary, telephone calls, and other overhead Amortization schedules, pass books, and membership fees or entrance fees Escrow fees or charges Notary fees Commitment fees or marketing fees of any secondary purchaser of the mortgage and preparation and recording of assignment of mortgage to such purchaser Trustee s fees or charges Loan application or processing fees Fees for preparation of the Truth-in-Lending disclosure statement Fees charged by loan brokers, finders or other third parties whether affiliated to the lender or not, and Tax service fees *VA does not intend to prevent the veteran from seeking independent legal representation. Therefore, the veteran can independently retain an attorney and pay a fee for legal services in connection with the purchase of a home. Closing documents, should clearly indicate that the attorney s fee is not being charged by the lender, but is being paid by the veteran as part of an independent arrangement with an attorney. 94

Calculating the 1% Origination Charge For Lender Paid Compensation: Line 803/Block A PLUS all of the fees charged on the loan from the list on the previous slide CANNOT be more than 1% For Borrower Paid Compensation: Line 801/Block A PLUS all of the fees charged on the loan from the list on the previous slide CANNOT be more than 1% If the veteran did not finance the funding fee in the loan amount the 1% is calculated off of the base loan amount. If the veteran financed the funding fee in the loan amount the 1% is calculated off of the total loan amount (base + funding fee). Note: For IRRRLs, this fee may not exceed 1% of the existing VA loan balance of the loan being refinanced. You must use the VA Form 26-8923, IRRRL Worksheet, for the calculation. 95

Maximum Allowable VA Appraisal Fees fees that can be charged to the Veteran. PEach VA Regional Loan Center has a maximum allowable for appraisal inspection lease refer to the Nationwide Maximum Allowable VA Appraisal Fee Schedule that mandates the allowable cost a VA appraiser may charge. Note: All VA repair and/or completion certifications have a maximum charge to Veteran of $100. 96

Seller Concessions 4% Allowable concessions include: Payment of the buyer's VA funding fee Prepayment of the borrower s property taxes and hazard insurance Payoff of credit balances or judgments on behalf of the buyer Gifts such as a television set or microwave oven Payment of points above what is appropriate to the market not standard discount points * *Example: If the market dictates an interest rate of 7 ½ percent with 2 discount points, the seller s payment of the 2 discount points would not be a seller concession. If the seller paid 5 points, 3 of these points would considered a seller concession. All of the other closing costs (title insurance, title exam, MERS, appraisal, origination fee, etc.) can be paid by the seller and do not count towards the 4% concession Note: Dollar for dollar reduction of qualifying sales price required for all concessions over 4% of value 97

Escrow Waivers Not Permitted All loans must escrow Taxes & Insurance (HOI and Flood) 98

HUD-1s VA requires that all HUD-1s have the itemization/breakdown on the fees listed from the 800 series as well as the 1100 series. This must be signed and dated by the veteran. This also applies to VA purchase transactions where seller concession s apply. All purchase transaction HUD-1s must have the breakdown on what the seller concession s are covering. Note: Seller Concessions can not cover the cost of nonallowables on VA HUD-1s. 99

Example of VA HUD-1 Requirements VA Purchase Transaction where there are $4,748 in seller concession s. Settlement agent provided itemization reflecting what these seller concessions are covering. 100

Example of VA HUD-1 Requirements The itemization on HUD-1s for the 800 series must show what the fee is, who is paying for the fee and to whom the fee is going to regardless of transaction type. 101

Example of VA HUD-1 Requirements The itemization on HUD-1s for the 1100 series (settlement fees) is required on all VA HUD-1s regardless of transaction type. 102

20 Q&A s on VA Loans 103