© 2012 Rockwell Publishing Financing Residential Real Estate Lesson 12: VA-Guaranteed Loans

© 2012 Rockwell Publishing Introduction This lesson will cover: characteristics of VA loans eligibility requirements VA guaranty VA loan amounts underwriting guidelines for VA loans

© 2012 Rockwell Publishing Introduction VA loan program was established to help veterans finance purchase of their homes. Affordable loans. Advantages over conventional financing.

© 2012 Rockwell Publishing Characteristics of VA Loans VA-guaranteed loan: made by institutional lender, but portion of loan is guaranteed by Department of Veterans Affairs. Protects lender against losses from default.

© 2012 Rockwell Publishing Characteristics of VA Loans VA loans may be used to finance purchase or construction of one- to four-unit residence. Can’t be used for investor loans. Veteran must occupy home.

© 2012 Rockwell Publishing Characteristics of VA Loans No downpayment required (100% financing). No maximum loan amount set by VA. No maximum income limits. Less stringent qualifying standards. Can be fixed-rate loan or ARM. No mortgage insurance required. No reserves after closing required.

© 2012 Rockwell Publishing Characteristics of VA Loans 1% of amount financed to cover cost of making loan only; no other origination fees. No prepayment penalties. Can be assumed by creditworthy buyer, veteran or non-veteran. Forbearance for veterans in financial crisis.

© 2012 Rockwell Publishing Characteristics of VA Loans Funding fee: amount borrowers must pay VA to defray administrative costs of loan program. Instead of mortgage insurance premium. Percentage of loan amount. Paid at closing or financed with loan amount. Funding fee

© 2012 Rockwell Publishing Characteristics of VA Loans Regular military veteran: funding fee is 2.15% of loan amount, unless veteran makes downpayment of 5% of more: Downpayment > 5% but < 10%: funding fee is 1.5% Downpayment 10% or more, funding fee is 1.25% Fees slightly higher for Reserves or National Guard members Funding fee

© 2012 Rockwell Publishing Characteristics of VA Loans Some exempt from funding fee requirement. Veterans entitled to receive VA compensation for service-related disabilities. Surviving spouses of veterans who died in service or from service-related disabilities. Funding fee

© 2012 Rockwell Publishing Eligibility for VA Loans Eligibility for VA loans based on length of active duty service in U.S. armed forces. Minimum requirement: ranges from 90 days to 24 months depends on whether service was during wartime or peacetime period Check with VA to determine eligibility.

© 2012 Rockwell Publishing Eligibility for VA Loans Veterans discharged for service-connected disability: no minimum active duty service. Disabled veterans

© 2012 Rockwell Publishing Eligibility for VA Loans Dishonorable discharge will prevent eligibility. Veterans whose discharge was neither honorable nor dishonorable are eligible. Dishonorable discharge

© 2012 Rockwell Publishing Eligibility for VA Loans Reserves or National Guard for at least six years: eligible for VA loan no minimum active duty service requirement Reserves or National Guard

© 2012 Rockwell Publishing Eligibility for VA Loans Certificate of Eligibility: issued by VA, used by veteran to apply for VA loan. Veteran must submit most recent discharge/separation papers. Lender can usually obtain certificate online. Certificate of Eligibility

© 2012 Rockwell Publishing Eligibility for VA Loans Surviving spouse may be eligible if veteran: died on active duty died of service-related injuries was listed as missing in action is prisoner of war Eligibility of spouse

© 2012 Rockwell Publishing Summary Characteristics and Eligibility VA-guaranteed loan Owner-occupancy requirement Forbearance Funding fee Minimum service requirement Certificate of Eligibility

© 2012 Rockwell Publishing VA Guaranty Essential feature of VA loans is that they’re guaranteed by U.S. government. Significantly reduces lender’s risk of loss if borrower defaults.

© 2012 Rockwell Publishing VA Guaranty Guaranty amount: portion of loan covered by VA guaranty. Guaranty amount for loan depends on: loan amount maximum guaranty amount in county where home is located Guaranty amount

© 2012 Rockwell Publishing VA Guaranty Began in World War II: guaranty amount was $4,000. Over the years: increased periodically to reflect increasing housing costs. Eventually: guaranty varied with loan amount, up to a specified maximum. Maximum guaranty amount

© 2012 Rockwell Publishing Maximum Guaranty Amount Now: VA maximum guaranty tied to conforming loan limits for conventional loans. Increases automatically when conforming loan limits increase. Amount may change each year—check with VA for most current figures. Tied to conforming loan limits

© 2012 Rockwell Publishing Maximum Guaranty Amount Maximum VA guaranty in most areas: 25% of Freddie Mac conforming loan limit for one-unit residence 2011 Freddie Mac’s conforming loan limit for one-unit residence: $417,000. So 2011 maximum VA guaranty amount in most areas is 25% of $417,000, or $104,250. $417,000 x.25 = $104,250 Maximum in most areas

© 2012 Rockwell Publishing VA Guaranty Guaranty amount available in particular transaction depends on loan amount. Guaranty based on loan amount

© 2012 Rockwell Publishing VA Guaranty Loan amountGuaranty amount Up to $45,000: 50% of loan amount $45,001–$56,250:$22,500 $56,251–$144,000:40% of loan amount, up to $36,000 $144,001–$417,000:25% of loan amount Over $417,000:25% of loan amount, up to county max. Guaranty based on loan amount

© 2012 Rockwell Publishing VA Guaranty Entitlement: guaranty amount available for particular veteran to use. Doesn’t expire. Available until used by veteran or eligible surviving spouse. Guaranty entitlement

© 2012 Rockwell Publishing VA Guaranty Restoration of entitlement: restored if veteran sells home and repays loan available again for veteran to use restored if loan paid off when veteran refinances restored entitlement applied to new loan Restoration of entitlement

© 2012 Rockwell Publishing VA Guaranty Paying off loan without selling home: can use restored entitlement to purchase another home only allowed to do this once must occupy new home (owner- occupancy requirement) Restoration of entitlement

© 2012 Rockwell Publishing VA Guaranty VA guaranty doesn’t necessarily relieve borrower of personal liability for loan. Veteran may be liable: after default after loan assumed (for older loans) to VA, to lender, or to both Veteran’s liability

© 2012 Rockwell Publishing Veteran’s Liability Liability to VA: Veteran may have to reimburse VA for default if foreclosure sale results in loss. For loan closed on or after January 1, 1990: veteran required to repay VA only if guilty of fraud, misrepresentation, or bad faith. Liability after default

© 2012 Rockwell Publishing Veteran’s Liability When veteran is required to repay VA: amount owed is delinquent federal debt federal income tax refunds can be applied to it federal pay can be garnished veteran not eligible for any federal loans until arrangements to repay are made Liability after default

© 2012 Rockwell Publishing Veteran’s Liability Even when veteran not required to repay VA (no fraud or bad faith): no restoration of entitlement unless veteran makes arrangements to repay Liability after default

© 2012 Rockwell Publishing Veteran’s Liability Liability to lender: veteran may be liable for amount of foreclosure not covered by guaranty state laws restricting deficiency judgments still apply Liability after default

© 2012 Rockwell Publishing Veteran’s Liability VA loan can be assumed by any creditworthy buyer. May be veteran or non-veteran. Approval from VA or lender required: if loan closed on or after March 1, 1988 to release original borrower from liability Liability after assumption

© 2012 Rockwell Publishing Veteran’s Liability Approval and original borrower released from liability if: buyer meets VA underwriting standards loan is current buyer assumes all of original borrower’s loan obligations Liability after assumption

© 2012 Rockwell Publishing Veteran’s Liability Liability after assumption VA loan originated before March 1, 1988 can be assumed without consent of lender or VA. Original borrower remains liable unless consent obtained.

© 2012 Rockwell Publishing VA Guaranty Veteran’s entitlement not automatically restored after assumption unless assumptor/buyer: is eligible veteran has entitlement equal to or greater than loan’s guaranty amount agrees to substitute own entitlement for original borrower’s substitution of entitlement requested from VA Substitution of entitlement

© 2012 Rockwell Publishing VA Guaranty For VA loan assumed by non-veteran: full entitlement can’t be restored. Veteran may still have remaining entitlement. Also called partial entitlement. Can be used to obtain another VA loan. Remaining entitlement

© 2012 Rockwell Publishing VA Guaranty New loan amount $144,000 or less: subtract entitlement used on old loan from $36,000 New loan amount over $144,000: subtract entitlement used on old loan from maximum guaranty amount in county most areas in 2011, usually $104,250 Remaining entitlement

© 2012 Rockwell Publishing VA Guaranty Example: Sales price for new home: $210,000 Maximum guaranty in county: $104,250 Entitlement used on old loan in 1996: $50,750 $104,250 County maximum guaranty - 50,750 Previously used entitlement $53,500 Remaining entitlement Remaining entitlement

© 2012 Rockwell Publishing VA Guaranty Co-ownership: if both eligible veterans, maximum guaranty is not increased if veteran buys home with non-veteran other than spouse, guaranty only covers veteran’s half of loan Entitlement and co-ownership

© 2012 Rockwell Publishing VA Guaranty Refinancing with VA loan: VA, conventional, FHA, seller financing other liens such as tax or judgment liens for non-VA loan, guaranty entitlement is used cash from proceeds allowed cannot exceed 100% of appraised value normal VA underwriting standards apply Refinancing with VA loan

© 2012 Rockwell Publishing VA Guaranty Streamline refinancing: refinancing existing VA loan just to take advantage of lower interest rates, or replace ARM with fixed-rate loan. Loan amount limited to old loan balance, closing costs, up to two discount points, funding fee, and cost of energy-efficient improvements. Underwriting not required. Refinancing with VA loan

© 2012 Rockwell Publishing Summary VA Guaranty Guaranty amount Maximum guaranty amount Entitlement Restoration of entitlement Remaining entitlement Substitution of entitlement Refinancing Streamline refinancing

© 2012 Rockwell Publishing VA Loan Amounts VA doesn’t set maximum loan amount. Loan can’t exceed appraised value of property. VA-approved appraiser appraises property, VA issues Notice of Value (NOV). Sales price exceeds appraised value: borrower must make up difference out of own funds. Loan amount can’t exceed value

© 2012 Rockwell Publishing VA Loan Amounts Other restrictions on loan amount come from lender, not VA. Lenders: guaranty amount equal to at least 25% of loan amount. Won’t make no-downpayment VA loan for more than 4 times guaranty amount. Larger loan, downpayment required. Guaranty + downpayment must equal at least 25% of price. Lender’s 25% rule

© 2012 Rockwell Publishing VA Loan Amounts Sales price: $435,000 Maximum VA guaranty in county: $104,250 Loan above $417,000 needs downpayment $435,000 Sales price x.25 $108,750 25% of price - 104,250 Guaranty $4,500 Downpayment required Making downpayment

© 2012 Rockwell Publishing VA Loan Amounts Example, cont’d: $435,000 Sales price - 4,500 Downpayment $430,500 Loan amount Making downpayment

© 2012 Rockwell Publishing VA Loan Amounts Veteran can finance part or all of downpayment required by lender if: combined loans don’t exceed NOV buyer qualifies for combined payments second loan is assumable by creditworthy buyer Secondary financing

© 2012 Rockwell Publishing Underwriting Guidelines Two methods of income analysis for VA loans: income ratio method residual income method

© 2012 Rockwell Publishing Underwriting Guidelines VA uses debt to income ratio to analyze income of loan applicant. Ratio generally shouldn’t exceed 41% unless there are compensating factors. Debts with more than 10 payments left are counted as recurring obligations. Income ratio analysis

© 2012 Rockwell Publishing Underwriting Guidelines Residual income analysis: second method used to qualify loan applicant (also called cash flow analysis). Gross monthly income −Taxes, recurring obligations, housing expense Residual income Residual income analysis

© 2012 Rockwell Publishing Underwriting Guidelines 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 size of proposed loan Residual income analysis

© 2012 Rockwell Publishing Underwriting Guidelines VA underwriting standards are merely guidelines, not hard and fast rules. Compensating factors may allow loan approval in spite of weaknesses in application. Compensating factors must be relevant to weaknesses. Compensating factors

© 2012 Rockwell Publishing Underwriting Guidelines Possible compensating factors: excellent long-term credit history conservative use of consumer credit minimal consumer debt long-term employment significant liquid assets sizable downpayment little or no increase in housing expense military benefits Compensating factors

© 2012 Rockwell Publishing Underwriting Guidelines Possible compensating factors, continued: satisfactory previous experience with home ownership high residual income low debt to income ratio tax credits for child care tax benefits of home ownership significant equity in property (for refinancing) Compensating factors

© 2012 Rockwell Publishing Underwriting Guidelines Special rules for approving applicant whose income ratio is over 41%. Ordinarily: lender must submit detailed statement to VA, listing compensating factors. If residual income exceeds minimum by 20% or more: loan can be approved with income ratio over 41% without any compensating factors. Income ratio exceptions

© 2012 Rockwell Publishing Summary Loan Amounts and Underwriting Notice of Value Downpayment Secondary financing Income ratio analysis Residual income analysis Compensating factors