Financing Residential Real Estate Lesson 12: VA-Guaranteed Loans

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

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

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

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

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.

Characteristics of VA Loans Lender may charge flat fee of no more than 1% of amount financed to cover cost of making loan. No prepayment penalties. Can be assumed by creditworthy buyer, veteran or non-veteran. Forbearance extended to veterans in financial difficulties.

Characteristics of VA Loans Instead of mortgage insurance premiums, VA borrowers must pay VA a funding fee to defray administrative costs of loan program.  Funding fee is percentage of loan amount.  Can be paid at closing or financed. Funding fee

Characteristics of VA Loans Regular military veteran: funding fee is 2.15% of loan amount, unless veteran makes downpayment of 5% of more. Reserves or National Guard: funding fee is 2.4% of loan amount, unless vet makes downpayment of 5% of more. Funding fee

Characteristics of VA Loans 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

Eligibility for VA Loans Eligibility for VA loans is based on length of active duty service in U.S. armed forces. Minimum requirement ranges from 90 days to 24 months, depending on whether service was during wartime or peacetime period. Veterans should check with the VA to determine their eligibility.

Eligibility for VA Loans VA determines eligibility. Issues Certificate of Eligibility, which veteran uses to apply for a VA loan. Veteran must submit most recent discharge/separation papers. Lender can usually obtain certificate online. Certificate of Eligibility

Eligibility for VA Loans Surviving spouse may be eligible if veteran was killed in action or died of service-related injuries and spouse has not remarried.  May also be eligible if veteran missing in action or is a prisoner of war. Eligibility of spouse

Summary VA Loan Characteristics and Eligibility  VA-guaranteed loan  Owner-occupancy requirement  No-downpayment loan (100% financing)  Forbearance  Funding fee  Minimum active duty service requirement  Certificate of Eligibility

VA Guaranty Essential feature of VA loans is that they are guaranteed by U.S. government.  Significantly reduces lender’s risk of loss in the event that borrower defaults.

VA Guaranty Guaranty covers only a portion of loan amount. Amount of coverage for a loan is called the guaranty amount. Guaranty amount

VA Guaranty Guaranty covers only a portion of loan amount. Amount of coverage for a loan is called the guaranty amount. Guaranty amount for a loan depends on:  loan amount, and  maximum guaranty amount in county where home is located. Guaranty amount

Maximum Guaranty Amount Now VA maximum guaranty amount is tied to conforming loan limits for conventional loans.  Increases automatically when conforming loan limits increased. Amount may change each year—check with VA for most current figures. Tied to conforming loan limits

Maximum Guaranty Amount Maximum VA guaranty in most areas: 25% of Freddie Mac conforming loan limit for one-unit residence. For 2009, Freddie Mac’s conforming loan limit for a one-unit residence is $417,000. So 2009 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

Maximum Guaranty Amount Higher maximum guaranty amounts apply in high-cost counties. High-cost county: County where median house price is higher than national median. Maximum in high-cost areas

Maximum Guaranty Amount In high-cost county, maximum guaranty is based on median house price in that county. The higher the median house price, the higher the county’s maximum guaranty. But no matter how high prices are in the county, maximum guaranty can’t exceed ceiling.  2009 ceiling: $319,265 Maximum in high-cost areas

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

VA Guaranty Guaranty amount available for a particular veteran to use is called the veteran’s entitlement. Veteran’s entitlement doesn’t expire. Available until used by veteran or unremarried surviving spouse. Entitlement is used, and no longer available, when veteran obtains VA loan and buys house. Guaranty entitlement

Veteran’s Liability Liability to VA If veteran defaults and foreclosure sale results in a loss, VA must reimburse lender. As a general rule, veteran not required to repay VA for amount paid to lender.  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

Veteran’s Liability VA loan can be assumed by any creditworthy buyer. May be veteran or non-veteran. If loan closed on or after March 1, 1988, parties must obtain approval from VA or lender.  Otherwise original borrower remains liable. Liability after assumption

Veteran’s Liability Assumption will be approved and original borrower released if these conditions are met: 1.Buyer meets VA underwriting standards. 2.Loan is current. 3.Buyer assumes all of original borrower’s loan obligations. Liability after assumption

VA Guaranty VA loan can be used to refinance any type of loan. VA, conventional, FHA, seller financing  Can also be used to pay off other liens, such as tax or judgment liens. If refinancing non-VA loan, guaranty entitlement must be used. Refinancing with a VA loan

VA Guaranty Refinancing amount can exceed old loan’s balance, so that veteran also gets cash from loan proceeds. But refinancing can’t exceed: 100% of appraised value, plus funding fee, plus cost of energy-efficient improvements. Normal VA underwriting standards apply. Refinancing with a VA loan

Summary VA Guaranty  Guaranty amount  Maximum guaranty amount  Entitlement  Restoration of entitlement  Remaining entitlement  Substitution of entitlement  Refinancing  Streamline refinancing

VA Loan Amounts Only other restrictions on loan amount come from lender, not VA. Lenders generally want guaranty amount to equal at least 25% of loan amount.  Otherwise hard to sell loan on secondary market. Lender’s 25% rule

VA Loan Amounts So most lenders won’t make no-downpayment VA loan for more than 4 times guaranty amount. For larger loan, downpayment required. Guaranty + downpayment must equal at least 25% of price. Lender’s 25% rule

VA Loan Amounts Example Sales price: $435,000 Maximum VA guaranty in county: $104,250. Lender won’t make loan for more than $417,000 without downpayment. $435,000 Sales price x.25 $108,750 25% of price - 104,250 Guaranty $4,500 Downpayment required Making a downpayment

VA Loan Amounts Example, cont. $435,000 Sales price - 4,500 Downpayment $430,500 Loan amount Making a downpayment

Underwriting Guidelines Lenders use standards established by VA to analyze veteran’s creditworthiness. Two methods of income analysis for VA loans:  income ratio method, and  residual income method.

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

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

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, and  size of proposed loan. Residual income analysis

Summary VA Loan Amounts and Underwriting  Notice of Value  Downpayment  Secondary financing  Income ratio analysis  Residual income analysis  Compensating factors