Real estate finance 9

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RFPPTLesson12.ppt

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Financing Residential Real Estate

Lesson 12:

VA-Guaranteed Loans

Introduction

This lesson will cover:

characteristics of VA loans
eligibility requirements
VA guaranty
VA loan amounts
underwriting guidelines for VA loans

Introduction

VA loan program was established to help veterans finance purchase of their homes:

Affordable loans
Advantages

Note: In these slides, we’ll use “veteran” as a shorthand to include current service members along with those who have completed service.

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.

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.
Loan may also be used for refinancing.

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

1% of amount financed to cover cost
of making loan only; no other origination fees.
Limit on credit report and underwriting fees.
Seller must pay real estate agent’s commission, and any escrow or mortgage broker fee.

Characteristics of VA Loans

No prepayment penalties.
Can be assumed by creditworthy buyer, veteran or non-veteran.
Forbearance for veterans in financial crisis.

Characteristics of VA Loans

Funding fee: amount borrowers must pay VA to defray costs of loan program.

Instead of mortgage insurance premium.
Percentage of loan amount.
Paid at closing or financed with loan amount.

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:

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

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

Characteristics of VA Loans

Seller concessions can’t total more than 4% of property’s appraised value. Includes:

payment of buyer’s funding fee,
prepayment of buyer’s property taxes and insurance,
buydown, and
gifts of household items (furniture, etc.)

Seller concessions

Eligibility for VA Loans

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

Minimum requirement:
24 months continuous active duty, or
full period vet was called to duty (min. 90 - 181 days)
depends on whether service was during wartime or peacetime period
Check with VA to determine eligibility.

Eligibility for VA Loans

Veterans discharged for service-connected disability: no minimum service period.

Disabled veterans

Eligibility for VA Loans

Dishonorable discharge prevents eligibility.

Veterans whose discharge was neither honorable nor dishonorable are eligible.

Dishonorable discharge

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

Eligibility for VA Loans

Certificate of Eligibility: issued by VA; required to apply for VA loan.

Can be obtained online or through mail.

Certificate of Eligibility

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

Summary
Characteristics and Eligibility

VA-guaranteed loan
Owner-occupancy requirement
Forbearance
Funding fee
Minimum service requirement
Certificate of Eligibility

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.

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

Maximum Guaranty Amount

VA maximum guaranty tied to conforming loan limits for conventional loans.

Increases automatically when conforming loan limits increase.
Higher maximums in counties designated as high-cost.

Conforming loan limits

Maximum Guaranty Amount

Maximum VA guaranty in most areas:

25% of Federal Housing Finance Agency conforming loan limit for one-unit residence

FHFA’s current conforming loan limit for one-unit residence: $453,100.

So maximum VA guaranty amount in most areas is 25% of $453,100, or $113,275.

Maximum in most areas

VA Guaranty

Guaranty amount available in particular transaction depends on loan amount.

Guaranty based on loan amount

VA Guaranty

Loan amount Guaranty 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–$453,100: 25% of loan amount

Over $453,100: 25% of loan amount,
up to county max

Guaranty based on loan amount

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

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

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

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

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

VA Guaranty

Co-ownership:

if both borrowers are eligible veterans, maximum guaranty is not increased
if veteran and non-veteran (who aren’t married) buy house, guaranty only covers veteran’s portion of loan

Entitlement and co-ownership

Summary
VA Guaranty

Guaranty amount
Maximum guaranty amount
Entitlement
Restoration of entitlement
Remaining entitlement
Substitution of entitlement

VA Loan Amounts

VA doesn’t set maximum loan amount.

Loan generally 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

VA Loan Amounts

Lender’s 25% rule may effectively impose a loan limit:

guaranty amount must equal at least 25% of loan amount
VA loan for more than 4 times guaranty amount requires downpayment
guaranty + downpayment must equal at least 25% of price.

Lender’s 25% rule

VA Loan Amounts

Sales price: $485,000

Maximum VA guaranty in county: $113,275

Loan above $453,100 needs downpayment

$485,000 Sales price

x .25

$121,250 25% of price

- 113,275 Guaranty

$7,975 Downpayment required

Making downpayment

VA Loan Amounts

Example, cont’d:

$485,000 Sales price

- 7,975 Downpayment

$477,025 Loan amount

Making downpayment

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

Underwriting Guidelines

Most VA underwriting guidelines resemble those used in conventional loans.

Underwriting Guidelines

Underwriter reviews the applicant’s credit report and credit scores.

Application can be rejected on poor credit reputation alone.

No VA minimum credit score, however.

Credit reputation

Underwriting Guidelines

Two methods of income analysis for VA loans:

income ratio method
residual income method

Applicant must qualify under both tests.

Income

Underwriting Guidelines

VA uses debt to income ratio to analyze income of loan applicant.

Ratio generally can’t exceed 41% unless there are compensating factors.
Debt includes PITI, credit cards, and other obligations with more than 10 payments left.

Income ratio analysis

Underwriting Guidelines

Residual income analysis: second method used to qualify loan applicant (also called cash flow analysis).

Gross monthly income

- taxes, recurring obligations,

- monthly shelter expense

= Residual income

Residual income analysis

Underwriting Guidelines

Vet’s residual income or cash flow must satisfy minimum requirement.

Minimum requirement varies according to:

region of the country
family size
size of proposed loan

Residual income analysis

Underwriting Guidelines

Underwriter can make exceptions to income ratio and residual income requirements if compensating factors present.

Compensating factors must be relevant to weaknesses.

Compensating factors

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

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

Underwriting Guidelines

Special rules for approving applicant whose income ratio is over 41%.

Ordinarily: lender must submit statement to VA listing compensating factors.
If residual income exceeds minimum by 20% or more, loan can be approved with income ratio over 41% and without any other compensating factors or explanatory statement.

Income ratio exceptions

Summary
Loan Amounts and Underwriting

Notice of Value
Downpayment
Secondary financing
Income ratio analysis
Residual income analysis
Compensating factors