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Introduction
This lesson will cover:characteristics of VA loanseligibility requirementsVA guarantyVA loan amountsunderwriting guidelines for VA loans
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Introduction
VA loan program was established to help veterans finance purchase of their homes.
Affordable loans.Advantages over conventional financing.
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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.
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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.
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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.
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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.
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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
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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
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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
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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.
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Eligibility for VA Loans
Veterans discharged for service-connected disability: no minimum active duty service.
Disabled veterans
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Eligibility for VA Loans
Dishonorable discharge will prevent eligibility.Veterans whose discharge was neither
honorable nor dishonorable are eligible.
Dishonorable discharge
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Eligibility for VA Loans
Reserves or National Guard for at least six years:
eligible for VA loanno minimum active duty service
requirement
Reserves or National Guard
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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
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Eligibility for VA Loans
Surviving spouse may be eligible if veteran:died on active dutydied of service-related injurieswas listed as missing in actionis prisoner of war
Eligibility of spouse
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SummaryCharacteristics and Eligibility
• VA-guaranteed loan
• Owner-occupancy requirement
• Forbearance
• Funding fee
• Minimum service requirement
• Certificate of Eligibility
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VA Guaranty
Essential feature of VA loans is that they’re guaranteed by U.S. government.
Significantly reduces lender’s risk of lossif borrower defaults.
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VA Guaranty
Guaranty amount: portion of loan covered by VA guaranty.
Guaranty amount for loan depends on:loan amountmaximum guaranty amount in county
where home is located
Guaranty amount
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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
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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
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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
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VA Guaranty
Guaranty amount available in particular transaction depends on loan amount.
Guaranty based on loan amount
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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–$417,000: 25% of loan amount
Over $417,000: 25% of loan amount, up to county max.
Guaranty based on loan amount
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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
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VA Guaranty
Restoration of entitlement:restored if veteran sells home and repays
loanavailable again for veteran to userestored if loan paid off when veteran
refinances restored entitlement applied to new
loan
Restoration of entitlement
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VA Guaranty
Paying off loan without selling home:can use restored entitlement to purchase
another homeonly allowed to do this oncemust occupy new home (owner-
occupancy requirement)
Restoration of entitlement
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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
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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
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Veteran’s Liability
When veteran is required to repay VA:amount owed is delinquent federal debtfederal income tax refunds can be applied
to itfederal pay can be garnishedveteran not eligible for any federal loans
until arrangements to repay are made
Liability after default
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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
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Veteran’s Liability
Liability to lender:veteran may be liable for amount of
foreclosure not covered by guarantystate laws restricting deficiency
judgments still apply
Liability after default
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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
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Veteran’s Liability
Approval and original borrower released from liability if:
buyer meets VA underwriting standardsloan is currentbuyer assumes all of original borrower’s
loan obligations
Liability after assumption
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Veteran’s LiabilityLiability 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.
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VA Guaranty
Veteran’s entitlement not automatically restored after assumption unless assumptor/buyer:
is eligible veteranhas entitlement equal to or greater than
loan’s guaranty amountagrees to substitute own entitlement for
original borrower’s substitution of entitlement requested
from VA
Substitution of entitlement
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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
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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
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VA Guaranty
Example:Sales price for new home: $210,000Maximum guaranty in county: $104,250Entitlement used on old loan in 1996:
$50,750
$104,250 County maximum guaranty - 50,750 Previously used entitlement
$53,500 Remaining entitlement
Remaining entitlement
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VA Guaranty
Co-ownership:if both eligible veterans, maximum
guaranty is not increasedif veteran buys home with non-veteran
other than spouse, guaranty only covers veteran’s half of loan
Entitlement and co-ownership
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VA Guaranty
Refinancing with VA loan:VA, conventional, FHA, seller financingother liens such as tax or judgment liensfor non-VA loan, guaranty entitlement is
usedcash from proceeds allowedcannot exceed 100% of appraised valuenormal VA underwriting standards apply
Refinancing with VA loan
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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
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SummaryVA Guaranty
• Guaranty amount
• Maximum guaranty amount
• Entitlement
• Restoration of entitlement
• Remaining entitlement
• Substitution of entitlement
• Refinancing
• Streamline refinancing
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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
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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
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VA Loan Amounts
Sales price: $435,000Maximum 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
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VA Loan Amounts
Example, cont’d:
$435,000 Sales price - 4,500 Downpayment $430,500 Loan amount
Making downpayment
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VA Loan Amounts
Veteran can finance part or all of downpayment required by lender if:
combined loans don’t exceed NOVbuyer qualifies for combined paymentssecond loan is assumable by
creditworthy buyer
Secondary financing
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Underwriting Guidelines
Two methods of income analysis for VA loans:
income ratio methodresidual income method
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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
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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
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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 countryfamily sizesize of proposed loan
Residual income analysis
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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
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Underwriting Guidelines
Possible compensating factors:excellent long-term credit historyconservative use of consumer creditminimal consumer debtlong-term employmentsignificant liquid assetssizable downpaymentlittle or no increase in housing expensemilitary benefits
Compensating factors
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Underwriting Guidelines
Possible compensating factors, continued:satisfactory previous experience with home
ownershiphigh residual incomelow debt to income ratiotax credits for child caretax benefits of home ownershipsignificant equity in property (for
refinancing)
Compensating factors
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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