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1 Printable Lesson Materials Print these materials as a study guide These printable materials allow you to study away from your computer, which many students find beneficial. These materials consist of two parts: graphic summaries of the content and a multiple choice quiz. Graphic Summaries This portion of your printable materials consists of dozens of frames that summarize the content in this lesson. The frames are arranged on the page to make it easy for you to study the material and add your own notes from your textbook or the online course. Quizzes Many students learn best from sets of questions, and this multiple choice quiz allows you to focus your review of the material to important topics Rockwell Institute NE 20th Street Bellevue, WA

2 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.

3 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.

4 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 Funding fee 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. Characteristics of VA Loans Funding fee 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.

5 Characteristics of VA Loans Funding fee 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. 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 Disabled veterans No minimum active duty service requirement for veterans discharged for a service-connected disability.

6 Eligibility for VA Loans Dishonorable discharge Dishonorable discharge will prevent eligibility (although veterans whose discharge was neither honorable nor dishonorable are eligible). Eligibility for VA Loans Reserves or National Guard Someone who has served in Reserves or National Guard for at least six years is eligible for a VA loan even without meeting minimum active duty service requirement. Eligibility for VA Loans Certificate of Eligibility 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.

7 Eligibility for VA Loans Eligibility of spouse 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. 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 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.

8 Guaranty amount Guaranty covers only a portion of loan amount. Amount of coverage for a loan is called the guaranty amount. Guaranty amount 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. Maximum guaranty amount When VA loan program began in World War II, guaranty amount was $4,000. Over the years, it was increased periodically to reflect increasing housing costs. Eventually, instead of having a single guaranty amount for all loans, guaranty varied with loan amount, up to a specified maximum.

9 Maximum Guaranty Amount Tied to conforming loan limits 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. Maximum Guaranty Amount Maximum in most areas 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 Guaranty Amount Maximum in high-cost areas Higher maximum guaranty amounts apply in high-cost counties. High-cost county: County where median house price is higher than national median.

10 Maximum Guaranty Amount Maximum in high-cost areas 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 ceiling: $319,265 Maximum Guaranty Amount Alaska, Hawaii, Guam, and Virgin Islands There are special (even higher) maximum guaranty amounts in Alaska, Hawaii, Guam and the Virgin Islands, where house prices are exceptionally high. Guaranty based on loan amount Not all VA borrowers in a particular county get the county s maximum guaranty amount for their loans. Guaranty amount available in particular transaction depends on the loan amount.

11 Guaranty based on loan amount Loan amount Up to $45,000: $45,001 $56,250: $22,500 Guaranty amount 50% of loan amount $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 entitlement 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. Restoration of entitlement Restoration of entitlement when home sold If veteran sells home and repays VA loan, veteran s entitlement is restored. Entitlement available again for veteran to use. Veteran can use it to obtain another VA loan and purchase a new home.

12 Restoration of entitlement Restoration of entitlement when loan refinanced Entitlement is also restored if existing VA loan is paid off through refinancing. New VA loan can be used for the refinancing, with restored entitlement applied to the new loan. Restoration of entitlement Restoration by paying off loan without selling home Also, veteran who pays off VA loan but doesn t sell home can use restored entitlement to purchase another home. Only allowed to do this once. Must occupy new home, because of VA s owner-occupancy requirement. Veteran s liability VA guaranty doesn t necessarily relieve borrower of personal liability for loan. Under limited circumstances, veteran may be liable after default or (for older loans) after loan assumed.

13 Veteran s Liability Liability after default 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. Veteran s Liability Liability after default Liability to VA When veteran is required to repay VA, amount owed is delinquent federal debt. Veteran s federal income tax refunds can be applied to it. Any federal pay can be garnished. Veteran isn t eligible for any federal loans until arrangements to repay are made. Veteran s Liability Liability after default Liability to VA Even if veteran not required to repay VA (because case didn t involve fraud or bad faith), loan guaranty entitlement won t be restored unless veteran makes arrangements to repay.

14 Veteran s Liability Liability after default Liability to lender If part of lender s foreclosure loss isn t covered by guaranty amount, veteran may be liable to lender for uncovered amount. State laws restricting deficiency judgments would apply. Veteran s Liability Liability after assumption 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. Veteran s Liability Liability after assumption 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.

15 Veteran s Liability Liability after assumption VA loan originated before March 1, 1988 can be assumed without consent of lender or VA. However, original borrower won t be released from liability unless consent obtained. Substitution of entitlement Veteran s entitlement not automatically restored after assumption. Restored only if 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, and requests substitution from VA. Remaining entitlement Full entitlement can t be restored if VA loan is assumed by non-veteran. But veteran may still have remaining entitlement that can be used to obtain another VA loan.

16 Remaining entitlement Determining remaining entitlement available for a new loan: 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. In most areas in 2009, usually subtracting from $104,250. Remaining entitlement 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 for new loan Entitlement and co-ownership Even if buyers are 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.

17 Refinancing with a VA loan 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 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 Different rules apply to 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 twodiscount points, 0.5% funding fee, and cost of energy-efficient improvements. Underwriting not required.

18 Summary Guaranty amount Maximum guaranty amount Entitlement Restoration of entitlement Remaining entitlement Substitution of entitlement Refinancing Streamline refinancing VA Loan Amounts Loan amount can t exceed value VA doesn t set maximum loan amount. VA s only rule is that loan may not exceed appraised value of property. VA-approved appraiser appraises property and VA issues a Notice of Value (NOV). If sales price exceeds appraised value, borrower must make up difference out of own funds. VA Loan Amounts Lender s 25% rule 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.

19 VA Loan Amounts Lender s 25% rule 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. VA Loan Amounts Making a downpayment 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 VA Loan Amounts Making a downpayment Example, cont. $435,000 Sales price - 4,500 Downpayment $430,500 Loan amount

20 VA Loan Amounts Secondary financing Veteran can finance part or all of downpayment required by lender if: 1. combined loans don t exceed NOV, 2. buyer qualifies for combined payments, and 3. second loan is assumable by creditworthy buyer. Secondary financing can t be used to cover downpayment required by VA because sales price exceeds value. 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 Income ratio analysis 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.

21 Underwriting Guidelines Residual income analysis 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 Underwriting Guidelines Residual income analysis 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. Underwriting Guidelines Compensating factors VA underwriting standards are merely guidelines, not hard and fast rules. Compensating factors may allow loan approval in spite of weaknesses in application. But compensating factors must be relevant to weaknesses.

22 Underwriting Guidelines Compensating factors 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 Underwriting Guidelines Compensating factors 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) Underwriting Guidelines Income ratio exceptions Special rules for approving applicant whose income ratio is over 41%. Ordinarily, lender must submit detailed statement to VA, listing compensating factors. But if residual income exceeds minimum by 20% or more, loan can be approved even though income ratio is over 41% without any compensating factors.

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

24 Real Estate Finance Lesson 12 Cumulative Quiz 1. A VA-guaranteed loan is originated by: A. an institutional lender B. state government agencies C. the Department of Veterans Affairs D. the Federal Housing Administration 2. Which of the following is NOT a characteristic of a VA loan? A. No downpayment is required B. The borrower will make annual mortgage insurance payments C. The loan may be assumed by anyone, including a non-veteran D. There is no maximum loan amount 3. Which of the following statements about VA loans is true? A. The maximum loan amount for VA loans is set by the VA B. The VA provides mortgage insurance that protects lenders against default C. VA loans allow prepayment penalties D. VA loans are easier to qualify for, compared with conventional or FHA loans 4. Which of the following would not be available through the VA loan program? A. A fixed-rate loan B. A loan for purchase of an owner-occupied fourplex C. An adjustable-rate loan D. An investor loan 5. A veteran borrower who was a member of the regular military obtains a no-downpayment VA loan for $100,000. The funding fee will be: A. $1,250 B. $1,500 C. $2,150 D. $2, Which of the following veterans would be least likely to be eligible for a VA-guaranteed loan? A. A veteran who served 150 days of active duty during the Vietnam War B. A veteran who served five months of active duty during the late 1980s C. A veteran who served 10 years in the National Guard D. A veteran who was discharged after 60 days for a service-connected disability 2009 Rockwell Publishing 1

25 7. The guaranty amount available to a particular veteran is also known as the veteran's: A. entitlement B. guaranty balance C. liability D. residual income 8. If a loan amount is between $144,001 and $417,000, the maximum guaranty amount is: A. 25% of the loan amount B. 40% of the loan amount, up to a maximum of $36,000 C. 50% of the loan amount D. $22, How is a veteran's full guaranty entitlement restored? A. A non-veteran buyer assumes the VA loan B. At least ten years have elapsed since the veteran's last loan was issued C. The veteran receives a waiver of liability from the government D. The veteran sells the property and repays the loan in full from the proceeds 10. A VA loan that closed in 1999 may be assumed by: A. another veteran, regardless of creditworthiness B. another veteran who is creditworthy C. anyone, regardless of creditworthiness D. anyone who is creditworthy 11. Tim and Teri are both veterans. They are buying a $450,000 house. They each have a full guaranty of $104,250 available. Their guaranty amount would be: A. $104,250 B. $112,500 C. $208,500 D. $225, A VA loan can be used to refinance: A. only a VA loan B. a VA loan or an FHA loan C. a VA loan, an FHA loan, or a conventional loan D. Never 2009 Rockwell Publishing 2

26 13. The document issued by a VA-approved appraiser which sets forth the value of a property is known as a: A. Certificate of Eligibility B. Certificate of Reasonable Value C. Notice of Value D. Either B or C 14. A VA borrower who does not live in a high-cost county is buying a $500,000 home. He has a full entitlement of $104,250. How large a downpayment will he need to make? A. $0 B. $20,750 C. $83,000 D. $395, A VA borrower may use secondary financing to cover a downpayment if: A. the buyer has enough income to qualify based on both loans B. the second loan doesn't restrict the borrower's ability to sell the property more than the VA loan does C. the total of all financing doesn't exceed the property's appraised value D. All of the above 16. Which of the following is the standard maximum debt to income ratio for a VA borrower? A. 33% B. 36% C. 41% D. 43% 17. The Evans family has a monthly income of $5,000. What are their maximum monthly total obligations, in order to qualify for a VA loan? A. $1,650 B. $1,800 C. $2,050 D. $2, The Evans family has a monthly income of $5,000. They have $700 in recurring obligations each month, a maximum housing expense of $1,350, federal income taxes of $420, state income taxes of $110, and Social Security and Medicare withholding of $330. What is their residual income? A. $2,050 B. $2,090 C. $2,950 D. $4, Rockwell Publishing 3

27 19. Which of the following would not be a compensating factor that would help a VA loan applicant who has inadequate income? A. High residual income B. Little increase in housing expense from previous housing expense C. Long-term employment D. Significant liquid assets 20. Which of the following factors would, without any other compensating factors, allow approval of a VA loan where the borrower's income ratio is too high? A. Excellent credit score B. Reserve funds C. Residual income at least 20% over the required minimum D. Use of a downpayment 2009 Rockwell Publishing 4