VA-Guaranteed Loans PDF

12 VA-Guaranteed Loans Learning Objectives After completing this lesson, students should be able to… List the characteristics that distinguish VA-guaranteed loans Describe the criteria for eligibility for a VA loan Define the ro...

12 VA-Guaranteed Loans Learning Objectives After completing this lesson, students should be able to… List the characteristics that distinguish VA-guaranteed loans Describe the criteria for eligibility for a VA loan Define the role of the VA guaranty and how it affects the VA loan amount Illustrate how a substitution of entitlement works Calculate how much of a downpayment will be needed for a particular loan Describe VA underwriting guidelines List compensating factors that might help a marginal applicant obtain a VA loan Suggested Lesson Plan 1. Give students Exercise 12.1 to review the previous chapter, “FHA-Insured Loans.” 2. Provide a brief overview of Chapter 12, “VA-Guaranteed Loans,” and review the learning objectives for the chapter. 3. Present lesson content: Characteristics of VA Loans Eligibility for VA Loans – Service requirements – Eligibility of spouse © 2018 Rockwell Publishing  Financing Residential Real Estate Instructor Materials VA Guaranty – Guaranty amount – Restoration of guaranty entitlement – Entitlement and co-ownership – Refinancing with a VA loan EXERCISE 12.2 Characteristics of VA loans EXERCISE 12.3 Comparing VA and conventional loan features VA Loan Amounts – Making a downpayment – Secondary financing Underwriting Guidelines – Income ratio analysis – Residual income analysis – Compensating factors EXERCISE 12.4 VA underwriting 4. End lesson with Chapter 12 Quiz. Chapter 12 Outline: VA-Guaranteed Loans I. Characteristics of VA Loans A. VA loan is made by institutional lender, but a portion of loan amount is guaranteed by the Department of Veterans Affairs 1. Loan guaranty functions like mortgage insurance, protecting the lender against a loss if the borrower defaults B. Key characteristics of a VA loan 1. VA loan can be used for purchase or construction of residence with up to four units (or refinance) 2. Veteran must occupy the home (or one of the units in a multifamily residence), which generally must be principal residence 3. No downpayment generally required, as long as loan doesn’t exceed home’s ap- praised value 4. No maximum loan amount 5. No maximum income limit 6. Less stringent qualifying standards 7. No mortgage insurance required 2  Chapter 12: VA-Guaranteed Loans 8. No prepayment penalty allowed 9. May be assumed by a veteran or a non-veteran 10. Forbearance extended to borrowers with temporary financial difficulties C. VA borrowers generally pay a funding fee from 1.25% to 2.15% of the loan amount, depending on the downpayment; fees may be slightly higher or waived in some situa- tions II. Eligibility for VA Loans A. Eligibility requires a period of service 1. 24 months of continuous active duty; or 2. the full period for which the veteran was called to active duty, so long as that was at least 90 days, any part of which occurred during wartime; or 3. at least 181 days of continuous active duty during peacetime B. Six years of service in the Reserves or National Guard even without fulfilling the minimum active duty requirement C. Shorter period of service required for disabled veterans or veterans discharged early for government, hardship, or medical reasons D. An eligible veteran is issued a Certificate of Eligibility, which the vet uses to apply for a VA loan E. The spouse of a veteran who was killed in action, died of service-related injuries, or is listed as missing in action or as a prisoner of war, may be eligible for a VA loan III. VA Guaranty A. Guaranty available to a particular veteran is known as the veteran’s “entitlement” 1. Guaranty amount depends on the size of the loan 2. Maximum guaranty (for loan amounts over $144,000) a. In most counties, maximum guaranty is 25% of the current Federal Housing Finance Agency conforming loan limit b. Each high-cost county has its own maximum guaranty amount based on the area median housing price B. Entitlement may be restored (and then reused) if veteran pays off loan in full 1. VA allows a one-time restoration of entitlement to a borrower who pays off VA loan without selling the property and wants another VA loan to buy one additional property C. VA loan may be assumed by a veteran or non-veteran 1. Generally, VA will issue release as long as loan is current and buyer is acceptable credit risk 2. If loan is assumed by a veteran who substitutes his entitlement, the original bor- rower’s entitlement is restored 3  Financing Residential Real Estate Instructor Materials D. If spouses are both veterans, they cannot combine their entitlements to increase the guaranty amount for a single VA loan E. If a veteran buys a home with a non-veteran, the guaranty only applies to the vet- eran’s portion of the loan EXERCISE 12.2 Characteristics of VA loans EXERCISE 12.3 Comparing VA and conventional loan features IV. VA Loan Amounts A. No maximum VA loan amount, but loan generally cannot exceed property’s appraised value 1. VA-approved appraiser appraises the property; VA issues Notice of Value (NOV) B. Most lenders require guaranty to equal at least 25% of the loan amount; in other words, lender won’t make no-downpayment loan for more than four times the guar- anty amount 1. In most areas, with the current maximum guaranty amount of $113,275, lenders generally won’t make VA loans for more than $453,100 without a downpayment C. If a VA loan amount is larger than four times the guaranty amount, the borrower must make a downpayment to make up the difference between the maximum guaranty amount and 25% of the sales price D. A borrower can finance part or all of a lender-required downpayment, as long as: 1. total financing doesn’t exceed property’s appraised value, 2. buyer’s income is enough to qualify based on payments for both loans, and 3. second loan is assumable by creditworthy buyer V. Underwriting Guidelines A. Applicant must qualify under two methods of income analysis: income ratio and re- sidual income B. Income ratio method: borrower’s debt obligations are measured against income; debt to income ratio generally must be 41% or less C. Residual income method: borrower’s proposed monthly shelter expense, other recur- ring obligations, and certain taxes are subtracted from the gross monthly income to determine the residual income; the residual income should exceed the VA’s mini- mum requirement, which varies based on the borrower’s location, family size, and proposed loan size D. Lenders may make exceptions to the income ratio and residual income requirements if the loan applicant has compensating factors 1. Compensating factors include: good credit history, minimal debt, long-term em- ployment, significant liquid assets, downpayment, high residual income, and a low debt to income ratio 4  Chapter 12: VA-Guaranteed Loans 2. If the applicant’s debt to income ratio exceeds 41% but the residual income is at least 20% over the required minimum, the lender may approve the loan without any other compensating factors EXERCISE 12.4 VA underwriting Exercises EXERCISE 12.1 Review exercise To review Chapter 11, “FHA-Insured Loans,” have students answer these questions. 1. Which of the following terms are associated with FHA loans? 100% financing (no downpayment required) Minimum cash investment Maximum loan amount Private mortgage insurance Mutual mortgage insurance Local loan ceilings 2. True or false? FHA programs are limited to applicants whose incomes do not exceed the area median income by more than 10%. 3. What are the standard income ratio limits for an FHA loan? Answers: 1. The terms “minimum cash investment,” “maximum loan amount,” “mutual mort- gage insurance,” and “local loan ceilings” are associated with the FHA-insured loan program. “100% financing” and “private mortgage insurance” are not. 2. False. FHA programs don’t set maximum income limits. The programs target low- and moderate-income borrowers by tying loan amounts to median housing prices. 3. 31% housing expense to income ratio; 43% debt to income ratio 5  Financing Residential Real Estate Instructor Materials EXERCISE 12.2 Characteristics of VA loans Read the following True/False questions aloud to students and have them jot their an- swers down on a piece of paper; discuss the answers together. 1. A VA loan requires only a small downpayment. 2. Although lenders limit the size of VA loans, the program rules do not specify a maximum loan amount. 3. A VA loan requires payment of a funding fee, but no mortgage insurance. 4. The federal government will reimburse the lender for all or part of the loss if a VA borrower defaults. 5. There are eligibility requirements for VA loans, but no qualifying rules. 6. The veteran’s guaranty entitlement is restored when a VA loan is paid off. 7. The guaranty amount available for a transaction does not depend on the loan amount. Answers: 1. FALSE. With a VA loan, the borrower is not necessarily required to make any downpayment at all. 2. TRUE. The VA’s rules don’t specify a maximum loan amount. As far as the VA is concerned, the only limitation on the loan amount is that it may not exceed the property’s appraised value. 3. TRUE. The funding fee serves a similar purpose as mortgage insurance premiums (no mortgage insurance is required for a VA loan). 4. TRUE. If a VA borrower defaults and the lender suffers a loss as a result, the fed- eral government will reimburse the lender for the loss up to the loan’s guaranty amount. This may or may not cover the full extent of the lender’s loss. 5. FALSE. Only an eligible veteran can get a VA loan, but even an eligible veteran can’t get a VA loan unless she meets the VA’s qualifying standards. 6. TRUE. The veteran’s entitlement is restored when the loan is paid off, or when the loan is assumed by another eligible veteran who agrees to a substitution of entitlement. 7. FALSE. The guaranty amount that’s available to a veteran depends in part on the veteran’s entitlement and in part on the loan amount applied for. The maximum guaranty is larger for larger loan amounts. 6  Chapter 12: VA-Guaranteed Loans EXERCISE 12.3 Comparing VA and conventional loan features Activity: After class, have students look at websites or newspaper ads for at least three lenders that offer VA loans in the local area. Ask the students to compare quoted rates for 30-year fixed-rate conventional loans and 30-year fixed-rate VA-guar- anteed loans. Which type of loan has a lower interest rate? Which has a lower APR? According to the fine print, what other charges are associated with each of the loans? EXERCISE 12.4 VA underwriting Discussion Prompts: 1. Irene, an eligible veteran, wants a VA loan to buy a home valued at $500,000. Her guaranty entitlement is $113,275. Assuming the lender follows the general practice concerning the relationship of the guaranty amount to the loan amount, how large a downpayment will Irene need to make in order to buy the house? 2. The Warners, a family of four, live in one of the states in the VA’s West region. They’ve found an 1,800 square-foot home, and they want a $200,000 VA loan, with monthly payments of $1,600. Their monthly income is $5,000. Aside from their housing expense, their monthly obligations consist of a $200 student loan payment and a $300 car payment. Do they qualify for the loan they want under the maximum income ratio test used for VA loans? 3. Now assume that the following amounts are withheld from the Warners’ earnings each month: $900 for federal income tax, $200 for state income tax, and $400 for Social Security and Medicare. Their estimated monthly maintenance and utili- ties amount is $252. What is their residual income? Do the Warners qualify for the loan under the residual income test? 4. Given their residual income, can the Warners qualify for the loan without any compensating factors? Analysis: 1. Lenders generally want the guaranty amount to be at least 25% of the loan amount. So Irene’s lender will require her to make a downpayment of $11,275= when she buys the $500,000 house. $500,000 × 25% = $125,000 – $113,275 = $11,275 downpayment. 7  Financing Residential Real Estate Instructor Materials 2. No, the Warners don’t qualify based on the income ratio test. Their debt to income ratio is 42%—higher than 41%, the standard ratio for VA loans. $1,600 (housing) + $500 (debts) = $2,100 ÷ $5,000 (income) = 42% 3. The Warners’ residual income is $1,148. $5,000 (income) – $1,852 (monthly shelter expense) – $500 (debts) – $1,500 (taxes) = $1,148 For a family of four in the West with a loan amount over $80,000, the minimum residual income is $1,117. So the Warners meet the residual income test. 4. When a VA loan applicant fails the income ratio test, the loan can still be approved if their residual income exceeds the required minimum by 20% or more, even in the absence of any other compensating factors. However, the Warners’ residual income is only $31 more than the minimum, and that isn’t 20% more. $1,148 – $1,117 = $31 (amount over minimum) $1,117 ×.20 = $223 (20% of the minimum) 8  Chapter 12: VA-Guaranteed Loans Chapter 12 Quiz 1. A VA-guaranteed loan is originated by: 6. If a loan amount is over $144,000, the maxi- A. an institutional lender mum guaranty amount is: B. state government agencies A. 25% of the loan amount, up to a maximum C. the Department of Veterans Affairs of 25% of the Federal Housing Finance D. the Federal Housing Administration Agency conforming loan limit for single- family residences B. 40% of the loan amount, up to a maximum 2. Which of the following is NOT a characteristic of $36,000 of a VA loan? C. 50% of the loan amount A. No downpayment is required D. $22,500 B. The borrower will make annual mortgage insurance payments C. The loan may be assumed by anyone, in- 7. How is a veteran’s full guaranty entitlement cluding a non-veteran restored? D. There is no maximum loan amount A. A non-veteran buyer assumes the VA loan B. At least ten years have elapsed since the veteran’s last loan was issued 3. The maximum guaranty amount available in a C. The veteran receives a waiver of liability VA loan transaction: from the government A. is 75% of the price or appraised value D. The veteran sells the property and repays B. cannot exceed the borrower’s residual the loan in full from the proceeds income figure C. is set by the lender, not the VA D. depends in part on the loan amount 8. Tim and Teri are both veterans. They are buying a $450,000 house. They each have an en- titlement of $113,275. Their guaranty amount 4. Eligibility for a VA loan is based on: would be: A. age, disability, and income level A. $113,275 B. a superior officer’s recommendation B. $126,550 C. length of active duty service C. $208,500 D. a distinguished service record D. $226,550 5. The guaranty amount available to a particular 9. A VA loan can be used to refinance: veteran is also known as the veteran’s: A. only a VA loan A. entitlement B. a VA loan or an FHA loan B. guaranty balance C. a VA loan, an FHA loan, or a conventional C. liability loan D. residual income D. None of the above; VA loans cannot be used for refinancing 9  Financing Residential Real Estate Instructor Materials 10. The document issued by a VA-approved ap- 15. Which of the following factors would, without praiser which sets forth the value of a property any other compensating factors, allow approval is known as a: of a VA loan if the borrower’s income ratio is A. Certificate of Eligibility too high? B. Certificate of Reasonable Value A. Good credit score C. Notice of Value B. Reserve funds D. Either B or C C. Residual income at least 20% over the required minimum D. Use of a downpayment 11. A VA borrower is buying a $485,000 home. His entitlement is $113,275. How large a down­ payment will a lender require him to make? A. $0 B. $7,975 C. $10,425 D. $21,750 12. Which of the following is the standard maxi- mum debt to income ratio for a VA borrower? A. 33% B. 36% C. 41% D. 43% 13. The Evans family has a monthly income of $5,000. In order for them to meet the VA’s in- come ratio test, their monthly total obligations should not exceed: A. $1,650 B. $1,800 C. $2,050 D. $2,150 14. The Evans family has a monthly income of $5,000. They have $700 in recurring obliga- tions each month, a monthly shelter expense of $1,500, federal income taxes of $420, state income taxes of $110, and Social Security and Medicare withholding of $330. They spend an average of $600 per month on food. What is their residual income? A. $2,050 B. $1,940 C. $2,950 D. $4,300 10  Chapter 12: VA-Guaranteed Loans Answer Key 1. A. VA loans are originated by institutional 8. A. A married couple, both of whom are lenders. They are guaranteed by the veterans, may not combine their en- Department of Veterans Affairs, which titlements to increase their guaranty will reimburse a lender in the event of amount. borrower default. 9. C. A VA loan can be used to refinance any 2. B. VA loans do not involve mortgage in- type of loan, although the veteran’s surance. The VA guaranty provides the guaranty entitlement must be used if a same type of protection as mortgage VA loan is used to refinance a non-VA insurance, but the borrower does not loan. pay an annual premium for it. 10. D. The document establishing a prop- 3. D. A larger guaranty is available for larger erty’s appraised value is known as a loan amounts. The available guaranty Notice of Value or Certificate of Rea- also depends on whether the veteran sonable Value. has full entitlement. 11. B. Most lenders require the guaranty plus 4. C. To be eligible for a VA home loan, a the downpayment to equal at least 25% veteran generally must have served of the sales price. If the sales price is on active duty for at least a specified $485,000, the guaranty plus downpay- period. The minimum period is longer ment must equal $121,250 ($485,000 for peacetime service than for wartime ×.25 = $121,250). Subtract the guar- service. anty from this amount to find that the borrower must put $7,975 down: 5. A. A veteran’s entitlement is the guaranty $121,250 – $113,275 = $7,975. amount available to that particular vet- eran. 12. C. As a general rule, a VA borrower’s debt to income ratio should not exceed 6. A. The maximum guaranty amount for 41%. loans over $144,000 is 25% of the loan amount, up to a maximum of 25% of 13. C. Since the maximum debt to income the Federal Housing Finance Agency ratio for a VA loan is 41%, multiply conforming loan limit for single-fami- $5,000 by 41%: $5,000 ×.41 = $2,050. ly residences. The Evans family’s total obligations should be no more than $2,050 per 7. D. If a veteran sells the property that he month. financed with a VA loan and repays the full loan out of the sale proceeds, his full guaranty entitlement is restored. It can also be restored if the loan is assumed by a veteran, but not if it’s as- sumed by a non-veteran. 11  Financing Residential Real Estate Instructor Materials 14. B. Residual income is determined by taking the applicant’s gross monthly income and subtracting recurring obli- gations, the monthly shelter expense, and certain taxes, including federal and state incomes taxes and Social Security and Medicare withholding. In this case, the residual income would be $2,090 ($5,000 – $700 – $1,500 – $420 – $110 – $330 = $1,940). Note that the amount the family spends on food is not part of the calculation. 15. C. If a VA borrower has residual in- come at least 20% over the required minimum, the lender may approve the application without other com- pensating factors even if the borrower exceeds the 41% income ratio. 12  Chapter 12: VA-Guaranteed Loans PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Financing Residential Real Estate Lesson 12: VA-Guaranteed Loans © 2018 Rockwell Publishing Introduction This lesson will cover: ⚫ characteristics of VA loans ⚫ eligibility requirements ⚫ VA guaranty ⚫ VA loan amounts ⚫ underwriting guidelines for VA loans © 2018 Rockwell Publishing 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. © 2018 Rockwell Publishing 13  Financing Residential Real Estate Instructor Materials 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. © 2018 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. ⚫ Loan may also be used for refinancing. © 2018 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. © 2018 Rockwell Publishing 14  Chapter 12: VA-Guaranteed Loans 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. © 2018 Rockwell Publishing Characteristics of VA Loans ⚫ No prepayment penalties. ⚫ Can be assumed by creditworthy buyer, veteran or non-veteran. ⚫ Forbearance for veterans in financial crisis. © 2018 Rockwell Publishing Characteristics of VA Loans Funding fee 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. © 2018 Rockwell Publishing 15  Financing Residential Real Estate Instructor Materials 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: ⚫ 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 © 2018 Rockwell Publishing Characteristics of VA Loans Funding fee 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. © 2018 Rockwell Publishing Characteristics of VA Loans Seller concessions 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.) © 2018 Rockwell Publishing 16  Chapter 12: VA-Guaranteed Loans 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. © 2018 Rockwell Publishing Eligibility for VA Loans Disabled veterans Veterans discharged for service-connected disability: no minimum service period. © 2018 Rockwell Publishing Eligibility for VA Loans Dishonorable discharge Dishonorable discharge prevents eligibility. ⚫ Veterans whose discharge was neither honorable nor dishonorable are eligible. © 2018 Rockwell Publishing 17  Financing Residential Real Estate Instructor Materials Eligibility for VA Loans Reserves or National Guard Reserves or National Guard for at least six years: ⚫ eligible for VA loan ⚫ no minimum active duty service requirement © 2018 Rockwell Publishing Eligibility for VA Loans Certificate of Eligibility Certificate of Eligibility: issued by VA; required to apply for VA loan. ⚫ Can be obtained online or through mail. © 2018 Rockwell Publishing Eligibility for VA Loans Eligibility of spouse 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 © 2018 Rockwell Publishing 18  Chapter 12: VA-Guaranteed Loans Summary Characteristics and Eligibility VA-guaranteed loan Owner-occupancy requirement Forbearance Funding fee Minimum service requirement Certificate of Eligibility © 2018 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. © 2018 Rockwell Publishing VA Guaranty Guaranty amount 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 © 2018 Rockwell Publishing 19  Financing Residential Real Estate Instructor Materials Maximum Guaranty Amount Conforming loan limits 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. © 2018 Rockwell Publishing Maximum Guaranty Amount Maximum in most areas 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. © 2018 Rockwell Publishing VA Guaranty Guaranty based on loan amount Guaranty amount available in particular transaction depends on loan amount. © 2018 Rockwell Publishing 20  Chapter 12: VA-Guaranteed Loans VA Guaranty Guaranty based on loan amount 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 © 2018 Rockwell Publishing VA Guaranty Guaranty entitlement Entitlement: guaranty amount available for particular veteran to use. ⚫ Doesn’t expire. ⚫ Available until used by veteran or eligible surviving spouse. © 2018 Rockwell Publishing VA Guaranty Restoration of entitlement 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 © 2018 Rockwell Publishing 21  Financing Residential Real Estate Instructor Materials VA Guaranty Restoration of entitlement 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) © 2018 Rockwell Publishing VA Guaranty Substitution of entitlement 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 © 2018 Rockwell Publishing VA Guaranty Remaining entitlement 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. © 2018 Rockwell Publishing 22  Chapter 12: VA-Guaranteed Loans VA Guaranty Entitlement and co-ownership 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 © 2018 Rockwell Publishing Summary VA Guaranty Guaranty amount Maximum guaranty amount Entitlement Restoration of entitlement Remaining entitlement Substitution of entitlement © 2018 Rockwell Publishing VA Loan Amounts Loan amount can’t exceed value 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. © 2018 Rockwell Publishing 23  Financing Residential Real Estate Instructor Materials VA Loan Amounts Lender’s 25% rule 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. © 2018 Rockwell Publishing VA Loan Amounts Making downpayment 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 © 2018 Rockwell Publishing VA Loan Amounts Making downpayment Example, cont’d: $485,000 Sales price - 7,975 Downpayment $477,025 Loan amount © 2018 Rockwell Publishing 24  Chapter 12: VA-Guaranteed Loans VA Loan Amounts Secondary financing 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 © 2018 Rockwell Publishing Underwriting Guidelines Most VA underwriting guidelines resemble those used in conventional loans. © 2018 Rockwell Publishing Underwriting Guidelines Credit reputation 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. © 2018 Rockwell Publishing 25  Financing Residential Real Estate Instructor Materials Underwriting Guidelines Income Two methods of income analysis for VA loans: ⚫ income ratio method ⚫ residual income method Applicant must qualify under both tests. © 2018 Rockwell Publishing Underwriting Guidelines Income ratio analysis 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. © 2018 Rockwell Publishing Underwriting Guidelines Residual income analysis 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 © 2018 Rockwell Publishing 26  Chapter 12: VA-Guaranteed Loans Underwriting Guidelines Residual income analysis 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 © 2018 Rockwell Publishing Underwriting Guidelines Compensating factors Underwriter can make exceptions to income ratio and residual income requirements if compensating factors present. ⚫ Compensating factors must be relevant to weaknesses. © 2018 Rockwell Publishing 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 © 2018 Rockwell Publishing 27  Financing Residential Real Estate Instructor Materials 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) © 2018 Rockwell Publishing Underwriting Guidelines Income ratio exceptions 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. © 2018 Rockwell Publishing Summary Loan Amounts and Underwriting Notice of Value Downpayment Secondary financing Income ratio analysis Residual income analysis Compensating factors © 2018 Rockwell Publishing 28