VA Helps Veterans Become Homeowners

During the past several years, all the news has been about how much harder it is to purchase a home because lenders have tightened guidelines. However, many have overlooked the fact that the VA Mortgage Program administered by the Department of Veterans Affairs has not tightened at all. The program exists as a benefit to veterans, reservists and active military and also makes Native American Direct loans.

The program is beneficial in helping  those eligible to purchase because of several important reasons:
For those who retain full eligibility, there is no down payment required. Most mortgages with 100% financing have gone by the wayside, but not only has VA maintained this benefit, VA mortgages have consistently outperformed national averages.
VA allows the seller of the home to pay for all closing costs. What does that mean? It means that a veteran or active member of the armed forces can purchase with no money down and no closing costs. Zero cash is required from the borrower.  Keep in mind that prudent financial advice and underwriting standards may require cash reserves after closing and certainly such reserves are a good idea even if not required by VA.

VA requires no mortgage insurance. While a one-time funding fee is required to help pay for the cost for the administration of the program, VA provides protection for the lender against default.  This is the part of the program which is a benefit to the veteran. If the loan defaults, VA will absorb up to 25% of the loss.  On conventional and FHA loans, required insurance can add 0.75% or more to the cost of the monthly payment. 

There are two other important points concerning the funding fee. This fee can be financed into the loan amount and therefore, no cash up-front is required. In addition, those who are on more than 10% disability arising from their military service can have the fee waived. This could mean a savings of thousands of dollars.

As in any program, there are restrictions upon the use of VA mortgages.

·         VA mortgages can’t be used to purchase second home or investor properties.

·         The applicant must qualify using a “residual” method of qualification, which actually goes through a budget and makes sure that there is enough money left over monthly to afford the housing payment.

·         The benefit can be used again after the first purchase, however, the eligibility must be restored by paying off the first mortgage or assumption of the mortgage by another veteran who substitutes their eligibility. Second-time use also increases the amount of the funding fee.

·         As mentioned in the previous   paragraph, VA loans are assumable. The interest rate is not adjusted, making the home easier to sell in certain  environments. However, unless assumed by another veteran, the veteran will not retain their original VA eligibility in order to purchase another home using a VA mortgage.

The program can also be used to refinance present mortgages. 

·         If the present mortgage is a VA mortgage, VA offers an Interest Rate Reduction Loan  (IRRL), a program that streamlines refi requirements. No appraisal and qualification is required to  lower the interest rate on a present VA loan.  The funding fee is also lower for these IRRL mortgages.

·         If the present mortgage is not a VA mortgage, the veteran can refinance into a VA mortgage if they have full eligibility. These loans require full qualification but also have a maximum loan-to-value ratio of 100%, including for cash-out transactions. That means a veteran in this situation can use 100% of the equity of their  home to pay off debts or for other purposes. 

One other point about VA mortgages. There is a restriction on the loan amount.  Generally, the maximum VA mortgage will correspond to the maximum conforming mortgage amount in a particular area.  Most areas of the country have the same loan amount, however, certain high cost areas are higher than the maximum (such as Hawaii) and at other times Congress has extended temporary limits in high cost areas, most recently in response to the severe housing recession we experienced in 2007 and subsequent years. 

The government truly helps veterans and active military purchase homes as well as refinance their present mortgages. This is a major benefit to help those who have served our Nation. 

Mike Ervin, Mortgage Banker

NMLS # 282715

(650) 735-5261 

www.mikeervin.com

Pre-qualification or Pre-approval? The Choice

The process of purchasing a home takes savvy, time and diligence. It is the most important financial investment we make in a lifetime and studies have shown that a consumer takes anywhere from six months to two years to contemplate the purchase. 

The complexity and importance of this transaction gives us every reason to go about it more seriously. This means having every tool at your disposal when you are ready to purchase your first home or move up to a new home. Why would anyone not utilize an important tool—especially if that tool is inexpensive and can save them money, time and energy?

This tool is called a “pre-approval.” What is a pre-approval?  First, let me tell you what it is not. A pre-approval is not a “pre-qualification.”

A pre-qualification is an opinion, typically offered by a loan officer after he/she talks with the prospective purchaser. This opinion is based upon information usually given to the loan officer verbally. It would not be unusual for the information not to be verified and the opinion might contain this statement—-

“This opinion is subject to the information provided being verified, including income, assets and/or credit.”

Though the loan officer may be well qualified, he/she is just proffering an opinion which is couched on information which may or may not be accurate. Many times prospective home purchasers do not even understand the questions they are being asked to answer. 

On the other hand, a pre-approval is a loan commitment. It is a loan approval that is based upon documentation submitted within the application process and underwritten by someone who has underwriting authority. In this case the “pre” merely means that the applicant has not purchased a home as of yet. Therefore, the commitment will be subject to these conditions…

• A sales contract on a property
• The appraisal of that property
• Final selection of a loan program and locking in a rate

These conditions are standard on a pre-approval because the property has not been selected. It should be noted that all loan approvals or commitments will have standard conditions such as a clear title and hazard insurance.

The question is—if you are planning to purchase a home, which process should you go through—pre-approval or pre-qualification? The answer is quite obvious. Let’s say that you would like to sell your home. Would you be more comfortable if the prospective purchaser had an opinion or a commitment? Of course, the answer is a commitment.
 
As a matter of fact, it would not be unusual for a prospective purchaser to have his/her contract accepted over other bidders because of the existence of such a commitment. In effect you may even obtain the house for a lower price because the seller is more comfortable with your bid. The better price may also happen because you are prepared to go to settlement more quickly with an approval in your hand. If the seller wants a quick closing, you will be prepared.

There are other benefits of a pre-approval. These include making sure you do not waste your time looking in a price range you cannot afford and giving the lender more time to work out problems while you are looking. Why shouldn’t the lender be working while you are looking? A pre-approval actually should stand for a better transaction—more negotiating power with less stress. I think you would agree that these were worthy goals. Thinking about buying a home?  Start the process with a visit to your lender!

 

Mike Ervin

Mortgage Banker

NMLS # 282715

(650) 735-5261  

www.mikeervin.com

Why Is My Rate Higher?

Time and time again I get this question from some of my clients.  “I read in the papers that the average rate for mortgages is now ____%.  Yet I am being quoted a higher rate than ‘average.’ Why am I being asked to pay more?”
This is a very good question and one that deserves more than a “cryptic” answer.  After all, your home is the most important investment and typically your largest payment. The rate you are charged directly affects that payment. 
First, you must understand that the averages reported by major information sources such as Freddie Mac and BankRate.com  will be based upon averages of those who have certain “personal” and “transactional” characteristics or variables.   Each of these variables may affect the rate you will be asked to pay.  There are many of these variables that can affect the rate and thus the payment of a home loan.

Personal Variables -
Credit Score. The most widely recognized and most important of all variables is tied to your credit score.  Most applicants now understand that a poor credit record can affect the rate they pay. The higher the score the better and you may need a score of 720 or more in order to procure the lowest rate quote. 
What can cause your score to be lower?  Late payments, significant blemishes such as judgments or bankruptcies, too much credit or not enough credit and more.  It is important to note that a low score does not only affect your mortgage rate, but can also affect your rate on credit cards, other loans and even insurance rates.  Here is the good news: by working with someone knowledgeable such as your loan officer, you can raise your score and lower your quote.
Too many debts.  If you are carrying too many debts, you may not only have a lower credit score, but also a high “debt- to-income” ratio. This high ratio may result in not being qualified for all loan programs.  When choices are restricted, the choices that remain may result in a higher rate.
Not enough income.  In the past, “no-income verification” programs solved the problem for many who had income, but could not document that income for lenders. The financial crisis has caused most of these programs to go away and again limits choices to those which may allow higher debt-to-income ratios.

Transactional Variables -
Primary Residence.  Most mortgage “averages” are quoting the rate on a primary residence, which means you live in the property. If you are purchasing or refinancing a property you are renting out as an investment, the rate is going to be higher and there will be other underwriting restrictions such as a requirement for a  larger down-payment.  Second or vacation homes not rented out often times are quoted the same as primary residences but that is not always the case. For example, one popular program, FHA, does not finance second homes except in unusual circumstances.
Down-payment or equity. If you are putting the minimum down or you have little equity in the home when refinancing, you are likely to be asked to pay mortgage insurance that protects the lender against default. This raises the cost of the mortgage.  Some programs will charge a rate premium as well as mortgage  insurance.
Large loan amounts.  If you are looking for a large mortgage which exceeds the conforming (Fannie Mae or Freddie Mac), as well as FHA and VA loan amounts, then you will be asked to pay a higher rate. The secondary markets are not as efficient for “jumbo” mortgages as the government does not support this segment of the markets as significantly.
Type of property.  Many property types can cause a higher rate.  One of the most common is condominiums, especially those that don’t have approval from the entities specified in the previous  paragraph. What would cause a condo project not to be approved? Perhaps there is a high percentage of investors owning units or a high percentage of owners behind on paying association dues.  Other property types that may include premiums on rate could include duplexes, rural properties, properties with combined commercial usage and other unusual properties.

This list should not be considered  exhaustive as there are other situations that may affect your rate.  However, this list does  demonstrate the importance of meeting with your loan officer BEFORE you purchase a home so that you can make a more informed decision.

Mike Ervin
Senior Mortgage Banker
(650) 735-5261