Source: https://journal.firsttuesday.us/va-mortgage-basics/44532/
Timestamp: 2020-05-28 05:31:53
Document Index: 445381624

Matched Legal Cases: ['§3704', '§3710', '§36', '§3729', '§3712', '§3712', '§3711', '§3711', '§36', '§36', '§36', '§36', '§36', '§36']

VA mortgage basics | first tuesday Journal
Posted by ft Editorial Staff | Jul 6, 2015 | Feature Articles, Loan Products | 0
This is the first in a series on mortgage programs for veterans. This article explores the U.S. Department of Veterans Affairs (VA)-guaranteed mortgage.
For a comparison of VA, Federal Housing Administration (FHA) and conventional mortgages, see Part II of this article series.
VA mortgage availability
A former member of the armed services – a veteran – is interested in purchasing a home. The veteran’s income and credit rating are sufficient to qualify them for a home mortgage. However, the veteran has not accumulated enough money for the down payment required by conventional lenders and issuers of private mortgage insurance (PMI).
May the veteran buy a home now, even though their savings are insufficient for a typical down payment?
Yes! The U.S. Department of Veterans Affairs (VA) mortgage guarantee program is specially designed to assist qualified veterans to buy a home with zero down payment.
To be eligible for the VA-guaranteed mortgage program, the veteran homebuyer needs to have:
served at least 90 days on active duty during World War II, the Korean Conflict, the Vietnam era, or the Persian Gulf War;
were discharged with an honorable discharge;
Mortgages guaranteed by the VA are limited to mortgages which fund the financing of the veteran’s residence, including:
Further, VA-guaranteed mortgages are only made on property to be occupied by the veteran or their spouse as their primary residence, or for veterans currently on active duty. [38 USC §3704(c)]
The lender’s VA mortgage guaranty
Guaranty limited to entitlement
Even though a veteran may have used their maximum guaranty entitlement to obtain a VA-guaranteed mortgage, they may obtain another VA-guaranteed mortgage in the future.
VA automatics and income and credit requirements
a debt-to-income ratio of less than 41%; [41% VA Pamphlet 26-7 Chapter 4.10.b] and
residual income greater than the guidelines, which vary based on region and family size;
Veterans who fail to meet one of the credit requirements are not automatically prohibited from obtaining a VA-guaranteed mortgage. The VA does not limit its creditworthiness evaluation to the published guidelines. Special circumstances may exist which cause the VA to approve a mortgage to a veteran who does not otherwise qualify. [38 USC §3710(g)(5)]
For instance, a veteran may use their VA entitlement to purchase income-producing property consisting of two-to-four residential units if the veteran occupies one of the units as their primary residence.
If income from the rental units is used as a source of revenue to carry payments on the VA-guaranteed mortgage, the veteran needs to demonstrate to the VA that they possess the management skills needed to be a successful landlord.
Also, a cash reserve needs to exist to cover the payments on the mortgage for up to six months without any rental income.
The VA mortgage guaranty program was established to encourage lenders to make home mortgages to veterans. However, the VA mortgage guaranty program provides no assurance that all veterans will qualify for a mortgage.
Mortgages eligible for guaranty
fixed rate home mortgages;
The VA imposes separate restrictions on each type of mortgage offered. For fixed rate mortgages, the VA requires:
Special VA mortgage regulations
The lender’s processing of a VA-guaranteed mortgage application is accompanied by procedures and requirements regarding:
structural warranties; and
mortgage funding fees.
The property which will secure the VA-guaranteed mortgage needs to meet minimum VA eligibility property standards.
The VA is paid a mortgage funding fee when the VA issues a guaranty. The amount of the funding fee depends on the amount of down payment made by the veteran, the type of military service performed by the veteran and the purpose of the mortgage.
The funding fee, sometimes called a guaranty fee, may be added to the mortgage balance. However, all other closing costs are paid as out-of-pocket expenses of the veteran homebuyer, or paid by the seller. [38 CFR §36.4313]
For cash-out refinances, the following funding fees are charged:
A fee of only 0.5% is charged on a no-cash-out refinance which pays off an existing mortgage (VA-guaranteed or conventional) when the refinancing is sought to reduce the interest rate on an existing mortgage. [38 USC §3729(b); VA Pamphlet 26-7 Chapter 8.8.h]
The VA applies somewhat different regulations on mortgages secured by manufactured homes. The VA only guarantees 40%, but not more than $20,000, of a mortgage used to purchase a manufactured home.
Any entitlement previously used by the veteran and not reinstated is subtracted from the $20,000 maximum.
The term of a mortgage used to purchase a manufactured home is limited to:
15 years and 32 days, for a mortgage to purchase a lot;
20 years and 32 days, for a mortgage to purchase a single-wide manufactured home or a single-wide manufactured home and a lot;
23 years and 32 days, for a mortgage to purchase a double-wide manufactured home; or
25 years and 32 days, for a mortgage to purchase a double-wide manufactured home and a lot. [38 USC §3712(d)(1)]
The manufacturer of the manufactured home warrants the condition of a manufactured home used to secure a VA mortgage. [38 USC §3712(i)]
Direct mortgages to veterans in rural areas
The VA recognizes the difficulty a veteran may encounter in some rural areas locating a lender who is willing to cooperate in the origination of a VA-guaranteed mortgage. As a remedy, the VA will fund mortgages directly to veterans to purchase or improve a residence located in a rural area. Mortgages directly funded to veterans by the VA are subject to the same requirements as other VA-guaranteed mortgages, plus additional direct mortgage conditions. [38 USC §3711(a)]
To qualify for a direct mortgage, the veteran needs to first show the VA they are unable to obtain:
financing at an interest rate which does not exceed the rate authorized by the VA; or
a mortgage from the Secretary of Agriculture. [38 USC §3711(c)]
The maximum amount of a direct mortgage to a veteran is $33,000. Veterans who qualify for the full $36,000 VA-guaranty entitlement may borrow up to the $33,000 maximum through this program.
Veterans whose available guaranty entitlement is less than $36,000 may borrow a mortgage amount which bears the same ratio to $33,000 as the amount of the veteran’s remaining guaranty bears to $36,000. This amount is further limited to a maximum of 91.67% of their remaining VA mortgage entitlement. [38 CFR §36.4503(a)]
For example, suppose a veteran interested in a direct mortgage is currently eligible for $18,000 of guaranty entitlement. The veteran compares their guaranty entitlement to the $36,000 maximum figure and discovers that their entitlement is 50% of the maximum. Here, they are eligible for a direct mortgage of 50% of $33,000, or $16,500.
Direct mortgages to veterans carry an interest rate of 7.5%. However, if the mortgage is used to fund home improvements, the interest rate is 9%. [38 CFR §36.4503(a)]
The veteran homebuyer is charged a funding fee of $50 or 1% of the mortgage amount, whichever figure is greater. The funding fee is 2% of the mortgage amount if the mortgage requires progress disbursements, as is the case with a construction mortgage. [38 CFR §36.4504(b)(1)]
Closing costs incurred by the veteran homebuyer, including VA fees, insurance, recording fees, taxes, etc., are paid in cash as out-of-pocket expenses of the veteran or seller, not from the proceeds of the direct mortgage. [38 CFR §36.4504(b)(3)]
The term of a direct mortgage may not exceed 25 years and 32 days. However, the VA may extend the term for up to five years if necessary to prevent a default on the mortgage. [38 CFR §§36.4505(a), 36.4506]
A direct mortgage to a veteran is not assumable without the written consent of the VA. If the VA consents, the assuming party is subject to the same assumption fees and costs imposed on the assumption of a VA-guaranteed mortgage. [38 CFR §36.4508]
To compare the benefits of VA, FHA and conventional mortgages, see Part II of this article series.
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