Updated: 7/23
A VA loan is a unique opportunity as it allows a Veteran to purchase a home with 100% financing (i.e.; no down payment). While a VA loan requires no down payment, a veteran may need funds to pay closing costs as well as verity a two-month reserve of the monthly mortgage payment (principal, interest, homeowner taxes and insurance). Although a seller is allowed to pay all of the veteran’s closing costs, a veteran is often required to pay at least a portion of those costs. Depending upon the veteran’s loan profile, a two-month reserve could be required. In other words, a VA “no-no” loan in which the veteran requires no cash is rare. These funds can be GIFT FUNDS, however – so, in essence, a Veteran can purchase without any cash of their own.
A VA loan is unusual in that a buyer qualifies via both a “ratio” calculation and a “residual” requirement:
Ratio
The total amount of monthly housing debt (Principal, Interest, taxes & Homeowner’s Insurance) plus total monthly consumer debt should not exceed 41% of the buyer’s gross monthly income. VA is the only financing that allows a buyer, who can demonstrate no consumer debt or use of credit, to use the entire 41% of gross monthly income to satisfy the monthly housing debt ratio. VA may consider stretching the qualifying ratio if the buyer can demonstrate “compensating factors” (e.g.; cash reserves at close of escrow, minimum payment shock wherein the current payment differs minimally from the proposed new payment, etc.)
Residual
A VA loan is unique in that the borrower must, in addition to qualifying ration wise, demonstrate a sufficient residual income available depending upon family size. the residual is the amount “left over” after subtracting from a buyer’s monthly income all estimated taxes (State and Federal), monthly consumer debt as well as monthly housing debt.
A VA FUNDING FEE will typically be added to your VA loan amount. This fee is much like the private mortgage insurance premium assessed in conventional financing. VA allows the fee to be added to the loan amount rather than requiring the fee to be paid in cash. The amount added for a loan with zero down payment is 2.15% of the loan amount if the buyer is a first time user of VA eligibility and 3.3 if a multiple user. the funding fee is reduced for those who use a down payment of 5% or more.
VA financing is unique in one other aspect of their qualifying formula – a RATING FACTOR WORKSHEET must be completed, with satisfactory ratings on the following:
- Job Stability
- Credit History
- Debt Ratio
- Balance Available for Support (Residual)
- Liquid Assets (Reserves)
ACCEPTING A VA OFFER – HOW MUCH MORE COST TO THE SELLER?
There is always a concern on the part of a seller that should they accept a VA offer that they will encounter considerably more costs in completing the transaction. While this may have been true years ago, the additional costs for accepting a VA offer are fairly minimal today.
There are few, if any, costs that the buyer is prohibited from paying. This is in contrast to the past when sellers were required to pay most of the fees as well as pay for inspections, including the pest control report.
Pest inspections and repairs remain a source of confusion. VA loans require that both “section 1 and 2” of the pest control report be completed prior to close of escrow. The VA requirement indicates that Section 1 items and section 2 items “that relate to health and safety” must be completed. In rare circumstances a section 2 item MIGHT be sufficiently benign that the VA underwriter MIGHT provide an exception. It is not something that should be anticipated under usual circumstances.
Most VA purchase contracts still anticipate that sellers will complete and pay for both sections 1 and 2 repairs. Note that the repairs must be completed prior to close of escrow. Although the veteran buyers= is permitted to pay for both the pest report and repairs few buyers may be willing to pay for repairs to a home they do not yet own. It is widely anticipated that sellers consider pest repair costs are merely an additional expense of the sale. One way to avoid surprises is for the seller to acquire a pest report when they decide to sell and have said report available for review upon acceptance of a purchase offer.
NO POINTS REQUIRED FROM SELLER: Many sellers still remember the days when VA required seller’s to pay discount points on behalf of the veteran buyer to allow the buyer to acquire a lower than market interest rate. This is no longer the case.
NO EXCESSIVE REPAIRS: This is a concern that is a “holdover” from past days . . . the fear that the seller will be required to perform all kinds of repair work. The standard today is simply one of “habitability”. Only the items identified on the pest report and/or identified by the appraiser as “health and safety” factors will be required to be completed by the seller.
NO LOAN LIMIT: While VA has no limit on the amount that a veteran can borrow, lenders do impose a maximum limit of 1.5 million dollars based upon the VA guarantee.
RESTORATION OF ELIGIBILITY: Once used, the VA benefit can be restored and used multiple times. Restoration of full eligibility requires any used VA loan to have been paid in full, typically via a sale of the home. A one time exception for restoration of full loan benefit can be obtained via a refinance and payoff of the existing VA loan. Partial eligibility may exist if the original VA loan has not been extinguished. The partial eligibility calculation can be complicated as the County loan limit must be considered. This is best discussed with your selected lender.
BUYER’S ESTIMATED CLOSING COSTS: The following are “typical” closing costs.
- Lender & Escrow Fees:
- Loan Origination Fee
- Credit Report
- Appraisal Fee
- Title Fees Per title schedule
- Recording Fee
Prepaid Recurring Costs:
- 1st Year Homeowner’s Insurance ** (see below)
- Insurance Impound 2 months of annual insurance premium
- Tax Impound 3 – 9 months depending upon time of year
- Pre-paid Interest From day of loan funding to end of month (calculated @ loan interest rate per day)
TAX & INSURANCE FORMULAS
Monthly taxes are calculated at .0125 times the Purchase Price divided by 12. (estimate only)
Monthly insurance is calculated at .0026 times the loan amount divided by 12. (estimate only)
HOW MUCH CASH WILL THE BUYER NEED
A veteran, in most cases, will need some cash with which to close their home purchase transaction, primarily the loan closing costs. While the seller can be asked to pay these fees for the VA buyer (the loan is then a “VA No-No” – no cost to the veteran), requesting the seller to do so may result in the buyer’s offer being less than competitive. We recommend that a buyer discuss this option with their real estate agent and their loan officer.
A WORD ABOUT THE CERTIFICATE OF ELIGIBILITY
Current regulations require that the certificate of eligibility be dated within six months of the close of escrow date for the loan transaction. If the veteran has an old certificate in his/her possession, it should be returned with a new request (called an 1880 form) for a new certificate. A very old certificate is likely to indicate that the veteran’s amount of eligibility is $36,000. Do not be confused. This means that the veteran has full eligibility and may acquire a VA loan up to a maximum amount of $1,500,000 without down payment, if qualified to do so. The amount on the certificate is an indication of the portion of the loan that the VA will guarantee for the lender. It does not reflect an amount, in cash or credit, that will be provided to the veteran at the time of purchase. If there is a question about the certificate of eligibility, call your loan officer for clarification.
GETTING STARTED:
- Acquire PRE-QUALIFICATION/PRE-APPROVAL with lender of choice
- Send for CERTIFICATE OF ELIGIBIITY (COE) Your lender can obtain this but will need the veteran’s DD214 form or the veteran can acquire the COE via the internet. New regulations require the COE to be dated within 6 months of the purchase date
- Confirm HOUSING ALLOWANCE – for qualifying purposes acquire housing approval via 1747 form, if still in the service
- Complete the LOAN APPLICATION and accompanying documentation to initiate the loan