Why use your VA Loan?
As a someone who served in the military myself, we went through a lot to be “awarded” the VA Loan. If you have your financial ducks in a row, and many Veterans and families do, you can use your VA Loan up to whatever the lender qualifies you for. I have gone up to 2.5 million but you can go higher depending on the investor- with a low interest rate- and even 0 down.
$0 down, lower interest rates, no mortgage insurance, low debt to income ratio requirements, no prepayment penalty, are just some of the benefits of using your VA loan.
What changes took place in 2020 with VA Loan?
Blue Water Navy Vietnam Veterans Act of 2019 was very recently enacted on January 1st, 2020 so there is now no county limit for high cost counties in California. I recently helped a Veteran with a purchase of a 2.6 million, 4 unit property – we closed in 30 days. He was very happy.
What are the Steps to use VA Loan?
First, there is a lot of misrepresentation on the VA Loan on the Internet, as well as circulating among realtors and loan officers. It’s important that you work with a VA loan and real estate specialist (like myself) for the following reasons:
- I can determine whether you qualify financially using accurate VA loan protocol, not only individually but also for your housing market.
- There are tons of lenders out there that overcharge, say they’re Veteran Friendly and claim to be helping, BUT, hide their costs in other areas or have to over-charge to keep up with their marketing costs. You need a VA Loan educated loan officer, who has fair pricing, preferably who also served, and has used the VA Loan like myself.
- As an educated VA realtor, I know the market and can help you decide if you should go for it or wait, contingent upon the market or your personal situation.
Second, we need to get you your Certificate of Eligibility and your Proof of Service DD214 to use your VA Loan from the Department of Veterans Affairs. This can be done by going to E-Benefits or we can do it for you faster when you do it. If you were disabled in the service and filed it, your COE will show “exempt” which means that your VA Funding fee is waived. If not, it is usually built into the loan or you can pay it which is still peanuts compared to an FHA loan or putting 20% down on a home with a higher conventional loan rate.
Third, I will take your application and look at pricing with you to see current rates.
Fourth, start looking for a home or the refinance process and gather needed documents.
VA Credit Score Requirements:
It depends on the lender I find for you, but generally you want a 620 or higher credit score. When you have a 740 or higher, you are able to attain better pricing but it’s not that much of a difference.
VA funding fees for Active Duty, Reserves or National Guard:
VA Loan Purchase:
If you put 0 Down on Home purchase: 2.3% charge of Loan Amount for 1st time users and 3.6% for subsequent use.
5% down on property purchase: You pay 1.65% for 1st and subsequent use.
If you put 10% down on property purchase: You pay 1.4% of loan amount.
VA Loan Refinancing:
Two options: You can either do an IRRL, which is an Interest Rate Reduction Loan- or- a Cashout Refinance Loan.
IRRL is when you currently have a VA Loan and want to refinance to a lower rate without getting cash back.
Cash – out refinance is when you want to refinance from a non-VA loan to a VA Loan or get some cash from current VA Loan.
VA Funding Fees for Refinance
-2.3% VA Funding Fee for first time users
-3.6% VA Funding Fee for subsequent users
Am I eligible for an IRRRL?
According to the Dept. of Veterans Affairs:
“You may be able to get an IRRRL if you meet all of the requirements listed below.
All of these must be true. You:
- Already have a VA-backed home loan, and
- Are using the IRRRL to refinance your existing VA-backed home loan, and
- Can certify that you currently live in or used to live in the home covered by the loan
Note: If you have a second mortgage on the home, the holder must agree to make your new VA-backed loan the first mortgage.”
Why might I want to get an IRRRL?
According to Dept. of Veterans Affairs:
“Often called a “streamline” refinance, an IRRRL may help you to:
- Lower your monthly mortgage payment by getting you a lower interest rate, or
- Make your monthly payments more stable by moving from a loan with an adjustable or variable interest rate (an interest rate that changes over time) to one that’s fixed (the same interest rate over the life of the loan)
A VA-backed cash-out refinance loan lets you replace your current loan with a new one under different terms. If you want to take cash out of your home equity or refinance a non-VA loan into a VA-backed loan, a VA-backed cash-out refinance loan may be right for you.
Why might I want to get a VA-backed cash-out refinance loan according to Dept. of VA:
A VA-backed cash-out refinance loan may help you to:
- Take cash out of your home equity to pay off debt, pay for school, make home improvements, or take care of other needs, or
- Refinance a non-VA loan into a VA-backed loan
You’ll want to keep closing costs in mind when refinancing a loan, as they can add up to thousands of dollars and I can give you the details on that. Make sure you understand how your new loan amount relates to the value of your home.
About the VA Loan
The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans and to help veterans purchase properties with no down payment.
The VA loan allows veterans 103.3 percent financing without private mortgage insurance or a 20 percent second mortgage and up to $6,000 for energy efficient improvements. A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA to insure the loan; this fee may also be financed. In a purchase, veterans may borrow up to 103.3% of the sales price or reasonable value of the home, whichever is less.
Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment. In a refinance, where a new VA loan is created, veterans may borrow up to 100% of reasonable value, where allowed by state laws. In a refinance where the loan is a VA loan refinancing to VA loan (IRRRL Refinance), the veteran may borrow up to 100.5% of the total loan amount. The additional .5% is the funding fee for a VA Interest Rate Reduction Refinance Loan or IRRRL.
VA loans allow veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% and sometimes 55% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills.
Note: I advise having reserves in your bank account when submitting an offer in the San Francisco Bay area. When you are willing to pay the difference in appraisal to keep escrow going forward in a “multiple offer” situation on the house you want, it helps. There are many people that want to purchase and we will be competing with “all cash” buyers, 25-50% down payment conventional offers, etc. The VA Loan is an excellent product, BUT, the VA Buyer must be aware of competition and listen to advice of a VA Loan Realtor if one wants to increase chances of getting into a home.
What is an FHA Loan?
FHA.com explains it well:
“FICO® score at least 580 = 3.5% down payment.
FICO® score between 500 and 579 = 10% down payment.
MIP (Mortgage Insurance Premium ) is required. (can vary from 0.45% to 1.05% per year depending on your loan amount and down payment.)
Debt-to-Income Ratio < 43%.
The home must be the borrower’s primary residence.
Borrower must have steady income and proof of employment.
FHA loans are a good option for first-time homebuyers who may not have saved enough for a large down payment. Even borrowers who have suffered from bankruptcy or foreclosures may qualify for an FHA-backed mortgage. An FHA Loan is a mortgage that’s insured by the Federal Housing Administration. They allow borrowers to finance homes with down payments as low as 3.5% and are especially popular with first-time homebuyers.”
This type of loan allows a buyer to finance home improvement (construction) into an FHA loan. The FHA 203(k) loan program allows rehabilitation or improvement costs to be financed into the purchase or refinance home loan with the ease of one loan and one closing.
FHA limits for 2020
For Bay Area surrounding counties and high cost counties in CA, the FHA limits are as follows:
The prices will range throughout California. Contact me to determine your specific parameters.
FHA Credit Score Requirements:
580 or higher FICO score requires a 3.5% down payment
Lower than 580 FICO score requires a 10% down payment
FHA Downpayment Assistant Programs:
- MyHome Assistance Program
- Brentwood Down Payment Assistance Program
- Emeryville First Time Homebuyer Loan Program
- GSFA Platinum Program
- CalHome Program
- First Home Mortgage Program
- Monterey County Down Payment Assistance Program
- Santa Ana Downpayment Assistance Program
- Riverside Down Payment Assistance Program
- School Teacher Employee Assistance Program
What are conventional loan requirements?
A conventional loan used to require 20% and 15% down payment, but now programs exist that are more flexible.
2020 conforming loan limits for CA high-cost counties surrounding the Bay Area and throughout is $765,600 for a single family home; $980,325 for a duplex; $1,984,525 for a triplex; and $1,472,550 for a quadruplex
A conventional loan is a mortgage product that is not insured by the federal government. Once you go beyond the county limit, it becomes a jumbo loan.
Conventional 15 Year Fixed Rate Mortgages offer a fixed initial interest rate that remains the same over the entire life of the loan. The monthly payments are amortized over a 15 year period. Many borrowers utilize a 15 Year Fixed Rate Mortgage to dramatically reduce the total interest expense they will pay over the life of their loan verses a 30 Year Fixed Rate Mortgage.
Conventional 20 Year Fixed Rate Mortgages offer a fixed initial interest rate that remains the same over the entire life of the loan. The monthly payments are amortized over a 20 year period.
Conventional 30 Year Fixed Rate Mortgages offer a fixed initial interest rate that remains the same over the entire life of the loan. The monthly payments are amortized over a 30 year period. The 30 year fixed rate mortgage is the most popular loan program as it allows borrowers to fix their interest rate for 30 years and provides the lowest monthly payment compared due to the longer amortization period.
The Conventional 3/1 ARM offers a discounted fixed rate for the first 3 years of the loan with a 30 year amortization. After the 3rd year, the interest rate may adjust up or down a maximum of 2% annually, with a cap of 6% over the life of the loan. Conventional 3/1 ARM’s are also available with annual and lifetime caps of 2% and 4%, respectively but certain restrictions apply. Some Adjustable Rate Mortgages do not have a pre-payment penalty.
Conventional 5/1 Adjustable Rate Mortgages [ARMs]
The Conventional 5/1 ARM offers a discounted fixed rate for the first 5 years of the loan with a 30 year amortization. This can be very appealing to a buyer because it reduces the initial monthly payment for a five year period. After the 5th year, the interest rate may adjust up or down a maximum of 2% annually, with a cap of 6% over the life of the loan. Some of my partners offer 5/1 ARM with annual and lifetime caps of 2% and 4%, and without a pre-payment penalty but certain restrictions apply.
Conventional 7/1 Adjustable Rate Mortgages [ARMs]
Perhaps the most appealing loan for the lowest monthly payment allowed, the Conventional 7/1 ARM offers a discounted fixed rate for the first 3 years of the loan with a 30 year amortization. After the 7th year, the interest rate may adjust up or down a maximum of 2% annually, with a cap of 6% over the life of the loan. Some of my partners offer 7/1 ARM with annual and lifetime caps of 2% and 4%, and without a pre-payment penalty but certain restrictions apply.
OTHER LOAN TYPES:
Whether it’s a manufactured home or a dream home needing a loan of $3,000,000 to buy and remodel a new property or remodel and existing property, a construction loan can be a good solution for baby boomers, or first time buyer or downsizing veterans. Some of the benefits are:
- Construction and permanent financing with a single closing
- Available for new construction or major remodel of an existing property
- Primary residence and second home financing available
- Borrow up to $3,000,000
- Finance up to 90% LTV
- Up to 18 month construction period
- Financing is also available on new manufactured homes
The United States Department of Agriculture loan program allows financing of 100% of purchase price with a 3.5% Guarantee Fee financed into the loan. There is no monthly mortgage insurance and the borrower doesn’t have to be a first-time home buyer, but cannot own “adequate housing in the local commuting area.” The property needs to be a maximum of 5 acres and seller paid closing costs are acceptable.
With a reverse mortgage a veteran or baby boomer can use their home as security for a loan. This is just like a traditional mortgage. With a traditional mortgage the borrower makes monthly payments until the loan is paid in full. With a Reverse Mortgage you never make payments. The idea behind a Reverse mortgage is to convert the equity in your home to cash without having to sell the house. This provides money for improving the finances of many seniors. These may or may not be appropriate for your situation, please contact me for further information.
Bridge Loans for Upsizing or Downsizing
Bridge Loan Financing is for buyers looking to purchase a new home without having sold their current primary residence. There are various ways to originate bridge loans. My partners can customize a loan to obtain the equity from a buyer’s current home [if for example they are downsizing to a smaller home with a VA loan and selling their current home, a bridge loan can apply the equity from the home being sole as a down payment for the purchase of a new home. Certain restrictions apply.
Sale with Gift of Equity Loans
Fannie Mae Rules allow a qualified donor to gift the equity in a property to a qualified buyer. This is typically done between parents and children but can apply to other relationships of buyer and seller. This type of loan is less frequently encountered because many estate plans involve a property being held in revocable living trusts, revocable trusts, with life estate provisions that can cause underwriters to shy away from a transaction. Although trusts and life estates can provide a smooth transition of assets from one generation to another without subjecting the donor to gift taxes or the donee to increased property tax reassessments, because their tax basis steps up in a trust to date of death of the donor]. Since in California, life estates have value [under Medi-Cal l rules] if a donor’s name is on title the time of application for skilled nursing home care or long term care or even at time of death, Medi-Cal can place liens on equity in a home or recover costs upon death of the donor. For this reason lenders will not loan to trusts but only to people. So buying or refinancing becomes impossible for titles with trusts or life estates on the property. However, a Sale with Gift of Equity is allowed by Fannie Mae lending rules and is much cleaner from a Medi-Cal [look back or life estate] point of view. This is because it has the key advantage of “getting the asset out of the donor’s name” so there is nothing to trigger medical lookback or recovery auditing. So as part of your estate planning discussion with your attorney, you should carefully understand these issues if you plan to refinance a gifted property and you should also calculate your long term gift and capital gain tax exposures if any. It’s generally best to do a life estate and trust later after the “Sale with Gift of Equity”. As an important note, in a “Sale with Gift of Equity” loan. It’s very important to apply for the Parent Child Exemption from Re-assessment before escrow so the loan package in terms of projected property tax payments is accurate and unquestioned by the underwriters. For the latest opinion from the California State Board of Equalization and the requirements for this important alternative to estate planning click here.