Financing Residential Real Estate
Lesson 12:
VA-Guaranteed Loans
Introduction
In this lesson we will cover:
characteristics of VA loans,
eligibility requirements,
VA guaranty,
VA loan amounts, and
underwriting guidelines for VA loans.
Introduction
VA loan program was established to help veterans
finance the purchase of their homes.
Offers many advantages over conventional
financing.
Characteristics of VA Loans
VA-guaranteed loan is made by institutional lender,
but a portion of loan is guaranteed by Department
of Veterans Affairs.
 Protects lender against losses from
default.
Characteristics of VA Loans
VA loans may be used to finance purchase or
construction of a one- to four-unit residence.
 Can’t be used for investor loans.
 Veteran must occupy home.
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.
Characteristics of VA Loans
Lender may charge flat fee of no more
than 1% of amount financed to cover cost
of making loan.
No prepayment penalties.
Can be assumed by creditworthy buyer, veteran
or non-veteran.
Forbearance extended to veterans in financial
difficulties.
Characteristics of VA Loans
Funding fee
Instead of mortgage insurance premiums, VA
borrowers must pay VA a funding fee to defray
administrative costs of loan program.
Funding fee is percentage of loan amount.
Can be paid at closing or financed.
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.
Reserves or National Guard: funding fee is 2.4% of
loan amount, unless vet makes downpayment of
5% of more.
Characteristics of VA Loans
Funding fee
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.
Eligibility for VA Loans
Eligibility for VA loans is based on length of active
duty service in U.S. armed forces.
Minimum requirement ranges from 90 days to
24 months, depending on whether service was
during wartime or peacetime period.
Veterans should check with the VA to determine
their eligibility.
Eligibility for VA Loans
Certificate of Eligibility
VA determines eligibility.
Issues Certificate of Eligibility, which veteran uses
to apply for a VA loan.
Veteran must submit most recent
discharge/separation papers.
Lender can usually obtain certificate online.
Eligibility for VA Loans
Eligibility of spouse
Surviving spouse may be eligible if veteran was
killed in action or died of service-related injuries and
spouse has not remarried.
May also be eligible if veteran missing in
action or is a prisoner of war.
Summary
VA Loan Characteristics and Eligibility
VA-guaranteed loan
Owner-occupancy requirement
No-downpayment loan (100% financing)
Forbearance
Funding fee
Minimum active duty service requirement
Certificate of Eligibility
VA Guaranty
Essential feature of VA loans is that they are
guaranteed by U.S. government.
Significantly reduces lender’s risk of loss
in the event that borrower defaults.
VA Guaranty
Guaranty amount
Guaranty covers only a portion of loan amount.
Amount of coverage for a loan is called
the guaranty amount.
VA Guaranty
Guaranty amount
Guaranty covers only a portion of loan amount.
Amount of coverage for a loan is called
the guaranty amount.
Guaranty amount for a loan depends on:
loan amount, and
maximum guaranty amount in county
where home is located.
Maximum Guaranty Amount
Tied to conforming loan limits
Now VA maximum guaranty amount is tied to
conforming loan limits for conventional loans.
Increases automatically when conforming
loan limits increased.
Amount may change each year—check
with VA for most current figures.
Maximum Guaranty Amount
Maximum in most areas
Maximum VA guaranty in most areas:
25% of Freddie Mac conforming loan limit for
one-unit residence.
For 2009, Freddie Mac’s conforming loan limit for a
one-unit residence is $417,000.
So 2009 maximum VA guaranty amount in most
areas is 25% of $417,000, or $104,250.
$417,000 x .25 = $104,250
Maximum Guaranty Amount
Maximum in high-cost areas
Higher maximum guaranty amounts apply in
high-cost counties.
High-cost county: County where median house
price is higher than national median.
Maximum Guaranty Amount
Maximum in high-cost areas
In high-cost county, maximum guaranty is based on
median house price in that county.
The higher the median house price, the higher
the county’s maximum guaranty.
But no matter how high prices are in the county,
maximum guaranty can’t exceed ceiling.
2009 ceiling: $319,265
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–$417,000: 25% of loan amount
Over $417,000:
25% of loan amount,
up to county max.
VA Guaranty
Guaranty entitlement
Guaranty amount available for a particular veteran
to use is called the veteran’s entitlement.
Veteran’s entitlement doesn’t expire.
Available until used by veteran or unremarried
surviving spouse.
Entitlement is used, and no longer available, when
veteran obtains VA loan and buys house.
Veteran’s Liability
Liability after default
Liability to VA
If veteran defaults and foreclosure sale results
in a loss, VA must reimburse lender.
As a general rule, veteran not required to repay
VA for amount paid to lender.
Loan closed on or after January 1, 1990:
veteran required to repay VA only if guilty
of fraud, misrepresentation, or bad faith.
Veteran’s Liability
Liability after assumption
VA loan can be assumed by any creditworthy buyer.
May be veteran or non-veteran.
If loan closed on or after March 1, 1988, parties
must obtain approval from VA or lender.
Otherwise original borrower remains liable.
Veteran’s Liability
Liability after assumption
Assumption will be approved and original
borrower released if these conditions are met:
1. Buyer meets VA underwriting standards.
2. Loan is current.
3. Buyer assumes all of original borrower’s
loan obligations.
VA Guaranty
Refinancing with a VA loan
VA loan can be used to refinance any type of loan.
VA, conventional, FHA, seller financing
Can also be used to pay off other liens,
such as tax or judgment liens.
If refinancing non-VA loan, guaranty entitlement
must be used.
VA Guaranty
Refinancing with a VA loan
Refinancing amount can exceed old loan’s balance,
so that veteran also gets cash from loan proceeds.
But refinancing can’t exceed:
100% of appraised value, plus funding fee,
plus cost of energy-efficient improvements.
Normal VA underwriting standards apply.
Summary
VA Guaranty
Guaranty amount
Maximum guaranty amount
Entitlement
Restoration of entitlement
Remaining entitlement
Substitution of entitlement
Refinancing
Streamline refinancing
VA Loan Amounts
Lender’s 25% rule
Only other restrictions on loan amount come from
lender, not VA.
Lenders generally want guaranty amount to
equal at least 25% of loan amount.
 Otherwise hard to sell loan on secondary
market.
VA Loan Amounts
Lender’s 25% rule
So most lenders won’t make no-downpayment VA
loan for more than 4 times guaranty amount.
For larger loan, downpayment required.
Guaranty + downpayment must equal at least
25% of price.
VA Loan Amounts
Making a downpayment
Example
Sales price: $435,000
Maximum VA guaranty in county: $104,250.
Lender won’t make loan for more than $417,000
without downpayment.
$435,000
x
.25
$108,750
- 104,250
$4,500
Sales price
25% of price
Guaranty
Downpayment required
VA Loan Amounts
Making a downpayment
Example, cont.
$435,000 Sales price
- 4,500 Downpayment
$430,500 Loan amount
Underwriting Guidelines
Lenders use standards established by VA to
analyze veteran’s creditworthiness.
Two methods of income analysis for VA loans:
 income ratio method, and
 residual income method.
Underwriting Guidelines
Income ratio analysis
VA uses debt to income ratio to analyze income of
loan applicant.
Ratio generally shouldn’t exceed 41%
unless there are compensating factors.
Debts with more than 10 payments left are
counted as recurring obligations.
Underwriting Guidelines
Residual income analysis
Residual income analysis (also called cash flow
analysis) is second method used to qualify loan
applicant.
Gross monthly income
− Taxes, recurring obligations, housing expense
Residual income
Underwriting Guidelines
Residual income analysis
Vet’s residual income should be at least one dollar
more than VA’s minimum requirement.
Minimum requirement varies according to:
 region of the country,
 family size, and
 size of proposed loan.
Summary
VA Loan Amounts and Underwriting
Notice of Value
Downpayment
Secondary financing
Income ratio analysis
Residual income analysis
Compensating factors