Air Force veteran Dan Hall of Lenoir City, Tenn., has been in the mortgage lending business since 1997. A graduate of Western Kentucky University, he serves borrowers and lenders for Elite Service Mortgage in North Carolina, South Carolina and his native state of Tennessee, where the company is based. Hall has helped hundreds of veteran borrowers obtain home loans using their GI Bill-based VA benefits over the past decade.
He recently spoke to The American Legion Magazine about today's VA home loan, what veterans need to watch out for, and how the program remains one of the most valuable benefits of military service.
Q. How do you, as a mortgage broker, describe the VA home-loan benefit to veterans?
A. The benefit is that they can buy a home, 100-percent financed, with no money down and get a rate that is typically better than conventional rates. You also don't have to pay private mortgage insurance that comes with conventional loans where your first mortgage exceeds 80 percent of the purchase price. This can save the veteran around $120 per month.
Private mortgage insurance required on conventional loans ensures that if the borrower defaults, up to 35 percent of the outstanding balance is paid by the insurance company, which lowers the liability of the lender, allowing them to sell the house quickly at a lower price. With a VA loan, you don't pay the private mortgage insurance. The government ensures the loan. This, combined with a lower rate, keeps house payments for veterans considerably lower than they are for other borrowers. VA also limits the types of fees that can be charged, protecting against predatory lending. VA also doesn't charge a pre-payment penalty.
VA does require a funding fee for its loans. The fee is paid at closing and can be paid by the seller, the borrower or rolled into the loan. The fee covers government insurance against losses to the lender. The amount of the fee varies depending on whether the veteran has used VA loans before, the amount of down payment, and whether the entitlement is based on regular military or National Guard/reserve service. Some veterans are exempt from paying the funding fee. The lender is responsible for determining the status of any veteran who may be exempt from paying the funding fee and for determining the amount of the funding fee owed by any non-exempt borrower.
Q. How has the program evolved?
A. The VA Home Loan Program developed out of the Serviceman's Readjustment Act of 1944 - the GI Bill. Many veterans had returned home from World War II with little or no savings in the bank. The act, signed by President Roosevelt on June 22, 1944, enabled millions of veterans to become homeowners with little or no down payments. Today, the VA Home Loan Program provides government insurance against losses to the lender. This enables lenders to provide 100-percent financing to veterans.
Q. How can the VA home loan be used?
A. To purchase a new or existing home, refinance an existing lien on a current residence, or to make energy-efficient improvements in conjunction with a purchase or refinance.
Q. Can a veteran buy any home, regardless of price, using the VA loan?
A. Although there is no set maximum limit VA allows you to borrow with your entitlement, most lenders and financial institutions will not approve a total of over $417,000. Lenders typically sell VA loans in a secondary market, where the cap is $417,000. That's the conforming loan amount limit. Anything over is considered non-conforming and subject to different standards and rates.
Q. How difficult is it for a veteran to qualify?
A. Fortunately, credit score is not the overriding factor in a VA loan. The credit standards are written as guidelines and are meant to be interpreted and used just that way, taking into consideration all of an individual loan applicant's financial, employment and family circumstances. No single factor is a determinant in any applicant's qualification for a VA-guaranteed loan. The use of compensating factors is encouraged for marginally approvable VA loans. One example of this would be if the veteran is enrolled in a home-buying education program provided by the lender.
This can be viewed as a strong compensating factor for a case in which it is otherwise difficult to conclude if a borrower is qualified.
You may also still be eligible for a VA loan even if you have no traditional established credit history. A satisfactory payment history on items such as rent, utilities, phone bills, etc., may be used to establish a satisfactory credit history. Other characteristics considered are employment and income. A veteran doesn't necessarily have to have been in one position or job if he or she can establish a stable income over a two-year period. They will also consider part-time employment if it is a reliable source of income expected to continue. A benchmark debt ratio is considerably lower than a conventional loan usually allows but, again, other compensating factors may come into play to make the loan possible.
Q. What are some of the traps first-time veteran home buyers want to avoid?
A. I would advise any veteran to avoid misleading advertisements. Veterans get solicited constantly through mailings or other forms of advertisements. Many of these solicitations suggest that the lender has some special relationship with VA that enables only them to offer this loan opportunity. Some attempt to give the impression that the letter the veteran received came from VA.
Some lenders falsely advertise that VA has a new program to refinance their existing VA loan at a lower interest rate, an Interest Rate Reduction Refinancing Loan. The IRRRL program has been available to veterans since the enactment of the Veterans Disability Compensation and Housing Benefits Amendments of 1980. There are no special programs available only to certain lenders.
Q. How is a veteran supposed to find the right house at the right price and avoid getting into, for instance, upside-down equity positions?
A. You need to find a real-estate agent you can trust who is willing to do the research to find a house and negotiate the best possible price. If you sense that the agent is not willing to spend very much time with you in your search or not willing to listen to your concerns and address them, then you are not with the right person. I have heard a number of agents say they don't like VA loans because of the time they take or the fact that you must use a VA appraiser. This should not be an issue. VA requires that all appraisals must be ordered through their system, and a qualified VA appraiser will conduct the appraisal. The VA appraiser is there to make sure that the home is not in a state of disrepair and it is worth the price. They help to ensure that at the point of sale you are not in an upside-down equity position. This in no way guarantees what the future holds for the real-estate market. We have seen some drastic changes over the last year.
As far as getting in too deep, that is why VA has stricter guidelines when it comes to qualifying debt ratios to protect the veteran from trying to purchase more than they can afford.
Q. What other benefits are there to using the VA home loan?
A. You can use the VA loan more than once if you have paid the previous loan in full. The only thing to remember here is that the funding fee increases. If you currently have a VA loan, you may refinance the loan to improve your rate or terms. Generally, no appraisal, credit information or underwriting are required. This is called a streamline refinance.
Q. Is there someone from VA who will help veteran home buyers?
A. You can call someone at VA anytime. To find out the number to call, you can go to www.homeloans.va.gov and look up the regional office in your area. However, they don't make loan decisions and can't override a lender's decision. They can answer questions about the program. On the Web site, they also have a number of links that answer frequently asked questions and provide other information you will need before getting a loan, such as your certificate of eligibility.
Q. Are VA home-loan veterans given any more leniency than other borrowers?
A. Yes. VA has several options to help distressed borrowers. Don't wait until you get the foreclosure notice. Call the regional VA office. You can speak with someone directly about your issues. The VA officer will analyze your financial condition and determine the best course of action.
If the veteran is financially capable, the first option would be to formulate a repay plan to catch up on payments. This would mean paying extra on current monthly payments until caught up. The second option would be to roll the delinquent amount owed back into the loan and start fresh. This is similar to a refinance, but there are no additional fees. If the borrower can't handle the payment level, another option may be to extend the loan term to lower the payment.
The final option is the last step before foreclosure. If VA determines that the veteran is no longer financially capable of making payments, it will advise the veteran to sell the home. It will also work with the lender to hold on foreclosure proceedings for 90 days. The lender is willing to do this because VA is backing the loan. Meanwhile, VA will allow the veteran to potentially sell the home at a reduced price that is lower than what the veteran owes on it. If this happens, the lender will still be paid in full. For example, if the veteran owes $100,000 on the home but is able to sell it for $90,000, the lender will still get the 100k owed, and VA will make up the difference. This is not reported to the credit bureau since VA made up the difference. The only way this will affect the veteran is if he ever wants to use the VA loan program again.
Q. Does service-connected disability rating influence a veteran's ability to get a VA loan?
A. In many ways, VA is similar to regular conventional loans in that credit, income, employment and assets are verified and reviewed to determine if the borrower has the ability and the willingness to repay a proposed mortgage. What VA will do is waive the funding fee for a veteran who is determined to be exempt.
Veterans who are exempt from the funding fee include veterans receiving VA compensation for service-connected disabilities, veterans who would be entitled to receive compensation for service-related connected disabilities if they did not receive retirement pay, and surviving spouses of veterans who died in service or from service-connected disabilities. If you were getting the maximum loan amount of $417,000, this would save you $8,965.50.
Q. What documentation is needed?
A. First and foremost, the veteran needs to obtain a certificate of eligibility. Many times, the lender can pull this information online through the VA system. Sometimes the online system for lenders can't make a determination. This in no way means it is denied. It means the veteran needs to either go to the VA Web site or call the regional VA office to order. VA may require form DD-214, if the veteran is no longer in the military, to show proof of service. Other than that, the lender will provide the other VA disclosure forms and ask for documentation, including pay stubs, driver's licenses and Social Security cards, tax returns from the previous two years, and bank statements.
To learn more about VA home loans, contact Dan Hall via e-mail. firstname.lastname@example.org