Your Guide to VA Loans

How to Cut Through the Red Tape and Get Your Dream Home Fast

Author:
Pub Date: 2007
Your Price: $24.95
ISBN: 0814474357
Format: Hardcover

• Your Guide to VA Loans
• Sample Chapter
• Table of Contents
• Request an Evaluation Copy, INSTRUCTOR ONLY!

Chapter 1
Getting Started

What is a VA loan? First and foremost, it's an entitlement. An entitlement is something that is owed to you by someone else. And you earned it. Way back in 1944, Congress enacted the GI Bill, which authorized the creation and funding of various "thank yous" to the nation's veterans in the form of health benefits, free education, and housing assistance.

What better way to thank those who served than with free health care, free education, and (almost) free housing? Back in the days before VA loans were invented, the U.S. Department of Veterans Affairs knew that its soldiers had better things to do than save up for a down payment on a house-primarily dodging bullets, defending the country, and protecting the civvies back home.

Unfortunately, VA lending hasn't been as popular as it once was, mostly due to changes at the VA itself. As the VA got bigger and bigger, things took longer and longer to get done. At the same time, other nongovernment-backed loans, such as those approved using Fannie Mae and Freddie Mac guidelines, took less and less time. A VA home loan application could take several weeks to complete. Even in the electronic era, when home loan software became available to speed up the approval process, the VA was still doing things the old-fashioned way, by hand and by mail. Loans were approved by human beings, using antiquated qualification guidelines that could quite frankly deter qualified veterans and service personnel from even applying for a VA mortgage.

Qualifying veterans began to shun the program, instead relying on conventional or government loans fashioned by the Federal National Mortgage Association (FNMA) or a HUD-guaranteed loan backed by the Federal Housing Administration (FHA). In fact, I know of Realtors who would steer people away from VA loans thinking they were nothing more than a boondoggle.

Certainly, veterans could get approved by using a VA-backed loan, yet sometimes sellers wouldn't accept a VA offer, just because it took so long to get a VA loan to closing. If a seller is entertaining two offers that are exactly the same, and one can close within two to three weeks while the VA could take six to eight weeks, which offer do you think is most likely to be accepted . . . the VA loan or the other one? That's right, the other one.

Perhaps that was true a few years ago, but nothing could be further from the truth today. The VA has become more automated, its lending guidelines and approval process altogether have become more streamlined, and VA loans can close just as quickly as any other loan type. Finally, the government caught up with itself and began implementing new technologies that were available to other loan types.

There are other loan choices available in the marketplace, and we'll address those choices in Chapter 8, but if you qualify for a VA loan and want or need a zero down loan alternative, there is no better choice in the market.

Period.

Why? Because any other zero down loan program will require a higher rate, less desirable terms, higher closing costs, and strict credit guidelines. There simply is no equivalent zero down mortgage loan in the nongovernment arena that can match a VA loan.

For instance, an interest rate for a thirty-year fixed VA loan would be almost a full percent lower than a similar zero down mortgage from a conventional lender using FNMA standards.

On a zero-money-down VA loan at 6 percent over thirty years on $200,000, the principal and interest payment works out to about $1,193 per month. For a competing zero-money-down loan using non-VA loans at 7 percent, the monthly payment goes up to $1,322, or $130 every month! That's a lot of money, and it's why you should look into a VA loan.

Sometimes VA loans are not the best choice. There are required "funding fees" that are included in all VA loans, so if you have 10 percent or more for a down payment, a VA loan may not be your best option. We'll look more closely at conventional loans as compared to VA loans in Chapter 3 to help you make that decision. For most people, though, VA loans offer a way into their dream home.


Who Qualifies for a VA Loan?

According to the Veterans Administration, there are nearly 25 million veterans alive today. There are also National Guard members, active duty personnel, and qualifying spouses of deceased veterans.

To qualify for a VA loan, you must fall into one of the following categories during wartime and during peacetime.


Wartime Service

You can qualify for a VA loan if your wartime service was during:

You must have served at least ninety days on active duty and been discharged under other than dishonorable conditions. If you served less than ninety days, you may be eligible if discharged for a service-connected disability.


Peacetime Service

Peacetime service is recognized during the periods:

You must have served at least 181 days of continuous active duty and been discharged under other than dishonorable conditions. If you served less than 181 days, you may be eligible if discharged for a service-connected disability.


Service After 9/7/1980 (Enlisted) or 10/16/1981 (Officer)

If you were separated from service that began after these dates, you must have:

* Completed twenty-four months of continuous active duty or the full period (at least 181 days) for which you were ordered or called to active duty and been discharged under conditions other than dishonorable.

* Completed at least 181 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship) or 10 USC 1171 (Early Out) or have been determined to have a compensable service-connected disability.

* Been discharged with less than 181 days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances, for the convenience of the government.


Gulf War Service from 8/2/1990 to Date Yet to Be Determined

If you served on active duty during the Gulf War, you must have:

* Completed twenty-four months of continuous active duty or the full period (at least ninety days) for which you were called or ordered to active duty and been discharged under conditions other than dishonorable.

* Completed at least ninety days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship) or 10 USC 1173 (Early Out) or have been determined to have a compensable service-connected disability.

* Been discharged with less than ninety days of service for a service-connected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances, for the convenience of the government.


Active Duty Service Personnel

If you are now on regular duty (not active duty for training), you are eligible after having served 181 days (ninety days during the Gulf War) unless discharged or separated from a previous qualifying period of active duty service.


Selected Reserves or National Guard

If you are not otherwise eligible and you have completed a total of six years in the Selected Reserves or National Guard (as a member of an active unit who attended required weekend drills and two-week active duty for training), you are eligible for a VA loan, provided you were either:

* Discharged with an honorable discharge

* Placed on the retired list

* Transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable service, or continue to serve in the Selected Reserves

Individuals who completed less than six years may be eligible if discharged for a service-connected disability.

You may also be determined eligible if you are:

* An unremarried spouse of a veteran who died while in service or from a service-connected disability

* A spouse of a serviceperson missing in action or a prisoner of war

A surviving spouse who remarried on or after attaining age 57, and on or after December 16, 2003, may also be eligible for the home loan benefit. However, a surviving spouse who remarried before December 16, 2003, and on or after attaining age 57 would have had to apply no later than December 15, 2004, to establish home loan eligibility, otherwise the VA must deny applications.


Other Service

Eligibility for a VA loan may also be established for:

* Certain United States citizens who served in the armed forces of a government allied with the United States in WWII

* Individuals with service as members in certain organizations, such as Public Health Service officers; cadets at the United States Military, Air Force, or Coast Guard academies; midshipmen at the United States Naval Academy; officers of the National Oceanic and Atmospheric Administration; merchant seaman with WWII service; and others

In all cases, you must also have been honorably discharged. Dishonorable discharge would require an investigation by the VA to determine eligibility.


Step 1: Proof of Eligibility

If you fall into any of the above-mentioned categories, you next need to start completing some paperwork, beginning with obtaining your Certificate of Eligibility. This form is the legal proof to a lender that you indeed qualify for this special program. You start by filling out Form 26-1880 (Request for a Certificate of Eligibility; see Appendix C).

The form is self-explanatory, but the most important piece is Section 6, detailing your military service. This requirement is most often met by providing a copy of your DD-214 when you were discharged. If you were a member of Selected Reserves or National Guard, you need to provide a copy of your NGB Form 22, or the Report of Separation and Record of Service.

If you don't have your DD-214, you can request a copy by filling out yet one more form: Form SF-180 (see Appendix D). Complete the application and mail or fax it to the custodian nearest you. Currently, there are about fifteen custodians who keep your records.

All these forms are readily available to you by visiting www.va.gov or contacting your nearest VA center and asking them to mail, email, or fax the forms to you. You can also have your lender request your Certificate of Eligibility for you simply by providing them with your DD-214 or your NGB Form 22.

Okay, I know what you're thinking: "Goodness, this doesn't sound streamlined at all." And you're right, it could be a lot more streamlined. That's why President Bush authorized the creation of the Automated Certificate of Eligibility, or ACE, in 2002.

ACE is the preferred method of obtaining your Certificate of Eligibility. Your lender requests it electronically on your behalf directly from the VA. There's one caveat, though: You'll still need to have your DD-214 or Form 22, and the ACE database may not yet be fully activated. But your lender will try ACE first. If you're not listed in ACE, the old-fashioned way will suffice.

Getting your Certificate of Eligibility directly from the VA can take up to ten days if everything is done by mail. You can also simply visit your closest VA center if you're close enough.

Even though you may not yet have your Certificate of Eligibility and have to request it, that shouldn't hold up your loan application by any means. Your lender will still process your VA loan application in anticipation of getting your certificate. We'll go into more detail on your loan application later on in this chapter, but determining your eligibility is your first step.


Request for a Certificate of Eligibility (Form 26-1880)

This form is divided into eight small sections:

1. Your First, Middle, and Last Name. If you got married or changed your name during service or afterward, show both last names on the form.

2. Date of Birth. Easy enough.

3. Veteran's Daytime Telephone Number. Include all numbers: work, cell, and home.

4. Address of Veteran. This can be your street address or a P.O. Box.

5. Mail Certificate of Eligibility To. Only complete this section if the certificate is to be mailed to an address other than the one you gave in Section 4.

6. Military Service Data. In this section you list your service dates; your name as it appears on your separation papers or Statement of Service; your Social Security number or Service Number, if it's different from your Social Security number; and finally the name of the military branch in which you served.

7. Discharged, Retired, or Disabled Status. This section is divided into two parts. Section 7A asks if you were discharged, retired, or separated from service due to a disability or if you now have any service-related disability. If so, then you'll have to complete Section 7B, which asks for your VA Claim File Number. Disabled veterans receive additional mortgage loan benefits, and this is the area where you document your disability status.

8. Previous VA Loans. Even though this form has six lines so that you can list all your previous VA loans, it specifically asks that you don't leave any lines blank but write "N/A" where applicable. Although you can only have one VA loan at a time, this section will help the VA determine any remaining benefits you may have.

It's possible that you bought a VA home, someone assumed that note, or the property is rented out. Until you sell that property or refinance into a non-VA loan, then your eligibility is tied up on that original note. Or maybe you used your VA benefit to buy a home but sold it or refinanced it to another note, releasing your VA eligibility to use again.

As a veteran, you get to use your VA home loan eligibility more than just once to buy another home as long as the previous VA loan no longer exists and you've always made your payments on time. This section of the form asks what type of property you owned, where it was located, if you still own the property, and, if not, what happened to it. It also asks for the original date on the note and the VA loan number, if you can track it down.

You can use your entitlement as many times as you want, under certain conditions. Typically if you've paid off your prior VA loan and sold the property, you can have your used eligibility restored to buy yet another home. Also, on a one-time-only basis, you may have your eligibility restored once if your prior VA loan has been paid in full but you still own the property.

That's it. Once you've filled out all eight sections of Form 26-1880, you simply sign it, mail it in, and wait.


Request Pertaining to Military Records Standard Form 180

This form is divided into three sections (see Appendix D).

Section I: Information Needed to Locate Your Records. Parts 1 through 4 ask for your basic identification information, including your name, Social Security number, and date and place of birth. Part 5 asks if you were Active, Reserve, or National Guard, then asks for your dates of service, whether you were an officer or enlisted, and finally your service number. Part 6 asks if the veteran is deceased, and Part 7 if the veteran is retired from the military.

Section II: Information and/or Documents Requested. Part 1, Report of Separation, is probably the most common request for getting your DD-214. There are two boxes to check as well: Undeleted or Deleted.

An Undeleted report is simply a copy of all the information regarding your separation. If you want the DD-214, it's the Undeleted report you want. Everything about your discharge will be in this file. A Deleted report is similar to the Undeleted one, but it leaves out information regarding authority for separation, reason for separation, reenlistment eligibility code, and character of separation.

Part 2 asks for any other documentation or forms you need other than the DD-214. Part 3 asks you why you want the information.

Section III: Return Address and Signature. This is where you execute the request by signing and dating the request and indicating who you are. There is a separate page on the SF-180 that lists the addresses where you're supposed to send your request, depending on where and when you served.


Maximum Loan Amounts

The VA recently made a significant change to VA loan guaranty amounts. Before the change, those amounts were sometimes so low that they were unattractive. Let's say the veteran wanted to buy a $400,000 home but the VA guaranty was $60,000. Four times the guaranty means the maximum loan amount for a VA lender is $240,000. In this case, because the VA loan limit is lower than conventional loans, the veteran would be better off going for a conventional loan. These guaranty amounts have gradually increased over the years using a VA guaranty formula, but to be more competitive with the conventional market, VA guaranty amounts are now pegged to conventional loan limits. If the conventional loan limit is $417,000, then the VA will guarantee one-fourth of that amount, or $104,250.

Loan limits don't have to change every year, but they usually do. Each year, in October, the national median housing price is calculated. If there is a 10 percent increase in home prices year over year, the conventional and VA loan limits will also increase by 10 percent for that year. No change in home prices? No change in loan limits.

Because of this change, VA loans are now on par with other conventional or nongovernment home loans with regard to loan size. Because they also offer lower mortgage rates when compared to other zero down loans, VA loans are usually the hands-down choice for eligible borrowers.


Step 2: Preapproval from the Lender

Getting preapproved means you complete a loan application with a lender who reviews your income, your credit, and your assets. The lender then provides you with a piece of paper that says you're ready to go shopping because you've already been approved by your lender.

Your story begins with your loan application. The mortgage application is a five-page form that is divided into ten sections. One thing you'll notice is that there is no such thing as a "VA" loan application. Instead, one loan application covers all residential loans, including VA loans, and it's named after the Fannie Mae Form 1003-appropriately called "the ten-oh-three."

These ten sections are appropriated as:

1. Type of Mortgage and Loan Terms

2. Property Information and Purpose of Loan

3. Borrower Information

4. Employment Information

5. Monthly Income and Housing Expense Information

6. Assets and Liabilities

7. Details of Transaction

8. Declarations

9. Acknowledgment and Agreement

10. Information for Government Monitoring Purposes

And you thought the military had a corner on forms.

At last count, there were about 350 boxes to be completed on the 1003. Yes, it can be intimidating and, yes, the mortgage business has secret code words just like you're used to, but taking them one section at a time makes it a little easier to swallow. We'll do that here.


Section 1: Type of Mortgage and Loan Terms

The very first thing your 1003 asks you is what type of mortgage you're applying for: conventional, FHA, VA, or other. Many consumers won't know which type they need or if they're eligible for one or more of these loan types. You're VA eligible, so choose VA. You can change your mind later if you want, but for now, check this box.

This section also has a place for you to choose a fixed rate, an adjustable rate, the term of the loan (how many months or years), the requested loan amount, and, of course, "other." This part of the 1003, like the other sections, can be changed throughout the application process, so if you check that you want a fixed rate and change your mind later, you won't need to complete an entire new application. Just make the changes needed.

VA loan offerings can have fixed or adjustable interest rates, depending upon when or if Congress allows for them. VA loans always come in the fixed variety, and sometimes adjustable-rate loans appear. We'll discuss loan types in more detail in Chapter 7.


Section 2: Property Information and Purpose of Loan

This is the address of the property you want to buy. You can leave it blank if you haven't found a house yet, or you can put in something like "123 Main Street" just to get an address into the system. This section will also ask you if the property is a single-family house or a multiunit property, like a duplex. A legal description of the property is also required. The borrower or lender typically doesn't have this information early on, so you'll probably leave this box blank. A legal description reads something like, "Lot II, Section A, 123 Main Subdivision." Your lender will get this information later on from the agents, from the title, or from an attorney involved in the transaction. Some Automated Underwriting System (AUS) programs require a property address to get a preapproval; in that case, use a simple "123 Main Street, Anywhere USA."

This section also asks if your request is for a refinance loan, a purchase loan, or even a construction loan. Will you live in the property or is it for a rental? Either way, you must tell if the property you're buying is going to be your primary residence, a vacation or second home, or an investment property. VA loans do not allow purchases for investment or vacation homes, so if you're applying for a VA loan, you check "primary residence."

Lenders are getting stricter about verifying whether the home being purchased is for a primary residence. Loan fraud has become a big issue over the past few years, and one of the most common tricks is checking off "primary" residence when in fact the property will be used as an investment or for a rental. Mortgage rates are higher for nonprimary properties because they carry greater risk for the lender, so they're priced accordingly. Investment properties also often require a higher down payment.

So, instead of paying more in down payment or getting a higher rate, borrowers check off "primary" residence, thinking they're saving themselves a lot of money. But the lender will find out soon enough-usually when the lender sends an employee out to the house, knocks on the door, and asks who lives there. If the lender discovers that it's not you living there, but renters, the lender will call the note in.

If you are making an application for a construction loan, there are sections that itemize the land cost and the construction cost, along with final anticipated value. For a refinance, it will ask you when you bought the property, what you paid for it, what existing liens there may be, what improvements you've made, and how much they cost. Although the VA can guarantee construction loans, few lenders (if any) offer them because of the risks and potential disputes associated with new construction. Construction lending is a drawn-out and labor-intensive activity that doesn't fit well with keeping VA rates low. More complexity in a mortgage loan can mean higher rates. Neither you nor the VA wants that.

The final part of this section asks how you're going to hold title, be it individually or with someone else, and if you're going to own the property "fee simple" (which is outright ownership of both the land and the home) or "leasehold" (where you may own the home but the land is being leased).

How can you buy a home on someone else's land? Leaseholds can work when the lease period is for an extended period of time, say, ninety-nine years or so. This sounds odd but it is not as uncommon as you think in areas where Native American tribes may own land that has been developed with houses, shopping malls, and the like. More than likely this will never be an issue for you.


Section 3: Borrower Information

This section is about you. It gets into the "meat" of the application and identifies who you are by way of your legal name, your Social Security number, and where you live. This is the most personal part of the application because it's used to check your credit report, address, age, and phone number. Who cares how old you are? People have to reach a certain age before they can execute a sales contract. Age information can also help identify a borrower (someone who is eighteen years old shouldn't have credit lines on his or her credit report that are twenty years old, for example). Sometimes this question sounds like a loan approval question, but the fact is that it's illegal to discriminate in mortgage lending, and it's illegal to discriminate based on how old you are.

This section also asks how many years of school you've had. For the life of me, I've never understood why this question is part of a loan application, and I've never been given any good reason. It seems to be a carryover from older loan applications, where the information was used to predict future earnings. An underwriter might let the new graduate from law school borrow a little more because of the person's likely strong earnings potential.

But is a person with a GED somehow less creditworthy than someone with a Ph.D. and an MBA? Hardly. But this box is still there on the loan application; you can fill in that information if you want to, but it really doesn't matter one way or the other. It might mean something if you put in just twelve years of school but claim that you're a doctor or a dentist. Then you'll need to explain how you accomplished such a feat. Otherwise, don't worry about loans not being approved based on the number of years you've gone to school.

The final section is reserved for the number of your dependents. This box really only applies to VA mortgages that calculate household and residual income numbers, but again, it isn't something that is used to approve or deny your loan request.

If you've lived at your current address for less than two years, you'll also be asked to provide a previous address. But that's really about it. No pint of blood or firstborn offspring required. In the end, this section simply nails down exactly who you are and where you've lived.


Section 4: Employment Information

Now that we know who you are, we want to make sure you have a job, confirm how long you've been working, for whom you work, and whether you're self-employed. This section asks for your employer's name and address along with a phone number. Lenders will contact your employer-either by telephone, letter, or even email (as long as the email address can be verified)-asking for verification of how long you've worked there, what your job description is, and how much money you make.

You'll notice there are two separate boxes about your length of employment. One box asks for "Years on this job" and the other asks for "Years employed in this line of work or profession." Lenders look for a minimum of two years in the workforce at the same job, as a sign of job stability. They also like to see someone in the same line of work, for the very same reason. If you've not been at your current job for two years, don't worry, as long as you've done the same or similar line of work somewhere else.

Have you been laid off because of an economic downturn? Document the dates and reasons for the time not worked. If you've been a store manager at your current job for six months, all you need to do is document your previous jobs for at least another eighteen months to make up your two-year minimum. There's another box for listing previous employers, asking for the same contact information along with how much money you made at your old jobs. Finally, you'll be asked about your job title, the type of business you're in, and whether you're self-employed.

If you're active duty, you're already employed. If you're recently discharged, simply provide your DD-214 to get your Certificate of Eligibility.


Section 5: Monthly Income and Housing Expense Information

How much money do you make, and how much are you paying for housing now (whether it's rent, mortgage, or living payment-free)? Your income is divided into six sections, plus the now famous "other." Here you enter your base salary, commissions or bonuses, income from investments or dividends, overtime earnings, and any rental income you might have from other real estate. Below this section there is an area for you to describe "other" income. This could be anything that's verifiable, such as child support or alimony payments, note income, or lottery winnings.

Then there is another box for listing your current house payment or rent. Here you put your rent or mortgage payment, plus any monthly property tax, hazard insurance payment, homeowners association dues, or mortgage insurance.


Section 6: Assets and Liabilities

This section covers your bank accounts, investment accounts, IRAs, or whatever other financial assets you might have. Don't let this section intimidate you. Just because there's a space for "Life Insurance Net Cash Value" or "Vested Interest in Retirement Fund" doesn't mean that you have to have either of them to get a home loan. You don't. You simply need enough money to close the deal.

The very first box describes your very first asset involved in the transaction: your "earnest money" or deposit money that you gave along with your sales contract. If you gave $2,000 as earnest money, that's the first money you've put into the deal. The lender wants to know how much you gave as earnest money and who has it, and will verify those funds as part of your down payment.

The next four sections are for listing your bank accounts (checking or savings) and related account information, such as account numbers and current balances. It's not necessary to complete every single box or to divulge every single account you might have. Typically lenders only care about your having enough money to close the deal and less about what your IRA balance is. The only time other balances come into question is if the lender asks for them as a condition of its loan approval. These extra funds are called reserves.

Reserves are best described as money left in various accounts after all the dust has settled, including money for your down payment and closing costs. Reserves can sometimes be a multiple of your new house payment, such as "six months worth of housing payments," and they must be in accounts free and clear of your transaction. Reserves can also be used to beef up your application if you're on the border of obtaining a loan approval.

A lender who is a little squishy on a loan may want to see some other aspects of your financial picture before issuing an approval. Reserves are an important criterion for many loans, but it's up to you to ask the lender if you in fact need to document absolutely everything in your financial portfolio or just enough to close the deal.

This section also asks about other real estate you might own, and there is even an area to list the type and value of your car. I'm serious. Again, this is a holdover from earlier loan applications, but if you leave this section blank, an underwriter might want to know how you get to work and back. Finally, there are the "other" assets. Historically, other assets meant expensive artwork or jewelry, but this too is an unnecessary question, so don't worry about leaving this box blank.

Next to assets is the liabilities section, where you list your monthly bills. This section is only for items that might show up on your credit report, such as a car loan or credit card bill. It doesn't include such items as your electricity or telephone bills. Don't worry if you can't remember the exact balances or minimum monthly payment required; just give your best estimate. Your lender will fill the application with correct numbers taken from the credit bureau later on. If you owe child support or alimony, there's a place for that information, too.


Section 7: Details of Transaction

This is the most confusing part of the application, and most borrowers leave it blank for the lender or loan officer to fill in. In fact, most loan officers don't fill it in-they let their computer program do the work for them. This is an overview of your particular deal, showing the sales price of the home, your down payment amount (if any), your closing costs, and any earnest money held anywhere. It then shows how much money you're supposed to bring to the closing table.

Note that this is just an overview and not the final word on the loan amount and costs, etc. It's simply a brief snapshot of the transaction. Believe me, you'll get reams of paper on this topic in other documents.


Section 8: Declarations

These are thirteen statements to which you must answer "yes" or "no." For example, "Are there any outstanding judgments against you?" and "Are you a party to a lawsuit?" and so on. Here you'll also declare if you've been bankrupt or had a foreclosure in the past seven years. Actually, there is no such thing as a seven-year requirement for bankruptcies and foreclosures for conventional or government loans anymore; this is another carryover from older application processes. Nowadays, bankruptcies and foreclosures generally affect loan applications only if they're two to four years old.


Section 9: Acknowledgment and Agreement

This is a long-winded, obviously lawyer-written section where you cross your heart and hope to die that what you put on your application is true, that you agree to have the home secured by a first mortgage or deed of trust, that you won't use the property for illegal purposes, that you didn't lie, and so on. You sign your loan application in this section and date it.


Section 10: Information for Government Monitoring Purposes

This is an optional section that asks about your race, your ethnicity, and whether you are male or female. This information doesn't make any difference on your loan approval and you don't have to fill this out if you don't want. The government requires that when borrowers opt not to complete this information, then the loan officer meeting with the applicants must make a best guess as to "guy or girl" or "black, white, Pacific Islander," or whatever. This is one of the ways the federal government can monitor the approval rates for various classes and races of borrowers. It's called the Home Mortgage Disclosure Act-or HMDA (Hum-duh)-monitoring section. The government uses this information to see if your bank or lender is discriminating based upon race, color, or creed. After all, how does the government know such things if it's not told? Or maybe a certain lender isn't making loans where the community may need them most. For example, the Community Reinvestment Act (CRA) requires lenders to place a certain percentage of their mortgages in underserved areas. This is how the government knows-by requiring such information on loan applications.

Step 3: The Process

After completing all your required paperwork, both from the government and from the lender, it's time to learn what to expect during the process.

First, your loan file is documented by verifying everything you put in your loan application. Verification is done by your loan officer initially, but more likely by your loan processor. You will deliver pay stubs, W-2s, 1099s, bank statements, and any and all third-party verification of your income and assets. We'll discuss the role of the loan officer and loan processor in more detail in Chapter 4.

At this stage, an appraisal, or Notice of Value (NOV), will be ordered to determine the market value of your home. Once the NOV comes in and your property comes in at value, other parts are put together for your home loan.

Your title insurance is issued by a title insurance company. You will contact your homeowners insurance company to get coverage for your home. Your home will be inspected by a home inspector. After jumping these hurdles, your loan file will be transferred to a loan underwriter, or the person who officially "signs off" on the mortgage approval, making sure your loan request complies with VA guidelines.

Once the underwriter approves the loan, it is sent to a closing department that prepares the closing papers for you to sign. Your papers will be printed and then delivered to whomever is handling your closing.

You sign your papers, according to the lenders' instructions, and the papers are sent back to the lender for review. If you've done everything you're supposed to do and the sellers have done everything they're supposed to do, then money changes hands, most typically via an electronic fund transfer called a "wire."

Once funds change hands and all the paperwork is complete, you get the keys and move in.

There, that was easy, wasn't it?


Assumption

One of the more unique features of VA loans is something called "assumption." Assumption means that if someone wanted to buy your home from you, he wouldn't have to find his own financing; he could assume your VA loan that financed the property.

There are two types of assumptions: "qualifying" and "nonqualifying."

Nonqualifying means that anyone, regardless of his or her credit or income history, could simply take over your VA loan . . . no questions asked. This option is only available for VA loans issued prior to March 1, 1988. That's when the VA made certain adjustments to the program. Previously, a loan could simply be transferred from the seller to the buyer without checking a person's credit report or otherwise determining if the buyer of the home had the inclination to pay back the mortgage. Homes were advertised as "VA Nonqualifying Assumable," which would draw typically nonqualified borrowers into homeownership. The theory behind the practice was to both help the veteran and expand homeownership.

Unfortunately, those who had bad credit continued to have bad credit and began to default on those very same VA loans, sometimes foreclosing on the property altogether.

This situation affected the veteran who transferred the property as well as the lender. If an assumed loan went into foreclosure, the veteran had to pay the difference or he wouldn't be entitled to VA loans anymore.

Then, in 1988, things changed. People who wanted to assume a VA loan would also have to qualify for the new loan just as they would with any other mortgage. They now became "Qualified Assumables."

This new assumable characteristic lost some of its luster because there really was no reason to assume a VA loan unless the loan terms were considerably better on the VA loan than the then-current mortgage market. If a VA loan had a 5.5 percent rate on it and prevailing mortgage rates were in the 7.0 percent range, then it might make sense to assume the VA loan and the low rate that went along with it.

There are also reduced closing fees with assumptions, because lender charges are essentially out of the picture, and there are no appraisal charges or discount points to pay, either.

There are surely some nonqualifying VA loans out there, but not many, as they would have to have been issued some twenty-plus years ago.

© 2008 David Reed.
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