World Wide Wealth Advisors

Understanding The VA Home Loan Approval Process: Active Military Service Members

CAUTION:  Reading this article will cause you to know more about VA home loans than most mortgage originators

The Pre-Approval Process:

Fax us your most recent LES, 2007 W-2 form and 2008 W-2 form (when you get it).  We'd also like to see a bank statement (all pages) with some of your assets. Our fax number is 858-605-4230.  It's a secure fax so no cover sheet is necessary.

READ:Mortgage Advice for San Diego Home Buyers and REALTORs

Underwriters look at three things: 

READ:  The Three C's Of Underwriting Approvals

Credit Reputation

• Credit Score
• Foreclosures, bankruptcies, liens and/or judgments
• Mortgage delinquencies
• Credit delinquencies, repossessions, collections, or charge-offs
• Credit accounts: type, age, limits, usage and status of revolving accounts
• Borrower's request for new credit in last 12 months

There is not a minimum credit score requirement, for VA Home Loans but a two-year good payment history is required.  A late payment on a credit card shouldn't hurt you but a pattern of late payments, in the past 24 months, might.

Capacity

• Debt ratios: Qualifying monthly housing expense-to-income ratio or monthly debt payment-to-income ratio
• Salaried versus self-employed borrower
• Cash reserves
• Number of borrowers
• Loan Characteristics:
  • Product: a 15 or 30 year fixed rate, , an adjustable rate mortgages,
  • Purpose of Loan: purchase or refinance (cash-out or no cash-out)

The VA also uses residual income analysis for determining "capacity".  The late Bruce Bourgault explains how this analysis is performed:

In the late 80's, as we became more and more automated, the VA established qualifying ratios and set them at 41%.  Prior to that time we approved a VA loan using the Residual income method.  Basically this required the LO to calculate the Service Members tax burden and then net out his pay.  From the net pay we would subtract his PITI, maintenance fees, and any debt that he had to include alimony or child support and then see how much he had left.

For example, if an 0-2 (with three years service) were receiving a base pay of $3484, a BAH of $2000 and BAS of $300, her total monthly income would be $5784.  We would deduct her taxes (on the base pay), of about $800.  She's single, without dependents so there are no childcare expenses.  This gives her contributory income of $5084.  If she had $1200 in monthly expenses (credit cards, car loans, etc), her contributory income is reduced to $3884.  The VA requires a residual income of $491.  In order to "trump" the debt-to-income ratio analysis, we would need residual income of 120% of that, or about $600; this would allow for a maximum housing expense of $3,200.

Using the "eight dollars per thousand" estimate, Lt (jg) Smith would be approved for a $400,000 VA home loan.

Collateral

• Borrower's total equity or down payment
• Property type: a 1-unit or 2- to 4- unit detached property, Condominium Unit or Manufactured Home
• Property use: Primary Residence Only

No down payment is required for a VA Home Loan because the VA insures 25% of the balance for the lender.  The VA charges the veteran a funding fee, which is added to the loan, to pay for that insurance.  Why does the VA charge a funding fee?

The VA funding fee is required by law. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is slightly higher. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment. Second time users who make a down payment of at least 5 percent pay a reduced funding fee of 1.5 percent, the same as first time users making the same down payment. For a 10 percent down payment, the fee drops to 1.25 percent.

How much is the funding fee?

The effect of the funding fee on a veteran's financial situation is minimized since the fee may be financed in the loan. National Guard and Reservist veterans pay a slightly higher funding fee percentage. To determine the exact funding fee percentage, please review the funding fee table.

Determining your monthly mortgage payment is based upon three components:

1- Principal and Interest- this is the amount needed to service the debt and retire the loan.You can determine that amount by using this calulator.  In Lt (jg) Smith's example, a $400,000 mortgage, for 30 years, at 5.25% would have a principal and interest payment of $2208.

2- Property Taxes- In California, we estimate 1.25% of the purchase price, for property taxes.  In Lt.(jg) Smith's example, The annual amount would be $5000 or $416 monthly.

3- Property Insurance- For single family homes, we would use the actual hazard insurance premium.  That would be about $65/month.  For condominiums, we would use the amount of the association fee because it includes the hazard insurance.  Let's assume that the amount is $300 monthly

Lt (jg) Smith's housing expense, then, would be $2,916, well under the "eight bucks per thousand" guesstimate.  She has monthly income of  $5784 and expected monthly debts of $4116.  She would fail the debt-to-income ratio test but be approved based upon the residual income analysis.

Sliding Down to 4.5% Mortgage Rates On the Bailout Playground

San Diego mortgage rates are ready to slide down to 4.5%, fueled by the confirmation of the rumor about the Fed's intervention into mortgage-backed securities markets:

The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.

Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.

Sean Purcell and I talked about this breaking news on Radio Mortgage today.  Here, I talk about the cost of  "free market", non-government supported mortgage capital is over 8%.  Yesterday, I detailed why it is absolutely NUTS not to jump on this bailout immediately; I believe that the fear of inflation will whipsaw the mortgage markets in the not-too-distant future.

Is this action inflationary?  Well, the Press Release would suggest that it isn't:

Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

I don't get it.  Sure, if the government can borrow money at 2.5%, and lend it at 4.5%, it sounds like a zero-sum game. However...not all mortgages are paid so their is the risk of default.  So while the government is borrowing money to lend money, it isn't a perfectly hedged arbitrage play; that's why Wall Street could eventually see this as inflationary, and start selling mortgage-backed securities.  That could drive mortgage rates towards the "free market" mortgage rates of 8%.

Wait, that's not all.  Where will the government get the money to but the mortgages?

Purchases will be financed through the creation of additional bank reserves.

Oh NOOOO!  The government is printing money again...that's inflationary! 

This is perhaps the greatest "bailout" you'll ever see in your lifetime.  If you're a well-heeled borrower (plenty of equity, documented income, and excellent credit, you can get a mortgage rate in the 4's BUT...

...you have to act quickly.  Contact me as soon as possible.

Take the 4.75% Bailout Mortgage And Run...Or Else

San Diego mortgage brokers are always asked what "the rate" is. We used to flippantly answer that question two ways:

1- With another question; "Are you talking about the "best rate"? (meaning an ARM product)

2- with opacity; that depends on the credit, equity position, and capacity to handle the debt

Of course, we know what your asking.  "The rate", more specifically defined, is the 30-year,fixed rate mortgage, with an equity position of 30% or greater, documented income, and excellent credit.  Even today, "the rate" is stratified into three loan size classes:

• under $417,000:               4.750% with 1% origination fee
• $417,000-546,250:           5.125% with 1% origination fee
• over $546,250:                 8.125% with 1% origination fee and 2 discount points

Pay mind to that last quote (8.125% with 3 points); that's the REAL, free-market, cost of mortgage capital and that's where we're eventually headed.  The lower, more attractive loan amounts are subsidized by the government, through the FHFA (which guarantees all FNMA/FHMLC loans).  That subsidy can't last forever.

San Diego real estate broker Steve Berg screams for help for this non-subsidized market:

According to Tim, if Congress doesn’t do something fast, the higher-end home market could be in a lot of trouble. Right now, there are few lenders who will even originate a 30-year fixed rate Jumbo loan. Countrywide/Bank of America will, but at about 8%, plus 1.5 points. You can get a 10/1 ARM at 6.5% with 1 point, but face the potential for a refinance down the road. I hope the National Association of Realtors (NAR), California Association of Realtors (CAR) and Congress jump on this problem, as Jumbo loan rates are already making a challenging environment worse.

Readers of this weblog know this; I outlined this problem in the 2009 San Diego Real Estate Market Outlook:

Next year, I suspect we’ll see a convergence of housing prices as the higher-priced homes follow the lead the of the lower priced homes’ decline.  The median price may very well drop but the lower-priced homes will hold value.  The government is doing everything possible to provide liquidity to the lower end of the market but there will be NO financing available, over $625,000 next year. Watch  Solana Beach, Encinitas, Poway and Scripps Ranch nose dive while the cash-heavy communities of La Jolla, Rancho Santa Fe, and Del Mar drop just a bit.  Sell that duplex in Cardiff and buy a four-plex in Imperial Beach, if you’re an investor (I imagine Jeff Brown will tell you to just get the hell outta Dodge).

The key component to the housing recovery for San Diego remains in the ability for a home buyer to get financing.  The US Treasury stepped in to provide financing for properties under $625,000, by:

(a) increasing the loan limits for FHA, conforming and VA loans to 115% of median price (expected Jan,2009)
(b) nationalizing Fannie Mae and Freddie Mac (guaranteeing the loan from default)

San Diego REALTORs know this; it's not just Mr. Berg who calls for federal subsidies for the tony communities of San Diego county.  The National Association of REALTORs wants the US Government to subsidize higher loan amounts.  I was in Orlando, at their convention,  when they called for it in their "four part housing stimulus package"

Why won't more bailouts work?  A commenter in that post, named Smithers, nails it:

I suspect the fed has to drawn the line somewhere, since voters in Kentucky are not thrilled with guaranteeing high-priced CA mortgages. (I’m not either, and I live in CA). While I think it is bad policy to prop up housing prices beyond what people can actually afford (e.g., in form of artificially low interest rates maintained by fed), politicians are hell-bent on doing it to suck up to our “gimme, gimme, we deserve it” mentality. However, the current politicians are also exploiting class-jealousy, which makes it hard for them to justify propping up prices that, for the vast majority of Americans, are for “the rich”.

The concept of classism is coming into play.  I talked about this in my 2008 Real Estate Market Outlook:

There will be a marked class distinction that develops within the next 6-7 years.  It won't be determined by assets but by debt and its utilization.  Those that respected money will get more of it; those that didn't respect it will lose it.  That will have a profound effect on productivity as the "hourly worker" will become despondent about his life and stop pushing for the overtime.  Why work the extra hours to make the mortgage payment when the house was lost in foreclosure?  A commitment to mediocrity will be the mantra of the American worker because every disposable dollar will be spent payig the bar tab he ran up five years ago.  Personal bankruptcies will rise.

When we scream for "bailouts" for California real estate we forget that Iowans think that we're ALL rich.  Now, we might be able to logically explain that a family living in a $700,000 home "ain't really rich" but perception is reality when it comes to asking for federal subsidies.  If Californians keep beating up Congress for more money for cheap mortgage rates, the Kentuckyans, Texans, Iowans, and Georgians are gonna get REALLY mad.   Igor Panarin's prediction of Civil War, based upon that class distinction, just might come true:

This map is from The Wall Street Journal's article, dated December 29, 2008.

Am I trying to scare you? 

Damn skippy, I am !

The real, free market cost of mortgage capital is 8%.  Federal subsidies are bringing mortgage rates down to 4.75%, for a 30-year fixed rate loan, for a limited period of time.  The federal subsidies can only last so long before rampant inflation comes into play.  We've been printing money for the past 18 months and, eventually, that will drive interest rates up to the free market rate.  We know that free market cost of mortgage capital to be 8% or greater for homes with equity.

Protect yourself from this today.  Call me at (858)-777-9751 and we'll see if you can get your bailout money, at 4.75%.

Am I crazy or just "keeping it real" ?  Contact me to find out.

Seven Things You Didn't Know About Me

1- I was an oarsman in high school.  I rowed for the St. Joseph's Prep crew team on the Schuykill River.  While the "sweepers" received a lot of attention, I was a sculler for the late, great crew coach Gus "The Hammer" Ignas.  The Hammer was a giant of a man.  He cursed like a sailor but loved all of us like his own sons.  I wept when he died.  Here's Chris O' Brien, recalling The Hammer:

After three hours in the broiling summer sun and 18 miles in an underpowered, overweight boat, he allowed us to go in to the dock but told us to stay in the boat once we pulled up alongside the slip. At this point, Gus hops out of his launch and starts in with, "Now, men, I am very proud of the way you handled this practice. It was tough and you gutted it out. Before you get out, there is one more lesson that I need to pass along to you today. When you are sitting at the dock like this, never lift your oars up off the dock like this." With that, he demonstrated just how high an oar had to go before the old Pocock quad would tip and then laughed hysterically at us as the boat rolled over and dumped us into the muck of the Schuylkill. There were all kinds of people up on the balcony who were absolutely roaring at us as we righted the boat and climbed on to the dock. Then, to top it all off, Gus says, "now get your boat out and put it away" as he turned to go home.

To this day, I still am unsure how we managed to get the boat out of the water without doing permanent damage either to it or ourselves, but we did manage to get it out and put away by ourselves. I wasn't really sure what the lesson in all of this was at the time as I wondered what the hidden message was, but in retrospect, I think that Gus actually wanted us to see that you could tip a boat on the dock and could think of no better way than to demonstrate it to us after an 18 mile row.

He was one of the great characters on Boathouse Row and I have related this story to countless people who knew the man very well who just laughed and said, "that's Gus" with no other explanations offered. For some reason, I just couldn't keep my promise to never get back in a boat again either- once you have felt the bottom of the Schuylkill swallow your legs to mid-thigh, there is no where to go in rowing but up.

2- I lived in Phoenix for twelve years.  I moved there when I was 26 and fell in love with what was then, a sleepy desert town. Alas, I missed the ocean and moved to San Diego in 2003.

3- My first teenage job was in Sales at a company called "Associated BankCard Holders".  I sold a service akin to Pre-Paid Legal to people over the telephone.  That experience was invaluable.  At 16, I learned the important salesmanship skills so many in my industry lack.

4- I've been an "information marketer" since I was eleven years old.  My neighbor and I created a "tip sheet" to sell, outside of the Garden State Race Track, with our suggestions for the winning picks.  Vendors at New Jersey race tracks are generally sanctioned by certain families and we were not granted that sanction.  That business lasted about two days.

5- I learned how to surf at the Jersey Shore when I was 14 years old.  Waves in the Atlantic are far inferior to the ones in the Pacific Ocean.  When I tried to transfer that learned skill to my new home, I failed miserably.  Today, I bodyboard:  monthly in the off season and thrice weekly during the summer.

6- I coached Little League in Litchfield Park, AZ, about ten years ago.

7- I"ve been on a "teenage dance show" at the Jersey Shore.  It was broadcast on Sundays from the Music Pier in Ocean City.  Dozens of people watched that show on Channel 46.

Eartha Kitt Passes Away on Christmas Day

Eartha Kitt, the sexy, seductive, sultry songstress, who made "Santa Baby" popular, died today.  Here's Eartha, at age 79, performing for President Bush, two years ago.