Title restrictions are entries on a title deed that prevents the sale or transfer of a property in some way. They can be conditional based on specific occurrences or they can be absolute. They are most often encountered in newer properties that are in some way communal, like a condo or duplex.Some condos have a clause in their paperwork that is called the right of first refusal, this is essentially the condo version of a homeowner’s association, and it gives the association the option to buy or lease your unit before selling the unit is approved for the buyer.In general, the VA will not restrict your rights to sell your home if you decide you need to. The VA does not have an early-exit fee or a prepayment penalty, regardless of how soon you sell your home.The Department of Veterans Affairs will not guarantee a home loan for a property that restricts your ability to freely sell the property.According to the VA, they “may guarantee a loan on which a title restriction limits the sale, lease, or occupancy of the dwelling to persons based on age, including a prohibition against the permanent occupancy of the dwelling by children, provided such restriction complies with applicable Federal law… VA may refuse to approve a property with an age restriction if its operation would work an undue hardship upon the owner in the case of sudden, unforeseen events or be likely to result in an increased risk of loan default.”
Buying a Condo
Condos are good for a single family that does not need as much space. They are cheaper to purchase and usually, the HOA manages the maintenance of the complex. They also can have amenities that make them an attractive option, like pools, a clubhouse, a gym, and more. You can buy a condo with the VA loan, but the process is slightly different than if you were buying a free-standing home.Since condos so often have title restrictions of some kind, if you want to buy a condo, the VA has to approve it first. The VA maintains a list of approved condominium complexes throughout the country to make this easier for you.If the condo you want to buy is not on the list, your lender can submit paperwork to the VA to try to get it added to the list; this is a complicated process. After your lender submits the paperwork, the VA will go through the condo’s documents and policies; it is important to keep in mind that this process can take sometimes.One of the requirements the VA has for a condo is that at least 50 percent of the occupants are the owners, not renters, and that at least 75 percent of the community has to be up to date on their HOA payments. If you are interested in a recently built condo, the VA will not approve it until at least 75 percent of the units have been purchased by others.
Your debt-to-income ratio is an important factor in your home loan application, whether you are applying for a VA loan or another type of loan. The debt-to-income ratio looks at how much money you have coming in and compares it to how much money you have going out in payments.Student loans are a huge chunk of debt for most people, and since student loan payments are usually fairly large, they can be a big factor in a home loan application. They also make it harder to save up for a down payment and closing costs.Having student loans is not enough to automatically make you unable to get a home loan. However, missing payments or defaulting on your loans can harm your chances of obtaining a mortgage.
Lowering Your Debt-to-Income Ratio
Most mortgage lenders will require you to have a debt-to-income ratio below 30 percent, sometimes up to 36 percent. If your student loans are interfering with that, you can look into lowering the amount you have left to pay off, refinance or consolidate your loans to lower your monthly payments, or enroll in an income-based repayment plan. Those allow you to lower your payments to be aligned with your income level. They can lower your payments down to 10 to 15 percent of your monthly income.
One way you can keep your student loans from interfering with your VA home loan application and debt-to-income ratio is by having them deferred. While your loan is in deferment, you will likely have no payment or a significantly reduced payment. If you have federal student loans, they are automatically deferred for six months following your graduation, so if you can get them deferred for an additional six months, the loans will not impact your VA home loan.One thing that is tricky with this method is that if they are deferred due to financial hardship, this can make them count against you instead of for you. If you deferred your loan because you cannot afford it, the lenders will assume you also cannot afford a monthly mortgage payment.Some of the reasons you can get your loan deferred are:
-You are currently enrolled in school at least half-time or are in a career school
-Serving active duty
-Unemployment or under-employment
According to the VA, “If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis. If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.”Getting your loans deferred can be difficult, depending on who your student loans are through. Different financial institutions have different rules for deferment of student loans, so in order to get them deferred, you will need to contact them directly to find out what is required and what that entails.
Guest blog from American Financial Resources*It is a great honor to serve our military men and women, and VA home loans help us make home buying possible for many of these families.If you’ve served in the military, you should be aware of some of the big changes in VA home loans that were ushered in with the new decade. Policy changes enacted as part of the Blue Water Navy Vietnam Veterans Act of 2019** became effective on January 1, 2020.Veterans and active-duty service members may now have more borrowing power, but may also pay higher fees for new VA home loans in 2020.In addition to extending disability benefits to more Vietnam War veterans exposed to Agent Orange, the new law eliminates VA loan limits for borrowers with full entitlement to VA loans. However, the VA funding fee has increased for most borrowers. The exception being active-duty Purple Heart recipients. Members of the Armed Forces serving on active duty who are in receipt of the Purple Heart award are now eligible for the VA funding fee waiver, even if the Purple Heart was awarded during a prior period of military service. Irrespective of the changes, the benefits of VA home loans remain the same. They have competitive interest rates and can provide 100% financing with no down payment required, among other advantages.
No More VA Home Loan Limits
Removing the loan limits for new VA home loans is a huge win for veterans and military families for the new year. The elimination of loan limits doesn’t mean unlimited borrowing power. Borrowers will still need to have sufficient income and meet a lender’s credit requirements to qualify for the loan amount. The good news is that veterans stationed in costlier real estate markets can now stretch the zero-down buying power of their benefit.It is important to note that loan limits will still apply to veterans who have one or more active VA loans, or have defaulted on a previous loan. Existing loans will follow the same county guidelines set by the Federal Housing Finance Agency; which in 2020 is $510,400 in a typical county and higher in more expensive housing markets.If a homebuyer is subject to VA loan limits, the lender, like American Financial Resources, will require a down payment if the purchase price is above the loan limit.
VA Funding Fee Increases for Some
The VA funding fee is a congressionally mandated fee associated with the VA home loan. For the next two years, veterans and service members will see a slight increase of 0.15 to 0.30% in their funding fee, while National Guard and Reserve members will see a slight decrease in their fee. Veterans with service-connected disabilities, some surviving spouses, and other potential borrowers are exempt from the VA loan funding fee and will not be impacted by this change.The VA funding fee paid will depend on the down payment amount and whether this is a first or subsequent VA home loan for the borrower. The fee for first-use, zero-down loans is 2.3% of the loan amount in 2020, up from 2.15% for active-duty military and veterans in 2019. The fee for subsequent use loans will be 3.6% of the loan amount, up from 3.3%. These fee levels will stay in place for two years, return to 2019 levels from 2022 through Sept. 30, 2029, and then drop further after that.Again, active-duty service members who have received a Purple Heart are now exempt from the funding fee.
Benefits of VA Home Loans
While it is important for eligible borrowers to understand the recent changes, veterans and active military should also be clear on the benefits of VA loans.100% FinancingVA loans are one of the only no-money-down options still available. Instead of waiting years to save up for a home, eligible borrowers can move forward with a home purchase, as well as borrow additional funds for renovations on the home, all with zero down payment.Locked-In, Low Interest RatesSince eligible borrowers can purchase or refinance a home, and the cost of repairs or updates, all in a single mortgage loan, a VA loan provides considerable savings when compared with other programs that might require a second mortgage.Fewer Added CostsEligible borrowers using a VA loan not only enjoy limited closing costs with a single appraisal, but there’s also no mortgage insurance requirement, which could add up to savings on monthly mortgage payments. And, eligible borrowers don’t have to worry about being charged any prepayment penalties if they are able to pay off their mortgage earlier than expected.Continued SupportIf borrowers are experiencing periods of temporary financial difficulties and are struggling to make mortgage payments, the Department of Veterans Affairs can provide assistance to help them retain their home. For 75 years, VA home loans have enabled thousands of deserving families to become homeowners. At AFR, we’re proud to provide these benefits to the brave men and women who have served our country and will continue to help many more generations of veterans come home.
About American Financial Resources, Inc.
American Financial Resources, Inc. (AFR) is the leading FHA 203(k) lender for sponsored originations in the country and an innovator in the construction and renovation lending area, as well as being ranked among the nation’s leading mortgage lenders. AFR utilizes the latest technology and delivers educational resources to mortgage brokers, loan originators and their customers. American Financial Resources, Inc. is an Equal Housing Lender: Lender NMLS 2826 at www.nmlsconsumeraccess.org. For more information, visit www.afrwholesale.com. *Lender NMLS 2826. www.nmlsconsumeraccess.org. American Financial Resources, Inc. (AFR) is a wholesale and correspondent lender. This is not a commitment to lend. All loans subject to credit approval. Guidelines subject to change without prior notice. This information is provided to assist business professionals only and is not an advertisement extended to the consumer as defined by Section 226.2 Regulation Z. Equal Housing Lender. Corporate Headquarters: 9 Sylvan Way, Parsippany, NJ 07054. www.afrwholesale.com** https://www.benefits.va.gov/benefits/blue-water-navy.asp
When you purchase a home, one of the conditions of the loan is that you have it appraised. Your VA loan appraisal is good for up to six months, or until the loan closes, for any type of loan that requires the VA appraisal.
The reason that an appraisal expires after six months is because the real estate market changes often, and part of what an appraiser does is use comparable sales, which are recently sold properties that are similar to the one you are looking to buy. The sales price of homes similar to the one you want may be much different than they would be if they were sold only six months later. However, if the housing market becomes volatile, and the prices have a sudden drop or skyrocket, the appraisal may not last as long. In these cases, they may only be good for up to three months.
Determining the Home’s Market Value
One of the main reasons that you are required to have a VA appraisal is so your lender can ensure you are not overpaying for the property. If your agreed-upon purchase price for the home exceeds its value, you will only receive the appraisal amount from your lender, so you will either need to negotiate a new price based on the appraisal with the seller, or find the funds to pay the difference.
For example, if the property is appraised for $150,000 but your offer is for $180,000, the lender will only give you the $150,000, you will need to renegotiate the price or get the remaining $30,000 on your own.
If the appraisal value is below your offer, you can ask the VA to give you a Reconsideration of Value, where both your lender and your real estate agent will provide more comparable sales that were not included in the original appraisal. Sometimes this will help with your appraisal, especially if it is a couple of months old, but it is not a guarantee.
Minimum Property Requirements
Another important part of the VA appraisal is to ensure that the property meets the VA’s Minimum Property Requirements, which is a list of specific things that have to be in a property bought with a VA loan.
These include that the property is residential, not commercial; that there is adequate space for cooking, sleeping, and living; the electrical and plumbing systems are safe and usable; the property has an adequate heating system; the roof is in good shape; there is access to clean water and a water heater, and a safe way to dispose of sewage; no health or safety hazards like asbestos and radon, along with no lead paint; and construction is not defective.
If the home does not meet the Minimum Property Requirements, you can ask the seller to complete the repairs. If the seller refuses, the VA may allow you to pay for these repairs, but lenders may have rules against this.
Keep in mind that the appraisal is not the same thing as a property inspection. The appraiser is not looking at everything, only what is on their list; an inspector is more thorough. Make sure you get a home inspection in addition to your appraisal.
When a major financial hardship happens in life, and you find yourself not being able to make your mortgage payments, if this goes on long enough you may find yourself facing foreclosure.Foreclosure is what happens when a homeowner cannot make their mortgage payments and defaults on the loan. In this case, the lender will choose to take possession of the property so they can recover some of the loss.This is a stressful time for you, as you lose your home and your credit score goes down, sometimes by as much as 160 points; this can take months or years to repair. Since the VA has more flexible requirements for credit scores, you may not have to wait until your credit has gotten back to what it was before you defaulted on your loan.
There is a lot of time and money involved in the foreclosure process for the lender, and in some states, they even have to involve the court system. To avoid all of that, some lenders will give you alternatives to foreclosure.The VA canhelp you retain your home and avoid foreclosure. The VA has free mortgage counselors available who can help you and give you advice to help get you back on track with your mortgage. They will work directly with your lender to help negotiate an alternative to foreclosure for you.A repayment plan is one of the options the VA has, which means you will continue making your mortgage payment, plus a little extra to make up for what is missing. You may be able to get special forbearance, which will stall the foreclosure so you can make your missing payments.Sometimes, a loan modification is available, that creates a new payment schedule, which includes your missed payments.You may be able to have a deed-in-lieu of foreclosure, where you hand the deed back to the lender instead of foreclosing.The last option is a short sale, where the lender lets you sell the home for less than you owe on the loan.If you go with the short sale or deed-in-lieu of foreclosure, they will still harm your credit, and there will be a waiting period before you can obtain a new home loan.
Getting a New VA Loan After Foreclosure
Since the VA loan is set up a little differently than other loans, if it has been at least two years since the foreclosure, they can disregard it when looking at your qualifications for the loan. If you had a foreclosure from an FHA loan, there is a three-year waiting period. This waiting period will allow you to rebuild your credit after the foreclosure.Your VA loan entitlement will be reduced by the foreclosure, which will limit the amount of money you can borrow without a down payment. You can get your entitlement back if you pay back the VA in full. If you did not use all of your entitlement on the home that was foreclosed upon, you can use what you have remaining on your new loan.
One of the great things about the VA loan benefit is that you can use it multiple times to buy homes. There is no limit to the amount of times veterans that you can use the VA loan program; it is a life-long benefit. To secure an additional loan, your lender will look into your VA loan entitlement. The VA funding fee will go up slightly for you from what it was when you bought your first home.
What is the VA Funding Fee?
The VA funding fee goes to the Department of Veterans Affairs to help them keep the cover any losses on the loan, and to keep their loan guarantee going. This fee can be rolled into your mortgage, but it will slightly increase your monthly mortgage payments. You can ask your seller to pay all or part of the funding fee on your behalf, and some sellers are willing to do this, but it is most commonly rolled into the mortgage.You are exempt from paying the funding fee if:
–You are receiving VA disability compensation or are entitled to it.
–You are in active service and have been awarded a Purple Heart.
–You are the spouse of a veteran who died in service or from a disability connected to their service.
How Much is the Fee?
The fee ranges from 0.5 percent to 2.3 percent of the total loan amount for a first-time borrower, though the amount can be reduced if they choose to make a down payment. For a subsequent home purchase, the fee is usually 3.3 percent, but it can also be affected by a down payment.
What is Entitlement?
All veterans and active service members who meet the VA’s eligibility requirements have entitlement. This is the amount of money the VA will pay the lender if the borrower defaults on the loan.Usually, the entitlement is approximately $36,000 the first time, and a secondary entitlement of $68,250 for if the veteran buys a home that is over $144,00. When you use your VA loan, you are using that entitlement.
Can Entitlement be Restored?
If you use your entitlement, it can be restored when the loan is fully repaid, by submitting an application to the VA. To have your full entitlement restored, you have to sell the home for the original loan and pay off the mortgage. So long as you keep selling and paying off your previous VA loan, you can have your entitlement restored as many times as you want or need to.However, if the mortgage is paid off, you can use a one-time restoration benefit that will let you keep it as a vacation home or rental property.
Can I Have Two VA Loans at Once?
You can have two VA loans at the same time, usually, this is done because an active service member has a permanent change of station but wants to keep the old house. If you have enough entitlement left, you can then buy a new home at your new station.Another use of this is for a veteran who lost their home to foreclosure, they may be able to later use their entitlement to buy a new home.
When buying a home with the VA loan, there is no down payment, making it an excellent option for veterans. However, one financial obstacle that veterans will still need to face is closing costs. Closing costs are paid at closing for the lender’s fees, insurance, taxes, title transfers, and other fees needed to complete the purchase.
How Much Are Closing Costs?
While the exact amount can vary in different parts of the country, they usually average between three and five percent on a less expensive home. There are online loan estimate forms that can help you determine an approximation of what your total closing costs will be.
These costs are paid for by you out of pocket, but in some cases, the seller will pay up to four percent of the closing costs for the buyer. This is discussed in negotiations with the seller, and they can help pay for any of the fees, up to the four percent mark. There are also programs that can help you pay for closing costs if you need financial assistance.
What Fees Are Included in Closing Costs?
While most of the closing costs you will pay are the same for a VA loan and another type of loan, the VA does have some differences. There are some fees that the VA prohibits, including mortgage broker commissions, prepayment penalties, attorney fees, and settlement charges. The only attorney fees that the VA will allow are for title work, no other fees will be included in closing costs.
While the fees included in your closing costs can vary, depending on your location, these are some that can give you a general idea of what you can expect.
The cost of an appraisal can vary, but it is usually around $500. The VA sets the cost of the appraisal, and it does need to be paid upfront. The appraisal is to determine the full value of the house, to ensure you are not overpaying, and to make sure the home meets the VA’s minimum standards.
The lender will use this to determine if the home is in a flood zone; this is usually around $20. If it is, you will need to purchase flood insurance too.
Flood insurance is an ongoing insurance policy that is required by your lender and is not usually covered by a standard homeowner’s insurance policy. The first year’s premium is due at closing, and depending on how much it is, you may end up having a lot more money added to your closing costs.
Homeowners Association (HOA) Fees
Often HOAs will charge you annual dues, which are not necessarily included in your closing fees, but you may want to factor the amount due into what you will need for closing.
The full year’s premium for homeowner’s insurance is due at closing. The standard policy does not protect against flooding, and it may not cover damage from natural disasters like earthquakes. Usually, these policies only cover things like trees falling on homes, fires, and other things like that.
Loan Origination Fee
This is the lender’s compensation for the loan, which the VA limits to one percent of the total loan amount. The lender might not include fees for underwriting or processing the loan in this fee.
The lender can itemize the fees up to one percent or they can charge a flat rate of one percent. If they choose the flat rate option, they are not allowed to charge you additional processing fees. This is unique to the VA loans.
Your local area sets this fee, and it is to make the sale public record. It can be as little as $20 or up into the hundreds of dollars.
Reserves for Tax and Insurance
This is another fee that varies by the taxes and insurance on the home and the area. This escrow is intended to cover the taxes and insurance premiums when they become due. Your lender can help you establish how much you will need for this.
A company will come out to the property to determine where the physical property lines are. While this is not usually required, it is recommended so you know exactly where the boundary lines are on your property. This usually costs around $400.
This fee is difficult to average, because it is dependent on the loan amount, purchase price of the home, and your location; ranging from a few hundred dollars to over $1,000. The title report and title insurance protect both the owner and the lender from someone claiming ownership to the house and winning in a lawsuit. If that happens, both the owner and the lender are reimbursed for the loss.
VA Funding Fee
This is a one-time fee the VA charges most borrowers for their loan benefit, and it can be rolled into the mortgage if desired. If a veteran is receiving VA disability, they are exempt from paying the VA funding fee. This fee helps fund future loans for other veterans. The fee can be anywhere between 0.5 percent and 3.3 percent, depending on the loan amount.
When buying a home, your employment and your income are a key factor in whether or not you will be approved for a mortgage loan. If you are self-employed, you may face some unique challenges to get a loan. The income from being self-employed is often less stable and consistent than what you would receive working for someone, and this inconsistency can lead to your lender needing to probe more deeply into your financial records.
Who is Considered Self-Employed?
You are considered self-employed if you have sole ownership or at least 25 percent ownership in a business or if you are a freelancer or contract worker whose income is mostly covered under IRS Form 1099-MISC.
Documentation You Need
If you are self-employed, you will need to provide your lender with a year-to-date profit and loss statement, and something to show your current finances, two years of your individual tax returns and business tax returns, and a list of your partners and/or stockholders. The lender may also want to see your business license and a letter from a CPA stating that you are still in business.This is more in-depth than you would have to provide as an individual because your lender needs to ensure that you have the income necessary to make your mortgage payments. They need two years of income records to ensure that your income is not dropping every year and is either remaining steady or increasing. If you do have a significant drop every year, you will need to provide a written explanation for this drop, but if it is too big, your lender is likely to decline your loan application.The process of proving your income is a little easier if you have recently taken over a family business, if the business has a proven track record of success. In this case, you only need to provide one year of income, though the more you give the lender, the better they can determine how much to give you for your mortgage loan.
One area the lenders will focus on is the business losses and expenses. Your net income is what you make after your expenses, so everything you write off on your taxes is not taken into account by lenders. The tax write offs are something that businesses like to utilize on their taxes, but having too many expenses can be problematic when seeking a loan. Writing off expenses gives you less taxable income, which is all that lenders are allowed to count when they process your loan application.For example, you made $80,000 last year, but you wrote off $25,000 of it in expenses. This means that your net income for the last year is only $55,000, which is all the lender will count in your income.
Keep Personal and Business Accounts Separate
Proving your income is difficult enough when you are self-employed, so keeping your personal and business finances separate is important. If you work alone, it can be easier, since you know which expenses are personal and which are business, but if you have a partner it can be a little bit trickier.
Your home is getting older, and the windows have been letting the cold air seep in, taxing your poor heating system, and raising your energy costs. It can be expensive to upgrade your home to make it more energy efficiency, but if you are a veteran, you may be able to obtain the VA Energy Efficient Mortgage, which allows you to add the cost of VA approved energy efficient improvements into your purchase or refinance VA loan.
Using the EEM Loan
Buying an older home that needs energy efficient improvements. ·
Buying a home that is already energy efficient to help boost the amount of money you can get in your mortgage loan.
Refinancing your current mortgage to upgrade the energy efficiency of the home.
How Much You Can Borrow
It is usually easy to get a loan of up to $3,000 approved, you just need to provide your VA lender with either an itemized quote from the contractor or the contractor’s bid, along with manufacturer information for every item. To obtain a loan between $3,001 and $6,000, you will also need to provide an energy audit that shows the average utility costs for a year in the home. The lender will then decide if the improvements in the proposal will make a significant enough impact on the home’s utilities.
An appraisal that lists how the improvements will increase the value of the home can help you obtain an EEM for over $6,000. It is difficult to get a loan over $6,000 for this, and both the VA and your lender have to approve it. Your lender will also determine if the increase in your mortgage from this is going to offset the monthly savings in energy reduction.
What Improvements Are Eligible
Some of the things you can get your EEM approved for include:
Windows and doors
Solar heating and cooling systems
Vapor barriers, storm windows/doors
Caulking and weather-stripping
Permanent air conditioning units
There are also some upgrades that the loan will not cover:
Window air conditioning units
Unique Aspect of the EEM
If you are rolling your VA EEM Loan into a mortgage to purchase or refinance a home, you can actually begin working on those improvements before closing. If they are completed before closing, you have to provide receipts for the work, and you can only include work completed within the last 90 days.
If your improvements are not finished by closing day, or you have chosen to wait until after closing day to begin, your lender will place the cash needed for your improvements into escrow, and you will be reimbursed for the funds once they are completed. You have six months to complete the projects and must provide your lender with proof of competition. If you are unable to complete the improvements within six months, the unused funds will be applied to the principal balance of your loan.
One of the parts of receiving a mortgage loan is the appraisal. An appraiser will come to the property and appraise its value, which helps determine how much a lender will give you for a mortgage loan on the property. When getting a VA loan, this same process is observed, but the VA has stricter guidelines when it comes to its appraisals. Since the VA guarantees these loans, they want to ensure the house meets their standards.
Sometimes, these stricter guidelines can make things difficult for a borrower. For example, if the house you are buying is on the market for $250,000 and you have offered to buy it for $230,000, but the appraisal values the house at $220,000, the VA will only lend you the $220,000. This means you will need to either renegotiate with the seller to drop the price by $10,000, or you need to make up the difference on your own.
Before a VA appraiser files their official appraisal value, they will contact the lender and tell them the value appears to be less than the purchase price, which invokes the Tidewater Initiative.
The lender has two days from there to provide the VA with comparable homes to support the purchase price, and they usually work with the buyer’s real estate agent for help with this. If the appraiser does not find an increase in value from the compared homes, they are required to provide a written explanation as to why that is.
At this point, the lower appraisal value is considered official, but you can then seek a formal appeal, known as a Reconsideration of Value (ROV).
Reconsideration of Value
Getting an ROV means the VA reevaluates how much the home is worth, and this has the potential to change the VA appraisal amount.
To get the ROV you can try to find other similar houses for sale to compare the one you want to, and if you are able to find other homes similar to your expected price range, the VA might be willing to reconsider their appraisal. There is always a chance that the appraiser missed something or made an error, so you might be able to get the VA to reconsider.
When the ROV Fails
ROVs do not always work, sometimes the appraisal value is still too low to get the full loan amount you need to buy the house. If this happens, you can attempt to renegotiate the price with the seller; considering the circumstances, they may be willing to lower it to the VA appraisal value. The lower appraisal value might make the seller realize the house is overvalued and make them willing to lower the price; often the price is set higher because of its sentimental value to the seller.
If the seller is not willing to lower the price, and this is your dream house, you might be able to cover the costs yourself. Unfortunately, you will have to pay this difference in cash, out of pocket, so it is not always a viable option.