LOAN PEDDLERS

VA Home Loans: Seller Can Pay Veteran's Debt To Qualify

We've talked about seller contributions towards closing costs but did you know the seller can pay off a veteran's debt to qualify?  The seller contribution is limited to 4%.  Typical VA closing costs in San Diego total about 2-3 % of the selling price; that "extra" 1-2% could be used to "buy the rate down" or to retire the veteran's debt for qualification purposes.

Here's a real life example:

One of our borrowers was buying a $380,000 home in Mira Mesa.  The seller agreed to pay 4% of the sales price towards closing costs ($15,200).  Closing costs for a 5.25% VA loan were about $8,000 while a 4.75% VA loan would have had $16,000 in closing costs.

We opted to accept the higher rate and use the extra $7600 in seller contributions to pay off the veteran's car loan; this eliminated a $500 payment from the veteran's debt-to-income ratio.  The borrower earned about $83,000 annually and would have had a debt-to-income ratio of 48% which exceeded to VA guideline of 42%.

When we paid off the car loan (using the $7600 in "free" seller contribution), the debt-to-income ratio dropped to 41.6% rendering the loan APPROVED.

Sometimes, you gotta be a juggler to get loans approved in this market.

What is a VA "No-No" Mortgage?

VA home loans, insured by the Veterans Administration, offer a 100% financing option (with a 2-3.3% surcharge, AKA a funding fee).  This means that an active duty service member or eligible veterans of the Armed Forces can purchase a home with no money down (the first "no").

Sellers are allowed to contribute up to 4% of the sales price towards the veteran's closing costs.  Typically, closing costs in San Diego, for a VA home loan, are about 2-3% (inclusive of pre-paid escrow items).  A full 4% seller contribution allows us to "buy down the rate" for a veteran.  Essentially, the transaction can be structured so that the veterans pays nothing out of pocket for closing costs (the second "no").

Both features together mean:  No down payment and No out-of-pocket closing costs.  We call that a VA NO-NO.

Nothing speaks like numbers; let's examine how it might work for a $300,000 purchase:

Typical closing costs for a $300,000 VA home loan:

Lender Fees-                                          $4325

Escrow and Title Fees:                        $1800

Prepaid Items:                                        $2925

TOTAL CLOSING COSTS          $9050

If the real estate agent were able to negotiate a 3% seller contribution, with an agreed upon price of $300,000, that would cover $9,000 towards the veteran's closing costs.  While it isn't a true "no-no", the veterans would come in to closing with about fifty bucks.

FHA & VA Mortgages Are Assumable

One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable.  What this means is that a buyer can "take the payments over" from a seller, if the existing loan is a FHA mortgage or VA home loan. 

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%.  I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher.  Left unchecked, inflation could drive mortgage rates into double digits by 2012.  The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough...unless you can offer the buyer a below market interest rate.  Let's assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan.  His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%.  The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that's over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market).  Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called.  Pragmatically, that doesn't happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years.  You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash.  That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.  Low prices and historically-low mortgage rates make these loans a consideration when comparing them to a conventional loan.

How To Shop For an Online Mortgage Broker

So you're surfing the internet for a mortgage?  I'm not surprised.  More and more people are "going online" first to find information out about mortgage lending.  Lenders are making it harder and harder to get money so you probably want to make sure you have your "ducks in a row" before you start your home search. I'm guessing you're probably pretty smart so I'll pay you the compliment of being blunt.  Here's my advice to you:

DON'T TRUST ANYONE...until you do.

Shaman-like advice from the mountaintop, huh?  Seriously, don't trust anyone to help you with your mortgage financing until you've vetted them completely and feel comfortable that they'll serve your interests before their own.  The Latin phrase "Caveat Emptor", which means "Let the buyer beware" comes to mind.  I know what you're thinking.  Can I trust a guy who starts off his sales pitch with "don't trust me" and "watch your own butt" ? My answer to you?

DON'T TRUST ME EITHER...until you do.

The mortgage crisis came from a confluence of factors.  Greedy Wall Street tycoons and opportunistic mortgage lenders offered cheap money to unsuspecting consumers.  Well, I guess not all the consumers are victims, either.  As it turns out, a few consumers "gamed the system" and lied about their income to take advantage of the Wild West atmosphere of the early part of this decade. When those consumers stopped making their mortgage payments, the house of cards fell and our financial system went running to the government with their hand out. So...

NOBODY TRUSTS ANYONE RIGHT NOW...and I think that's a good thing.

It's a good thing because we all have to take some responsibility for the money we lend and borrow.  I have to ask you a bunch of questions, get supporting documentation to prove your answers, and twist the arms of the underwriters to open the spigot and lend the very money you have deposited in their banks.  You should approach our relationship the same way.  You should feel free to ask me about my expertise, how I communicate with you, and what to expect from the services I offer.

I won't hide from you.  I let it all hang out on the internet so you can get those questions answered BEFORE you pick up the telephone to call me.  If you want to spend hours researching me, I'll give you so much information that it'll be like taking a sip from a firehose.  If this sounds like I'm a NO BULL kind of guy, who tells it like it is, I"m pleased.  I want to establish our relationship up front so you know exactly what to expect from me.  I won't give you a glossy, four-color sales brochure, with a picture of my office, overlooking the Pacific Ocean.  You won't find me on a late-night infomercial, dressed in an Aloha shirt, preaching the "get rich qucik" mantra that got us into this mess.  I'm direct and to the point.

...and I'll watch your butt because I'm watching my own butt, too.  I've been fortunate to call mortgage lending my career.  I love the business and I plan on being around until my little girl graduates college (some time in 2022).  I won't make it by ripping people off and giving bad advice.  If youve made it this far, I'm speaking to you.  What I'm saying resonates. 

You might be surprised when you call; I'm actually a helluva nice guy on the telephone.  I just like weeding out the folks who aren't serious about their money.  If you're still here, call me at (858)-777-9751.  If you're not ready to call just yet, read on.

How Important Are First Time Home Buyers To the California Real Estate Market?

I asked my LinkedIn community how important first time home buyers were to their (local) real estate market. 

Rosemary Joles of San Diego said:

Many of the San Diego first time home buyers thought they had been priced out of the market at the top of the real estate boom. They now are beginning to realize they can fulfill the dream of home ownership again here in San Diego. 50% of my business is first time home buyers, so they are extremely important to me. In addition they are very important to the revitalization of the housing market as a whole. Especially since they make up 41% of the current market share.

I agree, Rosemary.  Two years ago, I warned of the impending collapse of the under $500,000 market in San Diego County.  Last year, I thought that market would be robust this year and that the $500,000- $1,000,000 market would suffer due to lack of available financing.  As it turns out, I was right both years.  I think we'll continue to see "bargains" in the under $500,000 market, well into 2010 and increasing value in the mid-priced homes, as its prices collapse.

Will Handley, a Los Angeles home inspector said:

First time buyers are the industries life blood. My business expands and or contracts based on the healthy in-flow of new first time buyers into the market. With employment numbers in decline, the corporate transfer client base is shrinking as well. Thank goodness for the exceptionally robust REO market.

Amen, Will.  The REO market (foreclosed homes being offered by the bank) isn't just healthy for the real estate industry, its healthy for the economy if we intend to battle back from this recession. 

John Pucciano, a REALTOR in the DC-area, remarked:

At this stage, particularly with the $8,000 stimulus credit for first time buyers, low interest rates and affordable housing, first timers make up more than 40% of my business. This appears to be more than a local market experience (see resources below). While they do require additional effort, it is very satisfying to help the first timers progress to home ownership. I have been making a concerted effort to reach out to them.

John's correct.  The $8,000 tax credit, for people who have not owned a home in the past three years, is akin to federal bribery.  Simply put, the Government is willing to give you eight grand if you'll buy a home between now and December 1.  I think the problem is that many first time home buyers either:

(a) don't know that the program expires December 1, 2009
(b) don't believe the Government will stop the program.

I can't intelligently speculate about the unpredictable actions of our Government but I do know that its prone to do whatever will garner them votes.  Unemployed, unhappy people don't vote for the party in power so take that into account.

Lenders Can't Evict Sailors & Marines Because of Landlord's Foreclosure

If your landlord doesn't pay his mortgage, the lender will evict you, right?  Not if you serve as an active duty service member.  Cindy Jones, a real estate agent in Woodbridge, VA, tells us why:

Military familes who are forced to make a local move due to a foreclosure may find some relief from the Servicemembers Civil Relief Act.  Not many servicemembers know that under section 531 in the SCRA anyone looking to evict an active duty servicemember from a rental property that is their primary residence must have a court order.  This applies to rent that is less than $2831.113 per month.  Servicemembers can apply to the court to stay their eviction or reduce their rent until their case works it's way through the legal process.

As of July 2008 servicemembers who are being forced to leave their rental property due to foreclosure can apply to their base legal services and transportation office to seek financial assistance with their move.  In addition to the assistance you may find through your base you can also seek "cash for keys" from the lender who is foreclosing on the property.

San Diego sailors and Marines are discovering that the base pay and BAH increase for 2009, combined with drastically reduced real estate prices has made home ownership a reality.  If faced with such an eviction threat, we recommend you contact your base legal services office and read up about how VA home loans could help you get a home of your own.