I’ve long been a proponent of VA lending, but have recently realized that these loans are better than ever. For example, recent changes have increased loan ceilings to match Fannie Mae and Freddie Mac. VA has also rolled out a three-year ARM with attractive parameters. I’d like to encourage originators looking for another profitable niche to consider VA loans.
As a point of clarification–what I am calling a VA loan is actually a VA Guaranteed Loan. The Veteran’s Administration does not loan money to veterans, but rather, they guarantee the loan to the lender that replaces the need for mortgage insurance on a no-down loan. They call the amount of the guarantee “entitlement.” This amount has grown over the years. When I started originating VA loans about 30 years ago, it was $4,000 and the rule was that you could borrow up to four times the entitlement. As home prices rise, Congress approves increased entitlements and today it is $60,000. For many years, the 25 percent guarantee rule capped VA loans at $240,000, but “VA Jumbos” changed that. The new deal is that a veteran can put down 25 percent of the amount over $240,000 and go all the way up to a $333,700 loan amount.
Key Benefits
With all of the 100 percent financing programs available today, why is a VA loan such a big deal? There are several reasons. The biggest one is that VA does not charge a monthly mortgage insurance premium. Instead, they collect a one time “funding fee” that can be financed. The amount is 2.2 percent for regular military Vets and 2.4 percent for reservists with no down. With 5 percent or 10 percent down, the fees drop to about 1.5 percent, based on regular versus reserve status. For veterans using their entitlement a second time, it is 3.3 percent. If your vet client is 10 percent or more disabled, the funding fee is zero. Either way, if you calculate the monthly cost of financing this fee, it is always less than a monthly MI premium. I did an example for a $225,000 sale at 6 percent and the trade-off was $30 per month instead of $180 per month.
You may be thinking: Why not get an “interest only” second instead? That is actually not a bad idea and in theory the overall payment could come out about the same. But let’s face reality. The investor that is putting up the money for the second is taking the same risk that the mortgage insurance companies get paid for. You know they are not doing this for free and the lower your buyer’s credit scores are, the higher the yield. Plus, below a certain level, the 100 percent CLTV will not even be available.
This also brings us to another reason to include VA loans in your portfolio—they are relatively easy to qualify for. When the LTV on a conventional loan approaches 100 percent, guidelines become more stringent and the loan gets more expensive. On the other hand, VA loans have one fixed-rate and it doesn’t matter how squeaky clean the package is. If you get an acceptance, you get that rate. There is no tightening of the guidelines for a high LTV because VA loans are zero down by nature.
Another factor that can sometimes work to your advantage is the unique “residual income” approach to qualifying. Rather than using pure income- to-debt ratios, VA underwriting guidelines calculate how much money a family will have to live on after making their house payment and paying other bills. This calculation includes federal and state withholding, and estimated maintenance and utility costs. The residual income is compared to the required amount based on family size and is adjusted for various areas in the country. All of this really makes sense because a single person or even a married couple with no dependents could allot more of their income to a house payment. If you don’t want to do all these calculations, then just run it through Desktop Underwriting and see if you get an approval.
Another way to enhance your buyer’s buying power is with the new ARM program. Because the rate is fixed for the first three, five, seven, or 10 years, the borrower qualifies at the start rate. After the fixed period, the maximum rate increase is only 1 percent per year with a 5 percent life cap so it is probably the most stable ARM product available.
Marketing Approaches
There are many ways to generate VA business. The easiest and best is to get invited on to a military base and make a presentation to an entire battalion (Army) or squadron (Navy). Another option is to meet with reserve units during their weekend drills. Here’s an effective opening question for a commanding officer: “How do you feel about promoting the education of your men and women related to their VA benefits?” Naturally, he is going to say that he is in favor of such education, and as soon has he does, you can close with the “when and where” question (“When and where can we arrange to make a presentation…”)
Here is a tip when pursuing business with reservists. They typically drill one weekend a month and two weeks each year. As are frequently looking for fun things to do. There is always a full-time officer who administrates the unit and the reserve unit also has a commanding officer who is a civilian when not drilling. If you don’t make contact with the regular officer, try the other one. If you are having trouble finding the reserve units, try a web search. I experimented with a few key words like “reserve,” “Navy,” and the name of a location of a military base, and found out that a lot of reserve units have their own Web site. Most included options for contacting administration and one even had an advertising option. You don’t have to restrict yourself military publications. Ads in a local newspaper in an area where there is a large military base will work. Don’t forget the basic concept. A VA home loan guarantee is a benefit. Human nature is to take advantage of something that you have earned.
Other marketing strategies could include: distributing brochures to Veterans of Foreign Wards (VFW) halls, visiting recruiting offices to meet with the officers in charge (who could be great referral sources), and tailoring a postcard campaign to veterans. Don’t forget to visit the VA Web site: www.va.gov.
Other Considerations
It’s essential to find out what type of vet program your state offers. For instance, California has the Cal-Vet program, which is an alternative to the VA guaranteed loan. On the other hand, some state agencies supplement the VA loan. In Texas, the state provides a second mortgage program that not only piggy-backs the VA loan to higher loan ceilings, but can also be used for down payment and closing costs. I suggest you do a Web search using veteran’s organizations. I tested it and not only got hundreds of hits, but it also showed me several sites that list and link to dozens of organizations.
Regardless of where you pick up your veteran clients, something that you should always do is to offer to process their VA loan for them. This is extremely simple and they can do it themselves, but if you take the lead, you can tie them in as future clients. Make sure that you have a ready supply of VA Form 26-1880s. This is a request for a certificate of eligibility. Help them fill it out and send it to your local VA eligibility office with a copy of the Veteran’s DD-214, which is the document showing release from active duty. (Make sure you get the one with their service dates and not the one with the big eagle on it.) VA also has the ACE system (automatic certificate of eligibility) processed online in seconds, available to most lenders. There is an option to have the form returned to the lender, which is perfect. Then you can keep it on file and they will surely come back to you when they find a home.
Of course, one of the things that you should understand if you are going offer VA loans is to determine who is eligible. This is a little tricky because they keep changing the requirements. Before 1980, the requirement is 181 days of active duty. Now regular military requires two years and reservists have to be in for six years. Beyond this, there are dozens of exceptions. The VA Web site is a good source for more information on this. You can also order a copy of the VA Handbook that lists everything there is to know about VA loan guidelines.
Becoming a VA loan expert requires some learning, but it will surely be worth the effort. It has certainly been a good source of business for me.
By Thor Skonnord