Many first time veteran home buyers find themselves at a loss as they negotiate the loan process. I’ve created a comprehensive, yet (hopefully) easy to follow overview of the major terms and concepts you many encounter.
LOAN TYPES
There are two basic loan types – VA Fixed Rate mortgages and VA Adjustable Rate Mortgages or VA HYBRID ARM’s. VA Fixed Rate mortgages are fixed for the entire term of the loan and are the most secure loans. The term can be anywhere from 10-50 years depending on the loan program but 95% of the time are fixed for a 30 year term. These are best for veterans on fixed incomes and for veterans who plan on being in a property for either an extended or indeterminate amount of time and have no plans to refinance.
Since most veterans know that they will either sell or refinance their home well before end of the 30 years, many individuals choose adjustable rate mortgages. VA HYBRID ARMs can come in a variety of terms, depending on the loan product but are for the most part also based on 30 year terms. However, VA HYBRID ARMs have an introductory fixed rate period ranging from 3-5 years at a lower rate than those of a 30 year fixed loan. In exchange for the benefit of a lower interest rate, once the fixed rate period ends the loan will adjust to the current market conditions of that time.
It is a common misconception that when the Fixed rate period is up the loan rate will automatically increase. The loan will adjust according to the rate of the 1 year Constant Maturity Treasury Index (1yr CMT) + a fixed margin (usually 1.75-2.25%) which is determined at the inception of the loan. Let’s you had a 5 year VA HYBRID ARM at 7.5% with a margin of 2%. When the Fixed rate period is up after 5 years, if the 1yr CMT was at 4% then the interest rate on the loan would actually drop to 6%. Conversely, if the 1yr CMT at that time was higher, say at 6%, the rate would go up to 8%. Regardless what the 1yr CMT is at when the VA Fixed Rate ends, all VA HYBRID ARM’s have built in rate adjustment caps that limit how much the rate can change each month, year, and over the remaining life of the loan.
VA HYBRID ARM’s and VA Fixed Rate loans refer only to the interest rate on a loan. The terms Amortization and Interest Only refer to the payment schedulebased on this rate. Both VA HYBRID ARMs and VA Fixed Rate Loans are amortizing loans, although I will cover interest only loans as well to be thorough.
AMORTIZATION TYPES
Amortization refers to (with regard to mortgages) the repayment of the balance of the principle amount borrowed over a specific term. As mentioned earlier, loans have many terms and can be amortized over any of them. The key to understanding amortization is that it refers to a loan that is being repaid over the term of the loan. Banks “front end load” their loans in order to maximize their interest return. At the start of the loan, the bank calculates how much interest the rate they have locked you at will generate for them across the entire amount of the loan. When they receive your monthly payment, instead of equally distributing the payment to the interest due and toward reducing your balance, banks load the majority of the interest owed over the life of the loan into the first 10 years. Within the first year of a 30 year loan, the vast majority of the payment is going to pay the interest on the loan with very little actually going to pay down your principle balance. In the last year of the loan then, the majority of the payment will be going to pay down the balance, having paid the bulk of the interest calculated over 30 years in the first 10.
Interest Only loans are simply loans that do not amortize for a fixed period of time. On a 30 year interest only loan with a 10year interest only period, you will only be required to pay the interest due on the loan for the first 10 years. You will make no contribution toward principle. The interest you pay each month for the first 10 years is simple interest calculated by multiplying the balance (e.g. $100,000) times the interest rate (e.g. 6%) divided by the 12 months of the year. ($100,000 x .06 = $6000 , $6000 / 12 = $500+TI per month monthly payment for the first 10 years) By contrast, a $100,000 30 yr VA Fixed Rate amortized mortgage at 6% would be $599.55. Sure you might not be paying down your balance with an interest only loan but consider the following – you could take the $99.55 per month you were saving by not choosing an amortizing loan and:
Put it toward paying down higher interest rate credit card debt
Put it into an 6 month CD that would roll over every six months with compound interest taking advantage of rates as they rise. By doing this you would essentially be “hedging” the market against rising rates.
Putting money toward your home is beneficial only if it is contributing to a lower payment. Many veterans believe the interest they pay over the life of the loan reduces as their balance does over time. This is not true. It only appears that way. Because of the way loans are structured, the amount of interest you pay over the life of the loan is based of the original NOTE amount or principle balance. This interest you actually pay is the “front-end loaded” interest calculated on this original amount. So this means the only way you will lower your payment on most mortgages is by refinancing and paying off a portion of the remaining balance owed in a lump sum, thereby reducing your future payments on the new loan with a smaller balance and NOTE amount. By putting your savings away on an interest only loan as described in the 6 month CD example, you could actually pay down your balance faster than an amortizing loan of equal rate. Whenever you refinance, simply take the amount saved by making the I/O payment + the interest you have earned on in and use it to pay down your remaining balance. Putting money toward the equity in your home isn’t really safe anyway. Imagine if you took the $99.55 per month saved and put it toward your balance each month. If the property depreciates, that money is gone. If you had been saving it in a risk free, interest bearing investment, you not only have the money you would have lost but all of the interest earned as well.
CLOSING COSTS
The amount of VA loan closing costs you pay will be directly proportional to what rate you decide on. The general rule is: The higher the VA interest rate, the more projected interest the bank will make on you, the more flexibility the bank has to cover and or waive closing costs. You can choose to lock into rates even below prime if you choose to, but the bank will ask you to pony up with a commensurate amount of prepaid interest to “buy-down” your interest rate. It follows then that these fees are sometimes called “discount points”.
CONCLUSION
I hope this has been a helpful overview of the loan process and some of the key terms you may encounter. Feel free to check out some of my other posts (Linked Below) on specific VA loan products including the VA Hybrid ARM.
This presentation will help families to better understand how VA streamline refinances work and the benefits they can expect by taking advantage of this program.
VA Interest Rate Reduction Loan (Streamline) Overview
You complete the paperwork and fax it back along with mortgage statement, homeowners insurance statement, mortgage note, copies of drivers license and social security number verification (takes most families about 20 minutes)
When we receive paperwork your VA Processors prepare your file for closing
After the underwriters review and give us the clear to close we will have an authorized representative come to your home within the next four weeks to help you to endorse the final closing paperwork and finalize the new loan
I do not view myself as salesman. I think the secret to “selling” a loan or anything else for that matter is simpler more honest than many may think. If I do nothing more than push an interest rate, then “I” am not selling anything; only the rate is. Too often many of us are conditioned to chase low interest rates simply because the perceived wisdom tells us to. In fact, there is no “one size fits all” loan program, rate or fee structure. Realizing this, helps us better serve our VA loan clients, helps our veteran clients make more sound decisions, and establishes a relationship of trust between the veteran and their loan officer.
I can see how reading this title at first might lead one to think this post was meant for people who work with or for me. I share this here to give my veterans an insight into my personal philosophy and how when it comes to giving a veteran the best deal and best service I can, our interests are more closely aligned than one might think.
The following then represents the steps I take on every VA loan.
1. Get the data and identify the veteran. This information gives a context to a veteran’s motivation for investigating a loan. Sometimes a veteran is unaware of the best option or, in some cases, convinced an alternate option is better than what you suggest. This helps frame basis of your advice. Questions might include: How much debt do you have, how much do you owe on the home, what is your payment.
2. Find out the veterans goals – This can be open ended: What are your intentions with a potential VA refinance? Or pointed requiring a yes no answer:
· “Are you looking to free up money to pay down other debts?”
· “Are you looking to free up money to supplement your income?”
· “Are you looking to pay the home off faster?
3. Check the time – “What is the minimum amount of time that you are sure you will own the home?” This question provides scope to the mortgage options you present.
4. Run the numbers & create a plan – At its most essential, a refinance is an investment. You agree to pay/add a certain amount of closing costs in exchange for an incremental savings over time. When the cumulative amount you have saved has equaled the costs of the refinance, you have achieved the “breakeven point” in the loan. From this point forward any savings experienced are now “true” savings. The optimum quote will be one where the loan program, rate and fee combination saves the veteran the maximum amount of money between the “breakeven point” and the end of the length of time they were sure they would own for.
5. Identify the risk – By determining the potential risk, advantages and drawbacks of the various options available you alleviate unknowns. Unknowns create uncertainty, and uncertainty prevents good decision making. A fixed rate loan is often thought to be the safest loan available, but not necessarily for someone who has a large amount of higher interest rate credit debt. By taking a VA Hybrid ARM, the veteran might save significantly more. Since credit cards calculate the interest rates on the ending monthly balance, the faster one pays off credit card debt, the more money they free up each month. I have often been able to show veterans how paying off credit card debt faster can free up enough money to offset the maximum “worst case” rate/payment they could ever reach on the loan.
6. Clarify details and explain the options – encourage the veteran to ask questions. It is often the case that veterans object to the Hybrid ARM simply because it is an ARM. To disregard all ARM loans simply because of the ARMs with unfavorable terms that have hurt many homeowners is like refusing to ever drive a car simply because Toyotas are currently being recalled.
7. “You sell ME.” – If a loan officer has completed the preceding steps perfectly, then a sale is no longer the issue. Once you have devised a plan that best meets their goals, mitigates their fears and ultimately saves them the most money, you are talking about common sense. Though I don’t directly ask this of my veterans, my philosophy is “you sell ME as to why you shouldn’t do this.” In my experience, following these steps through with this approach helps the veteran arrive at a clear and meaningful decision.
Veterans have many loan options and there are many lenders and brokers who they could work with and may even be able to offer the same deal you can. Following these simple rules help me to distinguish myself among the choices, and hopefully earn their business.
This blog post will be short and sweet because I want the video above to do the talking. That said it is very important that any veteran home owner eligible for a VA streamline loan or even a VA cashout loan be aware that 4.5% VA rates have returned once again to the market! Most of the approved loan officers here at LowVARates would have never guessed that we would have seen this low 30 yr fixed rate return, but we are all certainly happy that it has. The FED will stop buying mortgage backed securities is just about a month, so we do not expect interest rates to stay this low much longer. If you have been waiting to refinance, YOU BETTER DO IT NOW.
My name is Ryan Johnson and I will be the VA loan specialist going over this program with you. Now I am a licensed mortgage professional in 37 different states across the country. I have been with Flagship Financial for 4 years and in the time frame I have helped hundreds of families buy homes and refinance their homes and take advantage of these lower interest rates like you are looking to learn about now.
The purpose of this quick overview call is to give you a general idea of what the VA streamline refinance program is, what the different interest rates, programs, terms, that you can take advantage of and a basic understand of what it takes to get started. This overview call is not meant to replace a one on one conversation. In fact, immediately following this overview you will be transferred back to my staff so we can have a one on one conversation to go over your specific numbers on your loan. But at least this will give you a good overview of what this program is about and what it can do for you so that when we do have that one on one conversation you already have an idea of what you can take advantage of and be better informed.
We’ll start off with what this VA Interest Rate Reduction Program is. Back in 1980 the VA came up with this program as a way to put you into a better, lower interest rate loan than you bought your house on. They do that by letting you pay off that higher rate loan and replacing it with a new lower rate loan. Thereby saving you money in interest.
Now there is nothing really special about that process, civilians have been doing that sort of thing since mortgages have been around-they just call it a refinance. But what makes this program special is how you qualify for it. See if you were a civilian and you tried to refinance your house you have to go through that same long, drawn out expensive, frustrating process that you originally went through when you bought your house originally. I’m sure you remember that process vividly because in most cases it tends to one of the least enjoyable experience when it comes to buying something. Well believe it or not everyone has to go through that over again just to lower their rate if that is something they want to do. Everyone has to except you. One of your very special veteran benefit entitlements is this program, the VA Streamline refi where your able to reduce your interest rate with no full appraisal, no full credit report, no income asset or employment verification and no inspection. Quite simply you sign the VA’s application, supply some of your existing mortgage documents and you get a new lower interest rate. That new lower rate will help you to pay off your hosue faster or lower your monthly payments or both. You also get to miss a couple mortgage payments when you take advantage of this program. You are also able to get a cash refund from your existing lender that you are entitled to. So we will go over all of those benefits in a minute.
Now the VA offers four basic options when it comes to buying or refinancing a home. And so each of these options has a different goal in mind and also I’ll go over the details of those and what we are going to do is compare each of these options to an example veteran. We’ll just say for our example veteran who has a 6% interest rate on his loan of $200,000. And we’ll see what would happen if that veteran was to go with each of these different options. Just to kinda give you an idea of what each option can save you. And I’m gonna go over the interest rates of each option for you as well. Now of course your numbers are going to be different when we go over those but at least gives you a general idea of what each of these programs are about.
So we’ll go ahead and look at option 1.
Option 1 is by far the most popular program on this va streamline refinance. The reason why is the number one most popular goal I hear with the veterans that call in, and we get hundreds of calls a day is I want to lower my monthly payment as much as possible. Well option achieves that better than any other option. That is the reason it is the most popular. You can get an interest rate as low as 3.75% on a 30 year loan with option 1. Well if our example veteran was to go with this program it would drop their rate from 6% down to 3.75% That is a 4500 drop in annual interest or 375 dollars per month. That is what makes that program so appealing . Now option 1 is called the VA 3 Year Hybrid Program and here is how it works. The 3.75% would be fixed in and guaranteed for three years. At the end of that time the VA then allows the rate to change but only by a small amount. The VA only allows the rate to go up or down a maximum of 1 percent in any given year thereafter. Now this is not one of those fully adjustable mortgage programs you have heard about in the news the last couple of years that have caused our country so much trouble. The VA would never stick you into a loan like that for one big reason. Your loan is guaranteed by the department of veteran affairs. Now when you bought your house they may have never explained to you what that guarantee is so I will do so now just in case you weren’t aware. What that guarantee means is that the VA guarantees that you will always be able to make your payments, you’ll be able to make them on time and if you should ever have any difficulty making your payments the VA will step in and actually help you or even pay your mortgage payments for you until you get back on your feet and even if that measure should fail and the lender is forced to foreclose on your house the VA is the one that is responsible for paying off the mortgage loan. Now the reason that is important to know is that is the only reason the lender was willing to give you this house with no down payment because that very attractive guarantee. And the VA only puts that guarantee on safe, stable ,reliable, loans that have a proven track record of the veterans being able to pay their payments on time throughout the entire term of the loan. And that is no exception for option 1. You can have confidence knowing the VA is putting you into a safe stable reliable loan because they certainly don’t want to pay off your mortgage loan and they definintely don’t for the tens of thousands of veterans that take advantage of this program every single month. Now the reason they came up with this option 1 is because they are taking advantage of a confirmed US statistic. And that is we as American home owners only keep our mortgages an average of three to five years and then we get rid of them. WE refinance to take advantage of lower interest rates and better loan programs like you are looking to do now. We refinance to take cash out of our properties and pay off debt of do home improvements or we sell our homes do to job changes, job transfers, family changes or we just want to live in a different area. There are many different reasons why we sell or refinance our homes so statistically whether you plan on it or not you are very likely to do one of the items I mentioned in the next 3 to 5 years. Well the VA looked at that and said, Well why in the world are most of our veterans taking these 30 year fixed mortgages and paying on a higher ratethan they have to. Let’s put a loan program together that is just as safe as a fixed rate loan because it is fixed for that important 3-5 years and we can offer it at a significantly reduced interest rate and here you have the birth of this 3 Year VA Hybrid Program at 3.75% interest rate.
Now lets say you get option 1 and you have enjoyed the last three years of 3.75% You’ve saved a bunch of money and year four rolls around and you haven’t made any changes and you are going to be in the loan. No problem. At that point the VA has stated the rate can change. It can go down it can stay the same it may go up .1% but the max it can go up is 1% to a maximum of 4.75%. Well that probably a whole lot lower than what you have right now and if you don’t want the rate to change at all at the end of those three years you can take advantage of this same easy streamline refinance program and lock in at another low three year s or maybe just go into a full fixed rate at that time if you’d like. The VA wanted to have a way for you to lock into a different loan program any time during the three years or after should you choose to do so. So that is option 1 the most popular program of all because it does lower your payment the most.
Option 2 is very similar. It is also a hybrid program, the Vas 5 Year Hybrid program. And youre able to get an interest rate as low as 4.5% on that program. So if our example veteran is at 6% went with option 2 they would save themselves $3000 per year in interest or just about 250 per month on option 2.
Option 3 is the VA 15 year fixed loan. This option will help you pay off your house faster compared to your 30 year term loan. What this option is going to do for you if our example veteran went with this loan it would drop their rate from 6% to 4.5% on a 15 year fixed loan that would save them just under $200,000 in payments and interest on top of the nice bonus of paying off their house in half of the time so this is the program that will save you the most over the term of the loan. Now that does come with a bit of a cost. That cost is in most cases you will experience a higher loan payment than your current payment. But it doesn’t have to be that much more. The typical increase is anywhere from 10-30% of your traditional 30 year payment. So for example if you are paying one thousand per month for your mortgage you would see your payment rise to 1100 to 1300 per month and you would be able to pay your house off in half of the time with this option 3. So if you can afford that payment look no further because this is the best option for you because it will save you more than any of the other options.
And that leads us to the fourth and final option which is just your standard, plain Jane 30 year fixed loan. Just like you’ve probably got right now. You are able to get an interest rate based on today’s rates as low as 4.75% on that particular loan program. So if our example veteran went with option 4 it would drop their rate from 6% to 4.75% which is a 2500 annual savings or just about 208 dollars per month they would save in payments and interest in option 4.
Now those are the four different options with their interest rates and example of the savings they can offer you. On top of that, regardless of which option you choose you will get the following additional benefits
Number one the va allows you to miss your next two months of mortgage payments and that could mean two, three, four thousand dollars in your pocket by missing those next two mortgage payments. The second benefit the va offers you is about two weeks after this transaction closes you are going to get a check in the mail for whatever is in your current escrow account and you get to keep that money and do whatever you want with it. The reason you are getting that check is because part of setting up this new laon for you is the va requires us to fund and establish you a new escrow account to ensure that your taxes and insurance are covered when come due but you already have an escrow account with your current lender so by law when we pay them off they are required to refund this money to you and you can keep that money and do whatever you want with it because like I said your taxes and insurance will be taken care of in your new loan. And so if you add the escrow refund to the two skipped payments you could walk away from this transaction with 2-3-4 5 ive seen as much as 9000 dollars in a veterans pocket in addition to saving 500 dollars a month every month on his monthly payment. So you can get some important financial benefits from this program and that is why the va makes it so easy to qualify for and tries to motivate you to take advantage of these programs.
So at this point I usually get a lot of questions, Ryan what’s that catch, is the program legitmate, it sounds to good to be true. I can assure you this program is legitimate in fact once this overview call is done and we have our one on one conversation I will even give you the vas website so you can look this program up yourself on the vas website and you will notice that web site will be very similar to what you have learned today on this overview call. There is no catch. The VA is trying to help you by giving you a lower interest rate but you do need to be aware of some changes when you do a va streamline refinance. Theres nothing really major it is still a va loan, you still retain all of the same va loan benefits, your taxes and insurance are still included in your monthly payment. Literally everything is identical to your existing mortgage except for these four changes
Number one, you will be paying your payment to a new VA lender because your old va lender is paid off. Number two, you will have a lower interest rate. Number three you will have a lower payment as long as you choose 1 2 or 4. Now regardsless of which you choose another bonus of your new lower payment is the fact that more of your mortgage payment is going to be applied to the principle balance every month. For example when you pay your mortgage payment right now lets say 200 per month goes toward your principle balance every month. Well after this transaction is done more like 250 to 300 per month is going to be paid down on your principle every month so you will actually see your mortgage balance drop more rapidly with this program. Just another benefit there. The fourth and final change you will experience is that you may be financing a little bit of a higher loan balance than you existing loan balance.
There are three reasons your loan balance can change. Number one the two months missed mortgage payment. That is an optional benefit the va offers you . If you take that money to use for your own purposes its not free money, its deferred interest that will be added to the loan. The second reason your loan amount can go up it the escrow refund check. Remember you get to keep that money and do whatever you want with it but its not free money either because we have to establish you a new escrow account to ensure your taxes and insurance are covered and that is just added to the loan as well. And so at this point I get a lot of questions like, Ryan I am adding 2 3 4 5 dollars whatever it ends up adding up to in your case to your loan that you don’t have to. Are you sure that’s a good idea. Well believe it or not the answer to the that question is yes, in most cases it is a very good idea and here is why. You are going to be financing this new loan at such a low interest rate, as low as 3.75%, you would be better off taking that money from the two missed payments and the escrow refund and putting it to good use and paying off high interest rate credit card bill, a car loan, a personal loan something that is financed at a much higher interest rate than 3.75% and now you can save even more money per month on payments and interest on top of the savings from the mortgage. And once again those are only suggestions and these cash benefits are optional and you don’t have to add to your loan but they are there if you like. And a third and final reason your loan can go up is because of closing costs. Whenever you purchase or refinance real estate, regardless of the loan or lender you choose there are closing costs involved.
However there are four very nice things about closing costs when it comes to the VA Streamline refinance. Number one you do not need to pay a single penny of these costs out of pocket. These costs are slimply rolled up into the mortgage and are included in the monthly payment an savings we have already gone over. The second nice thing about these costs is that in most cases, now I am not an accountant so I cant speak for you directly, but in most cases these costs are 100% tax deductible. Meaning you will be able to write these off when you file your taxes. You should expect to get a bigger return from the IRS. So, once again consult your tax professional on that.
The third nice thing about these costs is believe it or not these costs are optional. You don’t need to add any costs to your loan if you don’t want to and here is how that works. Let’s say you take option 1 and you qualify for a 3.75%. Becasure you may be concerned about adding costs to your loan because you may be moving in 6 months you can choose to close your loan at like a 4% or a 4.25% probably much lower that what you pay now but when you take a little bit of a higher rate the va allows you to reduce or even waive the closing costs involved so nothing gets added to your loan. And so we can go over that in detail if those costs are a concern of yours after this overview call. And the fourth and final thing that is nice about those costs is the fact that the va is looking out for you. The va built this program to put you into a better loan than you are in now and that includes ensuring that you are saving more in interest than this transaction is costing you. And so they have a very simple test they run that you must save more in interest than the transaction costs you or they won’t let you do it. Its their way of protecting you to ensure you are putting yourself into a better financial situation than if you stuck to your existing loan so we will go ahead and run that test after this overview call to ensure you are making a good decision by going into this program or whether you should just stick to your existing loan.
Now as far as what closing costs can look like, they should be very similar to what wa involved when you bought the house. You probably don’t quite remember what those were, most people don’t but on a national average they tend to be between 2-3 percent of the outstanding loan balance. Now of course you can reduce or waive those costs by going with a little bit of a higher rate but that typically what they tend to be.
Ok so you have just heard the details of what this program involves and what these changes involve. Now let’s say one of these options is peaking your interest and you like the idea of missing some payments and lowering your monthly payment, what happens next?
This blog post consists of 3 videos and I strongly suggest watching all three in order and in their entirety. If you have ever wondered why to use a VA streamline refinance or if you have been told you cannot save any money because your VA interest rate is already too low, then you need to watch these videos.
I hope you enjoy them.
Video Segment #1
Video Segment #2
Video Segment #3
If you know what option of the VA streamline loan programs you are most interested in I suggest contacting one of our approved VA loan officers right away.
In the quickly changing landscape of mortgages VA loans stand alone. The VA backed mortgage is very advantageous for those who are able to take advantage of it. Worries about appraisals for refinances? Gone. Worries about help making payments in hard times? Gone. Stress over a down payment for your first home? Gone.
From the outset the VA has worked to make VA loans both affordable and smart. Many veterans may not have the requisite 15-20% for a down payment on a conventional loan. The home that they are buying may not fall within the guidelines for an FHA purchase. The VA mortgage fills this gap for America’s Veterans and allows a nice home to be purchased with 100% financing. Along with this purchase the VA has services available when times are tough and the mortgage payment is in jeopardy of not getting made. Perhaps the easiest of the programs is the streamline refinance, where without an appraisal the veteran can refinance the loan in to a lower rate or shorter term with no cash out of pocket for the refinance transaction.
By using a VA loan veterans can ensure an increased level of stability, increased cash flow from lower payments, and access to the lowest rates at any given time through the VA streamline program and VA loans are the same whether you are in need of a Texas VA Loan or a California VA Loan.
To help with your purchase or refinance transaction, contact LowVARates.com to see how you can get on the road to home ownership, and lower monthly payments.
My father has always told me that I need to keep it simple. I tend to ramble when writing, so I’m going to take the high road and make this short and sweet for everybody reading.
If you haven’t refinanced yet, and the proposed loans will positively save you money within the first five years… Just do it.
If you’re “thinking” about it but haven’t even figured out whether it’s worth your while? Just do it. Either it is, or it isn’t.
Truth be told, I’m keeping this message simple because I don’t have the time to go on and on like I’ve done in prior posts, about the countless reasons why you should refinance. I’ve been putting in 60 hour weeks just trying to ensure that my borrowers get their loan closed in November. Everyone I speak with already knows about the two deferred payments; everyone knows about escrow refunds, energy-efficient mortgages, and no-out of pocket costs. The VA Streamline is about as simple as it gets when it comes to home loans.
Simple requirements = tons of qualified applicants, right? These days, e-mailing applications and exchanging information via fax has made it easy for me to get these loans into underwriting in as little as 2-3 days in some cases.
However, for as simple as the VA loan is, and as great as these rates are, by sharp contrast these lenders are equally, if not more difficult than ever.
They sure were an easy-going group until recently. They were like that rich, drunk friend who acted recklessly, but seem to have cleaned up their act to some extent. But even after taking all that bailout money, that hasn’t kept them from being the profit hungry machines they are.
Profit-hungry lenders, unfortunately, are exactly who we have to deal with when we’re looking to deliver the best rates. Hence, selectivity has entered the equation. The more selective a lender is in choosing borrowers, the more profitable his loan portfolio will be. It’s nothing short of price discrimination, much like health insurance companies. Minimum credit scores, valuation requirements (appraisals), tiered credit pricing, and exclusions for investment properties, manufactured properties, etc. have all become the standard qualifying procedures for many lenders. The domino effect only worsens the our odds of qualifying you with time.
Luckily, with the spectrum of lenders we work with, we can still find a home for just about anybody’s loan. But it’s getting tougher and tougher every day.
It seems that just about every month, I have interested borrowers who find out that the lender we were hoping to use has just disqualified them based upon new criteria.
And every month, I am able to qualify fewer of my valued clients, with fewer of these competitive lenders. The VA Streamline loan used to be an easy solution. It’s becoming a meritocracy.
So much of my time it seems, is spent trying to communicate the urgency to my borrowers that there is no time like the present to get this refinance done.
In fact, right now I’ve got some borrowers whose loans need to close ASAP. If they close even one week behind schedule, they will be disqualified under this lender’s new standards.
So like I said… I’m short on time, I’m keeping the message simple. Don’t wait. Your opportunity will not last forever. It doesn’t cost a thing to process your application and lock in a rate.
You’ve got nothing to lose. 30 minutes of your time is a small price to pay for all that the VA Streamline loan brings.
See, I’ve already spent too much time telling you this.
In a previous blog post, I discussed the benefits offered by the VA Hybrid Loan programs. By now, more veterans than ever before are finding that the VA Hybrid Loans are not only more secure than they had previously assumed, but offer a more efficient vehicle to achieve their financial goals. This post will expound one of the most beneficial and widely cited benefits of the VA Hybrid loan – debt management and reduction.
There are three guiding principles associated with debt management:
· Evaluating and organizing debts by interest rates, terms and payments.
· Prudent Building and redirecting cash flow to pay of debts.
Lets begin by recapping the feature benefits of the VA Hybrid loan program.
· ARM’s have a smaller fixed rate term (ex. 3-5yrs) but enjoy lower rates during that time in comparison to a fixed rate loan option. On average, rates on Hybrid VA loans are greater than 1% lower when compared to VA fixed rate loans.
· Hybrid ARM loans feature favorable terms unique among adjustable rate mortgages that include 1% yearly and 5% lifetime rate caps. Unlike most ARM loans which adjust monthly after the initial fixed rate period has elapsed, Hybrid ARM loans adjust once per YEAR and are tied to a financial index (1yr Monthly CMT) that averages rate changes over a 12 month period so as not to subject the borrower to wild payment swings.
Depending on specific debt picture, these favorable terms help VA Hybrid ARMS free up more money faster than traditional ARMs. Why? While its true VA Fixed Mortgage Rates don’t change, neither does the payment. In a debt reduction analysis, payments that do not adjust downward as one pays down the balance are generally of a lower payoff priority than ones that do. For example, credit card interest is usually much higher than that of a mortgage, to say nothing of the fact that mortgage interest is more easily tax deductible than credit card interest. But even in cases where the borrower is enjoying a low introductory rate on a credit card, one that may even be lower than the mortgage, the more money the borrower commits to the credit card, the smaller the payment obligation will be the following month. The smaller the payment obligation the more quickly the additional savings can be applied to remaining debts. In this way we can see that saving money in the short term often trumps long term loan benefits and provides an easier path to a debt free life.
Many VA homeowners who have followed these principles find themselves free of non-mortgage debt but later faced with an entirely distinct (albeit less serious) condition. Where is the best place to park the monthly savings now that other debts are clear? This problem is especially profound when dealing with active duty military personnel or reservists who are transferred or move to a new station. For those veterans unsure about how long they will live in a home, the hybrid arm allows the flexibility to build cash reserves. Until they move, they are free to put the payment savings into interest bearing accounts which maximize the dollars saved by the loan. Best of all if they ever “need” the money they can access it from their account at any time, without having to sell the home or to do a cash out refinance – both instances where the veteran borrower would have to incur a closing cost or transactional fee in order to access money that could have stayed in their possession. The traditional alternative has always been putting additional savings toward the principle balance, which, while psychologically comforting does not offset the risks of devaluation or the security of being able to retain more money each month. Imagine if after 10 years you had paid your $200,000 mortgage down to a balance $100,000. If the value had not changed in that time, you could say that you have $100,000 in EQUITY. But in all that time the payment would still be the same dollar amount as it was when the loan was originally closed. But there are other disadvantages. Consider if the value of the home dropped from $200,000 to $90,000. You would be unable to access all the money you sacrificed to bring down your balance. You may have had the intention to build your equity in this way to make sure you had more money when you eventually sold the home. In this example, it would be gone, since equity isn’t real money to begin with. I’ve worked with many veterans who have championed this strategy, particularly in a real estate market as nebulous as this one. Some were able stave of an unexpected period of unemployment, others were able to sell their homes and come to the table with a portion of their saved reserves to complete the transaction and avoid a credit-damaging short sale.
Whatever the case may be, there are an abundance of options afforded to the savvy veteran homeowner by the VA Hybrid Loan program. This program is less about simply having a lower rate, its about having a greater degree of flexibility with your own money. Do the math. Banks are crafty enough to know that over the course of a 30 year loan you will have paid back the principle balance borrowed twice in interest. They structure loans so that you pay the maximum interest in the early years. They do this because they know that most people sell their homes or refinance the mortgages well before 30 years. It’s not my intent to cast a dark cloud over lenders. I’m not a rich man. Most people aren’t. The opportunity to finance a house is a good thing. Most of us are willing to accept a certain amount of economic disproportion in order to live in a house with our families. All any of us can do in response is too look past the myth that 30yr fixed mortgages are the only vehicle toward financial promise. We may find that the Hybrid isn’t for us, but at least we will know if we are making the most of the options at our disposal. I can promise you all that the banks most certainly will.
I’d like to preface this post with a disclaimer. I am not Milton Friedman. I do not hold advanced degrees in any academic discipline that might lend my suggestions here intellectual credibility. To say that my writings lack the philosophical rigor and insight into the nuances of governance demonstrated by those of Thomas Jefferson would be a gross understatement.
I am just a guy who has worked for years with Veterans helping them to finance VA home loan purchases, refinances and debt consolidations. I’ve assisted high-ranking VA homeowners working at The Pentagon as well as members of the Navy JAG core. I’ve worked with 20 year old veterans returning from the Middle East – some of them deeply scarred and rendered disabled by the horrors of war- yet proud, and in possession of a nobility and stoicism that I will never fully grasp.
I’ve watched the VA lending environment expand and contract, watched VA guidelines tighten and loosen, watched veterans experience the singular joy of first-time home ownership and bore witness to the sobering reality of veterans facing foreclosure. Mine is an opinion forged in practical experience on the front lines of the VA loan guarantee program; working with veterans, hearing their frustrations, and (at times) lacking sufficient means to address them. What follows are three components of a Veteran Homeowners Mission Statement– philosophical rules to guide industry policy and practices that I believe will ultimately benefit all veteran homeowners. I invite all veterans, of both the military and mortgage industry alike, to sound off on what I write here so that we might evolve our collective understanding of the issues and form more practical and efficient solutions to address them.
#1 Less Is More
Throughout the loan process, veteran homeowners are flooded with loan disclosures. These disclosures were all created with a noble goal in mind- to ensure homeowners emerge from the home loan process better informed of their rights and made more aware of the details of the transaction. But with respect to the average homeowner there is an argument to be made that the collected loan disclosure documents often result in the opposite effect. Over time these disclosures have been amended and supplemented by others, at the Federal and State levels. Whether they will admit it or not, there are many borrowers who find themselves confused and intimidated by the number of documents which require their signature, to say nothing of the verbiage within them. I firmly believe that regardless of the imperfections of the process, it is the responsibility of the loan originator to not only properly disclose to homeowners, but to ensure that homeowners understand the documents they are presented with. An originators job is to guide borrowers through the loan process, represent their interests, and to ultimately provide them with sufficient knowledge by which to make a decision. But I believe there is a better way to deliver this knowledge. For example, any person who has ever entered a polling booth on election day knows that when they open the election guide they will find a list of the measures and candidates on the ballot accompanied by common sense breakdowns of each. Measures are summarized and supplemented by endorsements or criticisms offered by relevant parties on either side of the issue. Candidates up for election are described by their experience and political positions and are similarly endorsed or criticized by editorial commentary. Furthermore, there are links and references listed so that voters can learn more about the issues beyond the content contained in the booklets. This method allows voters to make reasoned judgments by translating their options and framing the impact of their choices. I would like to see the closing disclosure package for home loans treated in a similar fashion. By consolidating the number of disclosures and translating the relevant information into common language, homeowners will be able to better grasp the knowledge. I imagine a 1-3 document where rights associated with each disclosure are summarized in bullet points and organized by the relevant subject. They might include: Veteran Disclosures, State Federal Rights for all Homeowners, Transaction Specific Disclosures, etc. This document would require a signature by the homeowner acknowledging receipt of an accompanying pamphlet which would contain the full text of all the disclosures, greater analysis with examples, a glossary of related terms, and a procedural breakdown of the loan process.
#2 Give It To Them Straight
Numbers can be misleading. The Truth in Lending Disclosure mandated under the Truth in Lending Disclosure Act provides borrowers with amortization schedules, details the amount of interest that will be paid out over the life of the loan, loan specific terms and restrictions, and of course the APR, or Annual Percentage Rate. The APR calculation is provided to help borrowers determine how loan financing costs factor into their “effective” rate. The APR does not factor in title charges, appraisal costs, tax/insurance reserves or other “third party” charges, which could be underestimated to make a particular loan seem more attractive than another. But the issue with the APR,(especially on refinance transactions) is that it only functions as a means by which the borrower can compare offers between loan companies. The APR does not effectively help the borrower decide if they should refinance in the first place. An additional and more meaningful metric would be a “breakeven” analysis. The calculation would include the total settlement charges, adjusted for escrow refunds and interest added to their loan payoff, divided by the Principle & Interest savings on the loan. This number would then be adjusted to reflect the number of months it would take to both cover the cost of the closing charges and any principle reduction the borrower would have seen without refinancing over that time. The “breakeven” or “recoup” number would better frame the short AND long term benefit of the loan. Borrowers could measure this number against the number of months they intend to keep the mortgage. Too often borrowers will chase rates blindly, simply because they are lower than what they have, despite the fact that the recoup time eats into the advantage of the loan.
#3 Get Behind The Numbers
While a borrowers recoup time might at first appear disadvantageous, a borrower might choose to refinance in an attempt to redirecting mortgage payment savings to pay off higher interest rate debts. I believe that most borrowers intentions with regard to mortgage transactions are implied but not clarified. A “cash out” transaction, or “debt consolidation loan” might appear specific enough on paper, but requiring the borrower to clarify their intentions with worksheet/questionnaire helps the underwriter get a better sense of the net benefit of the loan and the credit worthiness of a borrower. The questionnaire/worksheet would clarify why the borrower decided on a particular rate/fee/loan program combination over alternatives, how long they intend to stay in the property and how the borrower plans to handle the resulting loan savings. This information may strike some as irrelevant and invasive. But this idea helps an underwriter keep both the borrower and the loan officer accountable. By completing the questionnaire/worksheet the borrower is framing the reason why they are applying for credit. It is widely accepted that recording ones goals or intentions often results in a higher probability that they will see them through. This helps involve the borrower into the loan process, and establishes a kind of ethical accountability that goes deeper than simply signing ones name. It gives both the borrower and the underwriter a chance to evaluate how well the loan originator guided the borrower to an appropriate loan. Lenders would enjoy the disclosure simply because it would be a specific declaration of intention and purpose by the borrower, one that could later be referenced should an allegation arise that the borrowers were misled.
This is all I have come with for now. I hope you see the value in these philosophical guideposts. If you as a reader finds these ideas lacking or ill conceived, I want to hear your feedback. My goal is to evolve these ideas with your help. What else have you found frustrating/helpful in your experiences as an originator, underwriter, or veteran homeowner?
