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4 Tips to avoid delays in closing your VA loan

Tuesday, January 25th, 2011

I have been processing VA loans for four years and have seen all kinds of things go wrong at the last minute. If you have purchased or refinanced a home in the past you may be familiar with some of the frustrating holdups in actually getting to the closing table. While some of these issues may be due to third parties and are out of our control, there are several steps that you, as a borrower, can take to help the process go smoother and more quickly.

  • Give your Loan Officer accurate information upfront. During the pre-approval process with your VA loan officer you will be asked for several pieces of information that are critical in determining your eligibility for a VA loan. It is important that this information is as accurate as possible, or else you run the risk of hold ups later if it turns out that you do not actually meet VA or lender criteria.  I have seen loans held up because of misinformation that was discovered at the eleventh hour. Some of these critical items include: your credit scores, how much you currently owe and your current interest rate (if you are seeking to refinance), any second mortgage or home equity line of credit, bankruptcy or late payments on your mortgage, if your spouse is on the loan with you, etc.
  • Return phone calls and/or emails promptly. This may seem obvious, but after processing thousands of VA loans I have seen many closings stalled simply because the borrower did not return a call or email with critical information we needed to move forward.  Life is understandably busy, but time is of the essence, especially when you are trying to save money!  Closings need to be coordinated with title companies and lenders, and can be pushed back days or even weeks waiting for information from the borrower.
  • Supply all documentation requested by your loan officer. Your loan officer will have sent you a list of items needed from you in order to process your loan and have it approved by the bank. Some of these items may include the Note from your current loan (if you are refinancing), employment/income documentation, DD-214 to request your COE, photo IDs, proof of homeowner’s insurance, etc. Omitting any one of these items will cause your closing to be delayed until it is received and reviewed. Banks will not issue an approval to close until all of their documentation criteria are met. The more thorough we can be up front during processing, the more smoothly everything will go toward the end.
  • Ask all of your questions well before you get to the closing table. Make sure you understand all of the terms and conditions of your VA loan, such as third party fees, your new payment, the interest rate, etc. Be sure to ask your loan officer to explain anything you do not understand before you are closing so that when it comes time to sign you feel confident and ready. It is frustrating for everyone when a closing has to be postponed because of something that could

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Posted in Loan Processing, VA Loan | No Comments »

Helping Veterans Understand and Negotiate the VA Loan Process

Thursday, March 25th, 2010

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:

  1. Put it toward paying down higher interest rate credit card debt
  2. 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.

http://www.lowvarates.com/va-loan-blog/how-about-the-va-hybrid-arm/

http://www.lowvarates.com/va-loan-blog/veterans-need-to-take-advantage-of-the-va-hybrid-loan/

http://vimeo.com/10101207

Feel free to contact me any time with questions:

James Shergill

888-657-2848 ext 252 Toll Free Office Line

650-605-3638 Mobile

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Posted in Loan Processing, VA Loan, VA Refinance, VA Streamline Refinance, va interest rates | No Comments »

Veteran’s Guide to Understanding a VA Good Faith Estimate

Tuesday, May 26th, 2009

Veterans must understand how to read and interpret a good faith estimate (GFE).  This is probably one of the most important documents when deciding what company to choose to handle the financing on the VA LOAN.  This GFE disclosure IS REQUIRED by the Real Estate Settlement Procedure Act (RESPA).  If you don’t get one then the broker or lender is not adhering to laws that govern the mortgage industry. 

WHAT IS A GFE ?

In a nutshell this disclosure should list all the costs associated with the VA loan.  It will show the new monthly payment, payoff amount or purchase price amount, taxes and insurance and funds required to close or funds the VETERAN is getting back (refinance) and debts being paid off if applicable.  There are specific costs and they are broken down into categories or numbers.  I will list them below:

800 – ITEMS PAYABLE IN CONNECTION WITH LOAN

These are all the charges that the lender or broker will charge.  In this section would be listed the ORIGINATION or DISCOUNT FEE.  The appraisal and other broker or lender fees will be listed here too.  Please remember the  veteran will not pay the “junk fees”.  The DEPT of VETERAN AFFAIRS will not allow an originating company to charge these fees which in return should benefit the veteran.  Here is a list of the NON allowable charges.  NON allowable means that the Veteran cannot pay them; on a refinance the broker or lender must pay them or not charge them at all, and on a purchase the seller can pay them.

NON Allowable Fees/Charges

  • Attorney Fees
  • Brokerage Fees
  • Prepayment Penalties
  • HUD/Inspection Fees
  • Signing Fees
  • Escrow/Closing Fee

813 – COMPENSATION TO BROKER

Yield Spread Premium (YSP) is the fee the bank or lender (the entity lending the money who you will make first payment to) has the ability to pay the broker a fee or premium for locking your rate in at an above PAR rate.  We will discuss, understanding interest rates and points at another time.

1100 – TITLE CHARGES

All of the Title Charges will be listed here.  They are title insurance, title exam, wire and endorsements.  Just like the broker there are fees here that the title company cannot charge a Veteran. 

1200 – GOVERNMENT RECORDING & TRANSFER CHARGES

The fees listed under this section would be recording fees, city and state tax stamps.  The recording fee is what the county recorder will charge for recording the new Deed of Trust.  State and City tax stamps are state specific.  Some states have tax stamps and other do note. 

1300 – ADDITIONAL SETTLEMENT CHARGES

This area would list any pest, termite inspections and home inspections.

900 – ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE

This heading makes it sound like the VETERAN must pay for these before the loan can close.  This is not the case.  Is simply is referring to monies collected before the first payment.  The charges listed here are the interest that needs to be collected before the first payment is due.  With VA loans interest is billed in arrears which means when a payment is made in June the Veteran is paying for the interest accrued in May.  So lets say you close on the 20thof the month.  You will have 10 or 11 days of interest collected in this section.  With VA LOANS the VA FUNDING FEE is listed in this section.  If  Veteran is receiving VA disability then there will be no funding fee.  Veterans should pay close attention to this.  An experience broker knows not to charge a VAFF when disability is being received by the veteran.

1000 – RESERVES DEPOSITED WITH LENDER

WithVA loans your taxes and insurance will need to be collected with your monthly payment.  An escrow account is used to hold the money that is owed for taxes and insurance.  When a Veteran makes a payment a portion of the payment gets deposited into an account.  This account will continue to build payment after payment until the taxes or insurance are due.  The lender will make the payment for the Veteran.  This is very helpful because it will prevent unforeseen expenses on the home owner and delinquent taxes and insurance.  The amount collected upfront varies  based on the dates they are due.  For example, lets say that taxes are due in December and the Veteran is refinancing and their first payment is due in March.  The Veteran will have made 10 payments before taxes are due, but you must have enough for the year plus 2 months as a cushion.  So in this section we would collect 4 months.  This same principle applies to the insurance.

TOTAL ESTIMATED FUNDS NEEDED TO CLOSE/ TOTAL ESTIMATED MONTHLY PAYMENT

This just gives the overall costs and details of the transaction and the total new monthly payment.

Like I said earlier.  This is a very important disclosure and should be looked at very carefully.  In my experience the GFE should be used to compare offers from other companies and it also shows how competent the originating company is.  Remember also, that this is just an estimate.  Usually this will never be 100% accurate to the final costs.  Those are listed on the HUD 1 or Settlement Statement, however, the GFE should be as close as possible and should give Veterans a good idea what to expect cost wise when buying or refinancing a home.

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Posted in Loan Processing, VA Loan | 1 Comment »

VA Streamline Loan Refinance – How the loan is processed

Monday, May 4th, 2009

Ever wonder what happens to all of the papers you send in to your loan officer? You might be asking yourself: who does it go to and what do they do? They go to processing. Processing a VA Streamline requires lots of help from everyone from you, the home owner who sends in your required paperwork to the loan officer who you are working with to the processing department, it is a collaborative process. Once the loan officer has your current mortgage statement, a copy of your current note, social security and or ID cards, homeowners insurance or condo policy, survey and disclosures then your file goes to processing where the processor double checks everything and processes you VA loan.

The steps that are required in processing a VA Streamline home loan are as followed:

  • Credit: The processing department must first pull credit with all three credit bureaus to determine what lender is best equipped to handle your loan. Processing makes sure that based off of your FICO that you are matched with the best lender for you.
  • Title: A home title is the record of property ownership where the owner has the right to posses the property. The title company that processing uses is based on which state you are located in.
  • COE: The COE which is the certificate of eligibility which is also formally known as the prior loan validation is run. Processing does this by go to the veteran’s information portal. The COE is an important part of a VA streamline because it proves to the lender that the veteran is eligible for a VA home loan.
  • Case Number: The case number is also order on the veteran’s information portal website. The case number is just the assignment from the VA of an internal VA loan number.  This number allows the VA to identify that your loan is in the VA system.
  • CAIVRS: A CAIVRS which is the credit alert interactive voice response system.  By using the borrower and co-borrower’s social security numbers it allows for processing to see if the borrowers are past default, have a claim, judgments or have any foreclosure records on government loans. If the borrower or co-borrower’s CAIVRS are rejected, then the borrowers cannot get a new government loan until they clear it up. This information is pulled using the HUD database.
  • Payoff: A payoff is ordered by using the borrower’s current mortgage statement. The processor will call the current lender and issue a payoff request to be sent to processing so that the new lender will know how much the current principle balance is.  The payoff determines how much it will cost to payoff your loan with your current lender.
  • Mortgagee Change: Once processing knows who your lender is going to be and what the loan number on the new account will be, processing then calls the borrower’s insurance company to change the mortgagee.  The mortgagee change requires the insurance company to change the lender information on an insurance policy.  This is important so that the insurance company knows who holds the loan and if the account will be escrowed or not.

After all of these steps are finished processing gives your file back to the loan officer. These are the steps that processing works on when processing a VA streamline home loan.

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Posted in Loan Processing, VA Cashout Refinance, VA Refinance, VA Streamline Refinance | 3 Comments »