LMW – Sidwell Mortgage

Tax Liens or Delinquencies Are Not
Always A Barrier To Homeownership

In the past it was not uncommon for a tax lien or tax delinquencies to disqualify a mortgage application, and defer or extinguish the buyer’s dream of home ownership. A tax lien is simply the government’s legal claim against one’s property, whether it’s real estate, personal property or financial assets. A lien is accompanied by the recording of a public document called the Notice of Federal Tax Lien. The NOFTL notifies creditors or potential creditors that the government has a legal right to the taxpayer’s property.

Let’s assume the borrower owes the IRS $15,000 and the Treasury Department has recorded a tax lien. When the tax debt represented by the lien is paid in full, within 30 days, the lien is released.

Usually mortgage financing is unavailable until the tax debt is paid in full and the lien is released. However, we have a loan product that permits us to fund a loan for a borrower WITHOUT paying off the full tax debt. This would not be a VA loan, but it is an attractive government-backed product and is available under the following conditions:

The borrower has to enter into a repayment agreement with the IRS wherein regular monthly payments will be made on the debt. Both the borrower and IRS agree on the amount of the monthly payments.
The Borrower has to make timely payments in accordance with the repayment agreement.
The IRS subordinates the tax lien to the deed recorded by the borrower’s lender.
The Borrower’s monthly payment to the IRS must be included in their qualifying debt-to-income ratio.
A payment agreement may encompass multiple liens and/or tax years;
Verification from the IRS confirming the repayment agreement and payment history will be obtained.
On a case-by-case basis the borrower may have to make 3 – 6 consecutive payment prior to the close of escrow (this is the exception, not the rule).
Where the borrower is require to make 3 – 6 timely payments before escrow closes, prepayment of scheduled payments to meet the required minimum number of payments is not permitted.
Of course, in addition to the IRS payment the borrower still has to qualify for the underlying mortgage loan.

Please note that state and local tax liens may be handled differently.

If you have any type of tax issue call us for a FREE no obligation consultation. Odds are, we can help! Make the call – it’s painless. And you may be pleasantly surprised.

Until the next post … may health and happiness abound!

What We’ve Learned – Edition 1:
Smoldering Embers

Most of our blog posts relate to questions from our clients, or convey information our readers should know about buying or selling a home. With this post we’re mixing things up a bit by also sharing our stories as professionals in the real estate industry. These are essentially the things we’ve learned. We hope you enjoy reading these stories as much as we’ve grown by living them.

The narratives run the gamut. You’ll find humor, poignancy, sadness, quirkiness and everything in between—it’s all a matter of course when the job is to serve others. The overriding theme is that virtually all of these vignettes are educational. Stay with the narrative and it’s quite likely you’ll learn something valuable. So let’s get started. With no further delay, here’s the lesson of the Smoldering Embers …

About 15 years ago one of our clients owned and occupied a condominium in mid-city San Diego. This condominium complex is a series of buildings and each building has four units—two units upstairs and two downstairs. My client’s condo is a downstairs unit facing north and the balcony/patios are on the east side of the building.

On a gorgeous Saturday afternoon the upstairs neighbor was barbecuing on the balcony. Like millions of Americans the neighbor owned a charcoal grill. As the neighbor removed the last items from the grill and placed them in a pan he heard the phone ringing. He hurried inside—forgetting to close both the cover on the charcoal grill and the sliding glass balcony doors—sat down the pan, and answered the phone. After talking for a few moments he grabbed his car keys and went to Albertson’s to pick up a couple of items needed to complete the meal.

There was a nice westerly breeze that day. As the wind blew, smoldering embers from the charcoal grill became airborne and made contact with the cloth curtains that hung inside the sliding glass balcony doors (remember, the same sliding glass balcony doors that were left open). The curtains ignited and the flame spread to the kitchen cabinets inside the unit and the balcony outside. The flames were accelerated with help from household chemicals beneath the sink and charcoal starter on the balcony. Soon the entire unit was engulfed in flames and so was almost half of my client’s unit directly below.

My client was out of town, the grill master had gone to the market, and apparently none of the neighbors noticed this building was aflame. Luckily, a local news helicopter crew was en route to cover another story and decided to circle back because the fire was more compelling. Of course the news crew notified the fire and police department. Otherwise it’s likely much more damage would have occurred.

As a property owner, would-be property owner, or tenant, there are several takeaways:

1) Stuff Happens! Always make sure you’re adequately insured.

2) This incident helps to explain why many landlords prohibit charcoal grilling on the balcony. If grilling of any kind is allowed it’s typically restricted to propane, methane, natural gas or electricity.

3) Flame retardant curtains may be a good idea in the kitchen/balcony/patio area.

4) When purchasing a home always ask if there have ever been any insurance claims. If so, there are additional questions you should ask:

>What was the nature of the claim?
> When did the claim arise?
> What was the extent of the damage?
> What was replaced or repaired?
> Who was the contractor?
> Were there permits required? (If so, request copies).
> Are there any receipts or warranties? (If so, request copies).
> Are the warranties transferable? (Read them and find out).
> What was the Date of Loss?
> How much did the insurance company pay?
> In dollars, what was the owner’s responsibility?
> In dollars, what was the Homeowner’s Association responsibility?
> Is there a Fire Incident Report?

Please note that Fire Incident Reports in some areas can take a week or so to obtain, and may not be free. In addition, payment may be required in advance. (Depending on your locale it may not be called a Fire Incident Report. Regardless of the name, just remember it’s the equivalent of a police report, but from the fire department). Once the Fire Incident Report is received read it thoroughly! You’ll want to make sure any circumstances that lead to the previous fire no longer exist. For example, if a fire started because of a build-up of brush in the canyon behind the home, putting out the flames and repairing the structure doesn’t correct the problem if the brush remains.

5) A security system that links the smoke detectors/fire alarm to the local authorities is helpful.

6) A sprinkler system may have arrested the fire before it spread.

7) If there are prior insurance claims, obtain a quote for hazard insurance before the contract cancellation period expires. If the existing owner has a series of insurance claims your ability to obtain coverage may be impaired, and if coverage is available the cost may be higher. Also note that if you have a couple of claims on the home you’re moving from and the seller has a couple of claims on the home you’re buying, you may have an even greater issue. Again, if there’s going to be a problem, you want to find out while you can still cancel the purchase contract without penalty.

8) When buying a property that’s been in a fire make sure your home inspector pays particular attention to the previously damaged areas. The quality of repairs may not be up to par. In the incident described above, all of the damaged wood and ceiling insulation was not replaced. We’re not certain if the insurance company, contractor or homeowner’s association cut corners. Unfortunately, my client did not find out until years later when they hired our firm to sell the property and we conducted a pre-listing inspection.

There you have it, some of what we’ve learned.

Until the next post . . . may health and happiness abound!

What Is Escrow And Why Is It Required

In a previous post I indicated there’s an army of people involved in closing a real estate and mortgage transaction (real estate agents, lenders, escrow officers, title officers, inspectors, appraisers, etc.). Of all the different professionals, and the service each provide, I learned early in my career that one of the most feared aspects of home buying, particularly among first time buyers, was “going to escrow.”

This was largely because the escrow officer had the unenviable task of informing the buyer of the amount needed to close the transaction, often after an inexperienced or unscrupulous loan officer had given them an estimate that was significantly less. As a result, escrow officers unfairly gained a reputation as being bearers of bad news. And indeed, it is bad news if the loan officer tells you on March 15th you’ll need $4,000 to close the transaction, but on April 28th escrow says no, the amount needed is $6,500.

Thanks to the reforms in the mortgage industry, I’m happy to report that most of the bad actors have been purged and the days of misquoting and overcharging unsuspecting borrowers are over. Thank heavens!! (We were all being lumped together and looked upon with scorn).

However, there still seems to be a misunderstanding of what an escrow officer is, what he or she does, and why an escrow is required. With that in mind, let take a look at the escrow process. So what’s an escrow company? An escrow company is simply a neutral third party whose task is to make sure everyone receives what they’re contractually entitled to get. In an effort to make the concept easier to grasp, let’s consider a transaction that’s less technical than real estate (and one that most of us have experienced at least once).

Assume you’re selling a car for $5,000 and you’ve secured a buyer who’ll pay that price. Further assume that you’ve hired an escrow company to handle the transaction and escrow is charging $150 – with the buyer and seller each paying one-half of the escrow fee, or $75.00.

Here’s how the transaction would proceed:

1) You would sign over the title of the car to the buyer and deliver the executed title, along with the Bill of Sale, and your share of the escrow fee to the escrow officer

2) The buyer would deliver the $5,000 purchase price by wire or certified funds to the escrow company, along with their share of the escrow fee, appropriate taxes, transfer fees, and Proof of Insurance

3) The escrow officer would check with DMV to make sure a duplicate title has not been issued (to prevent you, the seller, from selling the car to 2 different people)

4) The escrow officer would forward the taxes, transfer fees and transfer forms to the CA DMV – thereby assuring that the vehicle is no longer in your name and that you, the seller, is no longer liable for damages

5) Escrow would forward you the $5,000 as payment for your car

6) Escrow would forward the buyer the title that the seller signed and transferred into the buyer’s name

7) Escrow would pay themselves $150 as agreed

Notice that everyone gets what they’re entitled to receive (including the state of California – transfer fees and taxes), everyone is protected (including the citizens of California – proof of insurance), and the transaction is closed in accordance with California Law.

That’s what an escrow company does and why we’re required to use them.

Important Note: The escrow company does not get involved in the condition or the market value of the property being transferred.

Until the next post … may health and happiness abound!

VA Credit Guidelines: The Basics

Once they’ve decided to buy a home using their VA benefits, a common concern among servicemembers is whether they’ll qualify under VA’s credit guidelines. Often our servicemembers have preconceived notions about the minimum standard required to get a mortgage—sometimes they’re correct and sometimes they aren’t. The client’s tendency is to think they cannot get a VA loan, when in fact they can. This is largely because of a failure to realize that much of what concerns the client has already been “baked into the cake.”

Here’s what I Mean: The VA guidelines anticipate that in life Stuff Happens; and that in military life, Stuff Really Happens. Perfection isn’t necessary. For example, VA understands that the servicemember may have had 9 duty stations in 13 years, and that it may be unfair to compare the servicemember’s credit record with that of a civilian who has worked at the same job and location for 13 years without ever uprooting their family. Each time a military family moves there is an opportunity for something to fall through the cracks (like the last cable bill from the apartment near Camp Pendleton that somehow was not forwarded to the servicemember’s address in Quantico and ends up on their credit report as a collection account). To gain a VA loan approval, VA does not require payment of relatively small isolated collection accounts. Again, certain benefits and concessions are baked in for VA loan applicants.

With that said let’s undertake a general review of VA credit guidelines and get an idea as to how VA determines creditworthiness.

VA’s Prevailing Guideline – What’s Past Is Prologue

“The applicant’s past repayment practices on obligations are the best indicator of his or her willingness to repay future obligations.” VA Pamphlet 26-7, Revised, Chapter 4.

In other words, does the servicemember’s credit record reflect a willingness to pay obligations in a timely manner? If not, is there a reasonable explanation? If the explanation identifies extenuating circumstances, have the circumstances ended, when did the circumstances end, and has there been a series of payments re-establishing the servicemember’s consistent payment history? There is risk assessment, ratios, and verifications, but everything is undergirded by two things: 1) Is there a way to make this work for the veteran; and, 2) Does it make sense?

Minimum Credit Score Requirement

VA does not have a minimum credit score requirement—none. However, VA does not make loans, VA guarantees loans made by private, VA approved lenders. VA lenders may be more conservative than VA, but not more liberal. As such, VA lenders can place restrictions on their version of the guidelines (called overlays) in accordance with their own tolerance for risk and to assure marketability. As a result, most if not all VA lenders have a credit score requirement of at least 580. Sidwell Mortgage can originate VA mortgages with a single credit score as low as 580 – on a case-by-case basis.

Minimum Credit History

VA does not have a minimum credit history requirement. The absence of a credit history is typically not considered as a negative factor. If the servicemember has no credit history, a credit decision can be made based on the servicemember’s payment record on utilities, rent, auto insurance or other alternate credit references.

Bankruptcy

The presence of a bankruptcy on the servicemember’s credit profile does not in itself disqualify the loan. The circumstances of the bankruptcy are considered. Generally speaking, when the servicemember has filed a Chapter 7 bankruptcy, VA requires a 2 year wait period from the date of the discharge, after which the bankruptcy is disregarded. In the presence of a Chapter 13 filing, the wait period for some servicemembers may be as short as 12 months from the filing date.

In both cases satisfactory credit (i.e. no late payments) should exist between the date of the discharge and applying for the VA loan. Please note that other restrictions may apply.

Consumer Credit Counseling

If the servicemember has negative credit entries and is enrolled in a Consumer Credit Counseling Plan, they are deemed an acceptable credit risk after making 12 consecutive on time payments and getting permission from the counseling agency to take on new debt.

If the sevicemember has no negative credit entries and is enrolled in a Consumer Credit Counseling Plan, it is considered a neutral factor, perhaps even positive.

Prior Foreclosures

VA loans permit servicemembers to obtain VA financing two years following a foreclosure.

Deed In Lieu of Foreclosure

VA loans permit servicemembers to obtain VA financing two years following a Deed in Lieu of Foreclosure.

Note: These are general guidelines and there’s an exception to every rule. Make no assumptions. If you have a question that’s not addressed here or need additional clarification please contact us for a free no obligation consultation. We can be reached at 844.SID.WELL (844.743.9355). Feel free to also email us or send a message via the website.

Until the next post … may health and happiness abound.

CalVet Loans

At the outset it should be noted that CalVet is mandated by the State of California to make home loans to California veterans. There is no minimum credit score required, no overlays and no inflexible underwriting matrices. In terms of risk assessment, the loan simply has to make sense and benefit the veteran.

Before delving further into the CalVet Home Loan Program, let’s take a moment to explore what CalVet is and what it does.

When many clients hear CalVet they think of Jean-Marie Calvet and the French winery that bears his name. Unfortunately there’s no Merlot served at the institution we’re writing about today. The CalVet we’re discussing is simply California’s version of the United States Department of Veteran Affairs. The agency is tasked with providing the State’s aged or disabled veterans and their families with rehabilitative, residential, and medical care services; providing veterans with direct low‑cost loans to acquire farms and homes; and providing aid and assistance in presenting the veteran’s claims for federal, state, and local veteran related benefits.

CalVet is organized into three divisions: the Veterans Homes division, the CalVet Home Loan program (CalVet program), and the Veterans Services division (Veterans Services). Veterans Services administers programs and activities that are not related to veterans residential care homes or the CalVet program.

Now that you know a little about CalVet, let’s turn to the subject at hand; CalVet Home Loans, also known as the CalVet program.

CalVet loans are designed to provide benefits and features that save money and provide protection for the servicemember’s home. Veterans seeking a CalVet loan will receive a competitive, below market interest rate with as little as no money down. Other features include:

Liberal loan amounts that are determined by the veteran’s county of residence. For example, the CalVet limit in San Diego County is $776,187, and for San Francisco the limit is $795,187.
A low, competitive interest rate of 3.75% – 3.875% on a 30 year fixed term.
Annual percentage rates of 3.95% and 4.07% respectively.
There’s no monthly mortgage insurance and no prepayment penalty.
CalVet purchases the home and holds legal title. The home is then sold to the veteran by Contract of Sale (aka Land Contract). The veteran has equitable title.
The veteran is required to occupy the property for the full term of the loan. Exceptions are made on a case-by-case basis.
Funds are available for home loans on many types of residencies including Single Family Residences, Planned Unit Developments, Condominiums, and Mobile/Manufactured Homes in Parks (see the separate section below for more on Mobil/Manufactured Homes in Parks).
The loan limit, down payment and interest rate on mobile/manufactured homes affixed to a permanent foundation is the same as non-mobile/manufactured homes.
Zero Down Payment Loan Programs are available for VA guaranteed loans (CalVet/VA).
3% Down is required with the CalVet97 program.
CalVet offers excellent insurance benefits for fire, earthquake and flood to protect the veteran’s investment. This is made possible by the group rate CalVet receives by insuring all of its loans with CalVet’s preferred carriers.
CalVet charges a Funding Fee of 0% – 3.3% of the loan amount. In some instances the Funding Fee can be financed.
Rehabilitation Loans are also available. This enables the borrower to purchase a home in need of repair and fund the repair costs, with only 5% down, plus closing costs.
CalVet also offers Construction Loans permitting the veteran to build the home of their dreams, with only 10% down, plus closing costs.
Farm loans are offered on working, income producing farms. The farm, as a stand alone entity, aside from the owner, must produce sufficient income to service the debt and related ownership costs.

Mobile/Manufactured Homes In A Rental Park

The loan limit on a Mobile/Manufactured home in a rental park is $175,000.
The down payment on a Mobile/Manufactured home in a rental park is 15% for a used doublewide, and 15% for a new single wide. For a new doublewide the down payment is 10%.
CalVet will not fund a Mobile/Manufactured home that’s over 20 years old.
The interest rate on a Mobile/Manufactured home in a rental park is 6.5% (6.71% APR).

So what’s the takeaway? Sidwell finds that our CalVet loans are the preferable product for clients in need of rehab financing or construction financing. Most clients building a home have to obtain two loans: A construction loan and a permanent loan (this also results in the borrower incurring two sets of loan fees). CalVet allows the veteran to obtain one loan that covers both the construction phase and permanent phase of the financing – an option that’s considerably more attractive.

In terms of a purchasing a home to remodel, CalVet may also be the best deal. Most lenders won’t even consider financing a fixer, and if they do, it’s an expensive loan with a large down payment and additional costs. The veteran is likely to save significantly by purchasing and rehabbing through CalVet. The process is straightforward. CalVet will purchase the home in an “as-is” condition. Funds will then be advanced for approved repairs or refurbishment as the work is completed. A detail description of the repairs or improvements is submitted with the loan application and cost estimates. The additional loan amount will be based on these costs, and again, paid as the work is done. The veteran will have 180 days to complete the refurbishment in most cases.

So there you have it. In Sidwell’s opinion, if you’re a veteran planning to build a home, or purchase a fixer and rehab, it pays to take a close look at what CalVet has to offer.

Until the next post … may health and happiness abound!

Eligble VA Property Types:
What You Can & Can’t Buy
With A VA Loan

Eligible VA Property Types: What You Can & Can’t Buy With A VA Loan

If you’re using your VA eligibility to purchase a home, VA has guidelines regarding the type of property you can buy. Eligible property types are set forth below:

Single Family Residence
Condominiums (must be in a VA approved complex)
Townhomes (must be in a VA approved complex)
Manufactured & Modular Homes: Manufactured and modular homes must be sold along with the land and placed on a permanent foundation. Although VA guarantees loans on manufactured and modular homes, many lenders do not fund these types of loans. (Remember, VA does not make loans, but rather guarantees loans. Loans are made by VA Approved mortgage lenders. Many VA lenders do not make all types of VA loans). Some manufactured and modular home loans are only available on a state-by-state basis. Sidwell Mortgage can fund a VA loan on a manufactured or modular home in the state of California. Some restrictions apply.
Homes located on a farm: A servicemember may use a VA loan to purchase a home located on farm property, but not just land used for farming. A home must be included in the purchase. The VA loan is not for the farm land, but for the habitable, primary residence located on the land.
Multifamily One to Four Unit Structures: One to four multi-family units can be purchased with a VA loan, but at least one of the units has to be used as the borrower’s primary residence. The units must be in a VA approved development or must receive approval from VA.
New Construction: Although a VA home loan can be used to buy a brand new home, it’s often difficult to receive VA approval for these types of properties. This is largely due to VA guidelines that require pre-approval of builders, plans and building sites, along with a series of inspections and a one year home warranty. Purchasing a new home from a developer eliminates much of the red tape.

The Property Types VA Does NOT Allow

A VA loan cannot be used to purchase an investment home. The servicemember must intend to occupy the property as their primary residence.
VA loans cannot be used for purposes other than purchasing residential properties. The VA loan is not a business loan and cannot be used for storefronts or office spaces.
Purchases of unimproved bare land (land that does not include an owner-occupied primary residence for the borrower) is not permitted.
VA loans cannot be used to purchase homes that are not located within the U.S and U.S. territories.
Co-ops are not currently eligible for VA loans. VA suspended financing for these type of shared-ownership properties in December 2011 (to date the program has not renewed).

Until the next post … may health and happiness abound!

Refinancing With a VA Loan

Refinancing With A VA Loan

A servicemember can use their VA loan benefit to refinance an existing VA loan or to refinance another type of loan (e.g. FHA, USDA or Conventional) into a VA loan.

In refinancing an existing VA loan the servicemember has two options:
1) Obtain an Interest Rate Reduction Refinance Loan; or, 2) Obtain a VA cash-out loan.

VA Streamline (Interest Rate Reduction Refinance Loan)

The Interest Rate Reduction Refinance Loan, or VA Streamline as it’s sometimes known, is specifically designed to permit the servicemember to lower their interest rate and payment, quickly and easily. This is accomplished by VA relaxing the underwriting guidelines and eliminating certain paperwork, including:

No paystubs or W2s are required
No bank statements are required
No home appraisal is required
There is no loan-to-value limitation because no appraisal or value is required.
Underwater homes are eligible (homes on which the servicemember owes more than the home is worth)
The required funding fee is lower than for VA purchase loans
Closing costs can be wrapped into the new loan, meaning little or no out-of-pocket expenses
VA Cash-Out Refinance

VA permits the servicemember to access equity in their home by obtaining a VA cash-out refinance. This is done by the servicemember obtaining a VA loan that’s greater than their current loan, paying off the current loan, and receiving (i.e. pocketing) the difference after the new loan closes. VA will allow the servicemember to refinance up to 100% of the value of the home. Proceeds can be use for any purpose including debt consolidation, traveling, starting a business, college tuition, investment, or any other need or desire the servicemember may have.

The second purpose for the VA cash-out refinance is to pay off a loan that’s not currently a VA loan. For example, assume the servicemember bought a $410,000 home with FHA financing three years ago, and the monthly payment includes $280 for FHA mortgage insurance. After learning more about their VA loan benefit the servicemember realizes that VA does not charge monthly mortgage insurance. By simply refinancing from FHA to VA the servicemember saves $280 per month.

Until the next post … may health and happiness abound!

Prior VA Loans: The Impact Today

When a servicemember seeks VA financing one of the first questions we ask is whether they’ve had a prior VA loan. The answer to this question may significantly impact the servicemember’s ability to obtain subsequent VA financing. It all boils down to the way the prior VA loan was paid-off, transferred, settled, assumed or foreclosed.

Let’s take a look at some of the ways a prior VA loan may have been terminated and how the termination method might affect the servicemember today.

The Home Was Sold

If the home securing the previous VA loan was sold, the previous VA loan should have been paid-off at closing. Sometimes when applying for a subsequent VA loan, VA’s records may not reflect that the prior loan was paid-off, notwithstanding the sale. If that’s the case, VA will usually ask for a copy of the Final Settlement Statement (also known as a HUD-1 or Closing Disclosure). The Settlement Statement contains information VA may to confirm the prior VA loan was paid-off (e.g., property address, name of the VA lien holder, amount paid to the VA lien holder, date, etc.). Once this information is received, typically VA can restore eligibility and guarantee another VA loan for the servicemember.

The Home Was Short Sold

In a short sale the bank agrees to accept a payoff that’s less than the amount owed. For example let’s assume that in 2006 the servicemember bought a $225,000 home using their VA benefit. When the real estate market crashed in 2008 the value of the home dropped to $160,000, but $209,000 was owed. Soon thereafter the servicemember received orders to relocate and listed the home for sale. To complete the sale our servicemember asked their VA lender to accept a lower payoff based on the current market value. The goal at that point was to sell the home within 90 days and move on to the next duty station. With VA’s concurrence, the lender agreed to accept a payoff of $148,500 ($160,000 less the costs to sell the home).

In 2015 the service member applied to buy another home using their VA eligibility. When the lender received the VA Certificate of Eligibility the Certificate states that VA suffered a loss when the previous home was sold. At that point circumstances related to the disposition of the previous home clearly affected the servicemember’s ability to obtain another VA loan.

But all is not loss. There are a few things that can be done. We’d start by determining the amount of the loss. The servicemember would have the option of paying VA the amount that was loss, and VA would fully restore the borrower’s eligibility. Secondly we’d consider the amount, if any, of the borrower’s remaining eligibility. In the example above the servicemember used $225,000 of their eligibility to purchase the home. Since maximum VA loan limits are determined by the servicemember’s county of residence, we’d have to know the property’s location to calculate the remaining eligibility. For example, the maximum VA loan limit in Sacramento County is $488,750. Assuming the home was in Sacramento, and VA took a full loss on the previous short sale, the servicemember would have $263,750 of remaining eligibility to purchase another home ($488,750 – $225,000 = $263,750). There are other solutions available under this scenario. To discuss additional options, we encourage you to call for a free no obligation consultation.

The Home Was Foreclosed

A foreclosure occurs when the servicemember defaults on the payment and the lender takes possession or forces a sale of the home. During the foreclosure process the servicemember forfeits all rights to the property.

The ramifications of a foreclosure to the servicemember are similar to those discussed in the short sale scenario described above. There are a few notable differences: With a short sale the lender takes a reduced payoff, but allows the servicemember the dignity of selling the home and maintaining possession until the sale is complete. The foreclosure is facilitated by the force of law. Moreover, the resulting entries on the servicemember’s credit report will differ. Lastly, subsequent notations on the servicemember’s Certificate of Eligibility will reflect that a previous VA loan was foreclosed, the amount of the loss VA suffered, and the amount of remaining eligibility, if any. Sidwell’s response to a prior foreclosure is the same as described in the short sale scenario. In sum, we’ll advocate for the servicemember and find a path forward to secure financing for their next home purchase.

When The Servicemember Signs A Deed In Lieu Of Foreclosure

A deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) avoids foreclosure proceedings by conveying all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that’s in default.

When a prior VA loan is terminated by the Servicemember signing a deed in lieu of foreclosure, for purposes of determining subsequent VA eligibility, it’s treated the same as a foreclosure. As such, subsequent notations on the servicemember’s Certificate of Eligibility will reflect that a previous VA loan was foreclosed, the amount of the loss VA suffered, and the amount of remaining eligibility, if any. Sidwell’s response to a prior Deed In Lieu of Foreclosure is the same as described in the short sale and foreclosure scenarios above. In sum, we’ll advocate for the servicemember and find a path forward to secure financing for their next home purchase.

When The Home Is Refinanced

If the prior VA loan was repaid by refinancing into a non-VA product (typically Conventional or FHA) the debt to VA has been fully satisfied. However, eligibility is not restored unless the loan is repaid AND the home is sold.

Here’s why: VA loans are made to servicemembers who intend to occupy the residence as their primary home. If VA permits servicemembers to buy homes using their VA eligibility, occupy for a while and refinance into a non-VA product, the servicemember could use their eligibility to buy a series of investment properties with no down payment. Again, VA does not permit this. (It should be noted there is a one time exception to the must-sell requirement. This exception allows servicemembers to keep the first home and obtain a VA loan for another home. Borrowers who choose to utilize the “one-time restoration” allowance will have to dispose of all property in the future if they again seek restoration of entitlement).

When The Prior VA Loan Is Assumed

A VA loan is assumed when the terms and balance of the loan are transferred from the servicemember to another qualified borrower in accordance with the VA lender’s guidelines.

At one time all VA loans were assumable without the new owner having to qualify. Rules have changed, and today before a VA loan can be assumed, VA or the lender/servicer representing VA has to approve the buyer beforehand. Approval of an assumption request is not guaranteed; it’s left solely to VA or the VA lender/servicer. (There is one exception to the requirement for prior approval: VA loans that closed before March 1, 1988. On loans closing before March 1, 1998, the VA loan assumption is unrestricted and requires no approval form VA or VA’s lender/servicer).

When the servicemember’s obligation on a prior VA loan is assumed by a non-veteran, the servicemember’s entitlement is tied to the property for the life of the loan. As such, the servicemember’s future eligibility will be offset by the prior VA loan that was assumed by the non-veteran. This will not prohibit the servicemember from purchasing another home with their remaining VA eligibility.

If the prior VA loan was assumed by another veteran, VA substitutes the eligibility of the assuming veteran for that of the selling veteran and releases the selling veteran’s full eligibility. On a qualifying assumption, the party assuming the VA loan must meet all VA/lender requirements including income, credit, debt ratios, employment, etc.

Lastly, there are other scenarios in which a prior VA loan can impact the servicemember’s ability to secure subsequent VA financing. For example, a divorce decree that grants ownership of the home securing the VA loan to the veteran’s spouse, or the inclusion of the prior VA mortgage in a bankruptcy. These and other similar obstacles aren’t conducive to an individual blog post – the variables are legion. Please call us for an individual consultation. We’re your advocate and our goal is to secure VA financing for each servicemember. Call today and tell us your story. In 23 years Sidwell has heard it all. Odds are your circumstance is not unique. The number is 1.844.SID.WELL (844.743.9355) or if you’d prefer submit a question or leave an inquiry on our site.

Until the next post … may health and happiness abound.

VA Eligibility & Entitlement

One of the most common questions asked by servicemembers is whether they’re eligible to obtain VA financing. VA eligibility is determined by the Department of Veterans Affairs and involves eligibility of the servicemember AND the property. As far as the servicemember is concerned VA requires an acceptable credit history (not credit perfection), adequate income and a Certificate of Eligibility. In addition, the servicemember must personally occupy the property.
In terms of property requirements, the VA loan may be used for the following purposes:

-Buy a home or a condominium unit in a VA-approved project
-Build a home
-Simultaneously purchase and improve a home
-Improve a home by installing energy-related features or making energy efficient improvements
-Buy a manufactured home and/or lot

Please note that to obtain a Certificate of Eligibility, the servicemember must have been discharged under conditions other than dishonorable. To obtain the Certificate of Eligibility check your applicable status, wartime and peacetime periods, qualifying active duty dates and minimum active duty requirements set forth below.

Servicemembers and Veterans

World War II

Qualifying Dates: 9/16/1940 – 7/25/1947
Minimum Active Duty Requirement: 90 total days

Post World War II

Qualifying Dates: 7/26/1947 – 6/28/1950
Minimum Active Duty Requirement: 181 continuous days

Korean War

Qualifying Dates: 6/27/1950 – 1/31/1955
Minimum Active Duty Requirement: 90 total days

Post-Korean War

Qualify Dates: 2/1/1955 – 8/4/1964
Minimum Active Duty Requirement: 181 Continuous Days

Vietnam War

Qualifying Dates: 8/5/1964 – 5/7/1975
(For Veterans who served in the Republic of Vietnam, the beginning date is 2/28/1961).
Minimum Active Duty Requirement: 90 total days

Post – Vietnam War

Qualifying Dates: 5/8/1975 – 9/7/1980
(The ending date for officers is 10/16/1981)
Minimum Active Duty Requirement: 181 continuous days

24 Month Rule

Qualifying Dates: 9/8/1980 – 8/1/1990 (The beginning date for officers is 10/17/1981)
Minimum Active Duty Requirement: 24 continuous months, OR the full period (at least 181 days) for which you were called or ordered to active duty

Gulf War (where service has ended)

Qualifying Dates: 8/2/1990 to present
Minimum Active Duty Requirement: 24 continuous months, OR the full period (at least 181 days) for which you were called or ordered to active duty

Currently On Active Duty

War: Any War except Gulf War
Qualifying Dates: Any
Minimum Active Duty Requirement: 90 continuous days

Gulf War

Qualifying Dates: 8/2/1990 to present
Minimum Active Duty Requirement: 90 days of active service

National Guard & Reserve Members

(Six years in the Select Reserves or National Guard, AND were discharged honorably, OR were placed on the retired list, OR transferred to standby Reserve other than Select Reserve or an element of Ready Reserve other than Select Reserve OR continue to serve in Select Reserve).

War: Gulf War
Qualifying Dates: 8/2/1990 to present
Minimum Active Duty Requirement: 90 days of active service

If you do not meet the minimum service requirements, you may still be eligible if you were discharged due to (1) hardship, (2) the convenience of the government, (3) reduction-in-force, (4) certain medical conditions, or (5) a service-connected disability.

Spouses

The spouse of a Veteran can also apply for home loan eligibility under one of the following conditions:

-Unremarried spouse of a Veteran who died while in service or from a service connected disability, or
-Spouse of a Servicemember missing in action or a prisoner of war
-Surviving spouse who remarries on or after attaining age 57, and on or after December 16, 2003. (Note: a surviving spouse, who remarried before December 16, 2003, and on or after attaining age 57, must have applied no later than December 15, 2004, to establish home loan eligibility. VA must deny applications from surviving spouses who remarried before December 6, 2003 that are received after December 15, 2004.)
-Surviving Spouses of certain totally disabled veterans whose disability may not have been the cause of death

Other Eligible Beneficiaries

You may also apply for eligibility if you fall into one of the following categories:

-Certain U.S. citizens who served in the armed forces of a government allied with the United States in World War II
-Individuals with service as members in certain organizations, such as Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with World War II service, and others

Restoration of Entitlement

Veterans can have previously-used entitlement “restored” to purchase another home with a VA loan if:

-The property purchased with the prior VA loan has been sold and the loan paid in full, or
-A qualified Veteran-transferee (buyer) agrees to assume the VA loan substitute his or her entitlement for the same amount of entitlement riginally used by the Veteran seller. The entitlement may also be restored one time only if the Veteran has repaid the prior VA loan in full, but has not disposed of the property purchased with the prior VA loan. Remaining entitlement and restoration of entitlement can be requested through the VA Eligibility Center by completing VA Form 26-1880.

If you have questions about your VA eligibility or entitlement please contact us. We’ll gladly put our 23 years of experience to work on your behalf. We’ve helped vetarans obtain their entitlement, restore entitlement and appeal decisions where entitlement was denied. At Sidwell we’re not just a VA lender, we’re also an advocate for the servicemember.

Until the next post … may health and happiness abound!

Understanding VA’s Residual Income
Guidelines

Understanding VA’s Residual Income Guidelines

When it comes to risk analysis it’s not always easy to explain how things are done in the mortgage industry, but today we’re discussing a rule that actually makes sense to most of our clients. It is VA’s guideline regarding residual income.

Residual income is the amount the borrower has left each month after major expenses, payroll subtractions, maintenance, utilities, and certain other obligations are deducted.

Perhaps the best way to illustrate this is to have you actually underwrite a loan (shazam, you now have the power to Approve or Deny a loan application). Let’s say you have a 17 year old son named Tim, who’s a senior in high school. He’s a good, responsible kid who works hard, maintains excellent grades, and more often than not, tries his best to meet your expectations. Tim thinks of himself as independent and receives no allowance. He works a few hours on Saturday and Sunday at the local farmers market and earns $320 per month in gross pay. In addition, he’s held a job for the last three summers and has $3,600 in savings.

Predictably, Tim approaches you about buying a car, having found a great deal on a used Honda Civic. It’s mint condition with low mileage, and the owner is asking $6,000. Tim proposes a scenario in which he’d put up his $3,600 savings if you loan him the additional $2,400 to buy the car. Because he’d like to pay you back in a year, Tim suggests payments of $200 monthly until the debt is repaid.

Like any good underwriter, consciously or not, you consider the C’s: capacity, cash, collateral, and character/credit. Overall it’s a pretty decent loan application for someone that’s seventeen. He’s shown responsibility and the discipline to save. He’ll have some skin in the game in the form of his $3,600 savings as down payment. Tim doesn’t have much of a credit history, but you’ve never known him to not honor his word. And you’ll have some collateral in the form of the car.

However, there’s one aspect of this that’s problematic: Tim’s capacity. His weekend job pays $320 per month, but he brings home $240 (75% of his gross pay). If he’s paying you $200 per month toward the $2,400 you loaned him, he won’t have enough left over to buy gas, eat lunch, pay for the car’s insurance and maintenance, or even treat himself to a movie or ballgame. Tim’s residual income is insufficient. You love your son, and from all indications the young man deserves a chance to own his first car; but if you agree to this deal, you are setting him up to fail (i.e., default on the loan). This would be unfair to you and to him. How long would it be before he fails to make the $200 payment because the insurance is due or the vehicle needs a repair?

Congratulations! You’ve just underwritten your first loan and much to your chagrin, I’m sure, you had to say no.

Hopefully you now understand why VA has a residual income guideline. Though a bit more complicated, in principle the process is similar to the way we just underwrote Tim’s loan.

VA requires us to start with your gross income and deduct the following: 1) Housing related expenses such as principal, interest, taxes, insurance, HOA dues, Mello Roos, etc.; 2) Estimated expense for maintenance and utilities (based on a factor that VA provides); 3) Amounts taken from gross pay (payroll deductions); and, 4) Other payments you’re responsible for making (such as credit card and car payments, child support, etc.).

What’s left is the amount you have available for expenses such as gas, car insurance, life insurance, Cable/HBO/Cinemax, health club memberships, cell phone bills, Wi-Fi, groceries, lunch, dry cleaning, kid’s lunch money, toiletries, entertainment, incidentals, and so on.

So how much residual income does VA suggest? It’s based on your family size and the region of the nation in which you reside. See the table below:

Table of Residual Income by Region For loan amounts of $80,000 or more
Family Size	Northeast	Midwest	South	West
1	$450	$441	$441	$491
2	$755	$738	$738	$823
3	$909	$889	$889	$990
4	$1,025	$1,003	$1,003	$1,117
5	$1,062	$1,039	$1,039	$1,158
Over 5	Add $80 for each additional member up to a family of 7

Please note that throughout this post I’ve indicated this is a guideline. That’s because it’s not an inflexible requirement, but is considered in conjunction with other loan factors such as your debt-to-income ratio (though different there is a relationship between the two—one can change the other). Keep in mind that these calculations can get rather technical. Your Sidwell Mortgage professional is thoroughly experienced with VA loans and will perform the calculations and answer any questions.

Until the next post … may health and happiness abound!