The CalVet home loan and the VA home loan programs are the primary home financing options for California Veterans. CalVet and VA both offer Zero Down Financing, but which program is the best for California Veterans? Well, it depends. There are several factors that play into which program is best for your situation. The type of property and the purchase price, as well as your long-term plans for the property, can affect which program is your best option. There are also several differences between each program that have to be considered.
CalVet and VA both have similar eligibility requirements for time served, whether it was during peace time or war time. VA is available to veterans nationwide while CalVet is only available to veterans currently living in California.
CalVet Home Loan:
When you use CalVet for your loan, the property is purchased by CalVet, who then uses a contract of sale to sell the property to the veteran. Equitable title is held by the Veteran who will be occupying the home while CalVet maintains legal title. Through this process Veterans still will have several ownership rights including property tax and mortgage interest deductions. Since CalVet will still hold the legal title, they are able to acquire a group rate for homeowner’s insurance. Since CalVet holds the legal title to your property, it can be very challenging to refinance or obtain a second mortgage in the future. Since CalVet doesn’t refinance their loans, if a Veteran wants to take advantage of lower rates or pull cash out based on increased equity, they will have to refinance out of the CalVet loan. CalVet does serve a niche when it comes to manufactured and/or mobil homes, especially when they are located on leased land. CalVet is the best is the option if the manufactured home is on leased land.
VA Home Loan:
The veteran receives full ownership rights and legal title when using a VA loan, just like most other types of home loan programs. The VA loan program is also much more flexible when it comes to occupying the property. With a VA loan the veteran must initially occupy the property, but after a few years they are able to live elsewhere and rent out the property. With the CalVet program, the Veteran is required to occupy the purchased property as the primary residence until the loan is fully repaid. Another benefit is that VA loans are much easier to refinance. VA also offers the Interest Rate Reduction Refinance Loan (IRRRL), which allows veterans to refinance their loan to lower their interest rate and payment without a new appraisal and without needing to supply income documentation. While a VA loan does allow for financing of manufactured homes there are not many lenders who will fund a VA loan on a manufactured home, especially if it is on leased land.
County VA Loan Limits and Loan Entitlements:
The size of your needed loan will play into which program better suits your needs based on which county you live in. In Orange and Los Angeles counties the current VA loan limit is $679,650 whereas in Riverside County the current loan limit is $453,100. (based on 2018 loan limits for 100% financing) It is also possible to get a Jumbo VA loan that is above the county $0 down loan limit by coming in with a down payment. It is not unusual to have a Jumbo VA loan in the $800,000 to $1,000,000 range.
Understanding your options is critical. Make sure to research both VA and CalVet to make sure you are choosing the right loan program for your needs. And for a detailed loan scenario and video presentation of the loan scenario, contact Tim Storm directly
Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
“How much VA Mortgage can I afford?” is one of the most commonly asked questions a California Veteran has during the process of buying a home, And whether it’s you asking that question of yourself, or a lender calculating it for you, at some point along the way, you’ll need an answer to this question, along with “what is needed to qualify for a VA loan?”. So the sooner you understand how this is calculated, the sooner you’ll discover what price range of home you should be looking at.
Before we get too deep into the weeds of mortgage industry lexicon, let’s take a look at some basic terms used in this analysis.
- Qualified Income: This is the amount of income your Loan Officer feels confident will be approved by underwriters. Let’s say you make a base salary of $108,000 per year, but you’re also eligible for Overtime and Bonus Income. Typically you will need to have earned overtime and bonus income for two years before it can be added to your Qualified Income. A two-year average of the Overtime and Bonus Income is used. This is also true of Commission Income. Most importantly, the income used to qualify you will always be your Gross Income; i.e. before taxes. (for self-employed borrower, the income after expenses, net profit)
- Debt to Income Ratio (DTI): What percentage of your Qualified Income is being used to pay all your monthly debt obligations? This is just simple division, where you take the amount you owe monthly and divide that amount by your Qualified Income. Your monthly debt will not include things like taxes, car insurance, groceries, utilities, etc., but will include car payments, minimum credit card payments, student loans, and any other monthly payment that appears on your credit report.
- Maximum DTI: Underwriters cannot let you spend more than the lender guidelines allow for your specific loan product. There needs to be room in your Qualified Income to pay state & Federal taxes, buy groceries, gas for your car, etc. And if after a full review of your financial documentation, your Loan Officer calculates your DTI to be higher than the maximum allowed, then you may want to lower your price point for the new home. The good news for California Veterans is that VA loans have the highest DTI allowance of all mortgage products. Technically VA does not have a maximum DTI. While VA does not institute a maximum DTI, most lenders do. Some lenders will not allow the DTI to be higher than 50%, and some cap it at 55%. But there are lenders that will follow VA and not have a maximum DTI, instead relying on VA’s Residual Income calculation.
- Residual Income: The only loan program that uses the Residual Income calculation is VA. This carries more weight the DTI when it comes to VA loans. Residual Income is essentially what is left of your income after paying your PITI, car payments, student loans and other debt payments, income taxes, and home maintenance. Yes, this calculation takes into account home maintenance and changes based on the size (square footage) of the home you buy. The calculation also takes into account how large your family is. For example, a family of 5 will need to have more Residual Income than a single Veteran.
- Housing Expense: How much money are you obligated to pay each month to sustain the home in question? Lenders call this your PITI(A). It’s the full monthly cost, including Principal & Interest payments on your mortgage, Property Taxes to the County, and the monthly cost of your annual Homeowner’s Insurance policy. Additionally, if your home is located in a community managed by a Homeowner’s Association, your housing expense will need to include your monthly HOA dues. Note that whenever a Lender discusses PITI, it is assumed that it’s “all-in”, including any HOA, 2nd mortgage payments, Lease Payments, etc.
Examples of Debt to Income Calculations
Now that we’ve reviewed some basic definitions, let’s run thru a couple of examples to see how it all comes together
Here’s a fairly typical example of Consumer Debt for an average household:
- Car Payment #1 $300
- Car Payment #2 $450
- Visa Card $25
- MasterCard $150
- Student Loans $250
- Total of Consumer Monthly Debt Obligations $1,175
Now let’s look at a hypothetical breakdown of PITI for the house you’re looking to buy. We’ll assume the property is in Orange County where the High Balance Conforming Loan Limit is the highest in the state, according to the FHFA. If we use 100% VA financing, we’ll have a loan amount of $679,650 (2018 Orange County loan limit for 100% financing). *Note: Because your PITI will require knowledge of current interest rates and the subsequent Principal & Interest payment, as well as qualifying estimates for Taxes & Insurance, you will need to speak with an experienced Mortgage Loan Originator – VA Specialist to get an accurate estimate for PITI.
- Principal & Interest on new mortgage (P&I) $3,244 (using 4.25% note rate, 4.37 APR on Jan 7, 2018, assuming no VA Funding Fee)
- Property Taxes (T) $707 (1.25% of purchase price / 12)
- Homeowner’s Insurance (I) $141 (.25% of Loan Amount / 12)
- HOA Dues (A) $0
- Combined total of PITI $4,092
- The total amount used for DTI calculation ($1,175 + $4,092) $5,267
Now that we have an accurate number for the total amount of debt required to be serviced each month, we can look at the Qualified Income and come up with a DTI. If we find after a full review of your complete income documentation that you have Qualified Income of $9,000 per month, then we can derive your DTI immediately by the following calculation:
$5,267 ÷ $9,000 = .626 (58.52% DTI)
This DTI is too high for either FHA or Conventional mortgages, but could still work with VA Financing depending on the Residual Income and other compensating factors. However, since many lenders max the DTI for 100 % VA Financing at 55%, and because we want to make sure you have money left over to go out to dinner or maybe even take a vacation, we should work our initial plans to be at or below 55%. (Even 55% is very high. But for someone who has income that is not being used in the debt to income calculation, pushing the DTI to 55% may not be a big deal.).
In an analysis like this, we know that certain things cannot change. For example, we cannot increase your income without clear, complete and acceptable documentation to support it. And on the other side, you have the monthly consumer debt. We’ll assume that none of those debts can be paid off and therefore must remain in your DTI calculation. It follows then, that if: a) your income and debt cannot change; b) the DTI maximum is fixed, and c) your DTI is too high, then the only other variable that can change is the PITI on the new home. Therefore, we simply take 55% of your Qualified Income ($9,000 x 55% = $4,950) and subtract out the Consumer Debt of $1,175. This leaves us with an all-in PITI that cannot exceed $3,775 since doing so would put your DTI over the declared maximum.
The rest of it is up to your Loan Officer. Again, calculating the monthly PITI will require guidance on current rates for your specific transaction. But let’s lower the hypothetical purchase price to $600,000 and see if it works using the same assumptions as before.
- Principal & Interest on new mortgage (P&I) $2,952 (using 4.25% note rate, 4.37 APR on Jan 7, 2018, assuming no VA Funding Fee)
- Property Taxes (T) $625
- Homeowner’s Insurance (I) $125
- HOA Dues (A) $0
- Combined total of PITI $3,702
- The combined total for both consumer debt and the proposed PITI $4,877
Using the same formula as before, the DTI calculation would look as follows:
4,877 ÷ 9,000 = .5234 (54.18% DTI)
In our examples above, we started with a hypothetical purchase price of $679,650 but quickly discovered the DTI of 58.52% was higher than many lenders will allow. In our second example, we found that a purchase price of $600,000 provided us a DTI of 54.18%, which may be more feasible for our test borrower. We can, therefore, conclude that the approximate maximum amount of mortgage that you can afford is very near the $600,000 level. To go out shopping for homes much higher than that would potentially put you in a situation where you couldn;t afford to do anything beyond making your house payment.
One final thing to remember about maximum DTI: Every loan product, mortgage type and indeed, every individual loan application, will each have their own limits. We’ve used a maximum 55% in our VA examples above, but the VA is in the habit of helping Veterans get into homes, and it’s not at all uncommon to see an underwriter make an exception if there are what we call “Compensating Factors” on your application. Things considered as compensating factors include excellent credit, large amounts of assets in savings and retirement plans, several years in the same job, etc. Conventional loan guidelines are less forgiving, and you will find that the 50% maximum DTI on most Conventional loans is fixed without exception. Always work with an experienced Mortgage Loan Originator to find out what will apply in your situation.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
One of the most common misconceptions of VA lending guidelines is how a VA Loan can help to buy a home in an expensive state like California. Whether you’re looking to buy near a local ski resort, a beach-side community, or your own slice of heaven somewhere in the middle, the cost of homes is heavily influenced by location. The good news is that the VA hasn’t set a maximum for the amount you can borrow with a VA Loan. The bad news is that there are or course, limits to how much “liability” the VA is willing to take on, and this will indeed affect the amount of money you can borrow. That brings us to the subject of your VA Entitlement.
First, let’s be clear that the Veteran’s Administration (the VA), is not in the business of loaning you money to buy a home. A mortgage Lender will loan you the money to finance your home, and all the VA does is “guaranty” those funds … up to a specific amount. This is what makes the VA Loan so appealing to mortgage Lenders; there’s little risk involved in making a loan with a VA guaranty. But this guaranty is limited to the lesser of 25% of the County Loan Limit or 25% of the actual Loan Amount. In situations where your credit and income are eligible and you know the specific amount of your Entitlement, you can multiply that amount by 4 and you’ll know exactly how much you can pay for a house without any down payment. Conversely, you can start with the Loan Limits for the County in which you’re looking to buy, then divide that amount by 4 and you’ll know precisely how much your Entitlement must be in order for you to buy a home in that County without a down payment. And since the VA Loan Limits are the same Loan Limits as the Federal Housing Finance Agency (FHFA), it’s quite easy to discover the limits in your area. You can find them here.
If you haven’t yet discovered what exactly your Entitlement is, take a look at my previous blog on that topic. In short, there are two types of VA Entitlement; Basic and Bonus. According to the VA website, “The basic entitlement available to each eligible Veteran is $36,000.” Using the 25% rule discussed above, four times that is equal to $144,000 – your maximum purchase price with no down payment. This made a lot more sense in 1944 when the VA first started guaranteeing home loans. However, since that time, both property values and loan limits have increased substantially throughout the country. Now, the Basic Entitlement by itself won’t do much if you’re trying to buy a $500,000 home. This is where the Bonus Entitlement comes in.
And before we go any further, it’s important to know that the eligible Veteran will have their full VA Entitlement determined by adding the Bonus Entitlement to their Basic Entitlement, even if their Basic Entitlement is $0.00. Initially, every eligible Veteran is given sufficient entitlement to adequately cover the VA guaranty up to the FHFA Conforming Loan Limit. For example, The Loan Limit in San Diego County, CA is $612,950. Therefore, the VA guaranty is 25% of that, or $153,237.50. In this situation, if the eligible Veteran has the full $36,000 Basic Entitlement, the Bonus Entitlement is the difference between the VA guaranty and the Basic Entitlement ($153,237.50 – $36,000 = $117,237.50).
How the VA Jumbo Loan Program Works
One final piece on this. If the eligible Veteran is looking to buy a home that is priced above the Loan Limit for the County in which it’s located, they will need to finance 25% of the difference in cash “out of pocket”, as a part of their Down Payment. Remember, the VA Guaranty is only 25%, so they won’t need to cover the entire difference.
Let’s do a quick example:
The eligible Veteran has “Full Entitlement” available to them and is buying a home for $700,000 in a County where the Loan Limit is $636,150.
- VA Guaranty is 25% of the lesser of the Loan Limit and the Loan Amount ($636,150 ÷ 4 = $159,037.50)
- 25% of the Purchase Price is equal to $175,000 ($700,000 ÷ 4)
- Down Payment Required: $175,000 – $159,037.50 = $15,962.50
VA requires that a combination of the VA Entitlement and any cash down payment must equal 25% of the appraised value or the purchase price, whichever is less. So in the example above, the eligible Veteran would like to buy a home that costs more than the 100% financing Loan Limit for that County, and using the Jumbo VA Loan Program, they can still do it using a relatively small down payment.
Despite the rising prices of homes across the state, using a VA Loan to finance your next home purchase, will allow you to keep most of the cash in your pocket and finance the bulk of your purchase price with rates that are still at historically low levels. Don’t hesitate to call if you have any questions. And thank you for serving our country.
Authored by Tim Storm, a California Loan Officer specializing in VA home Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.