VA continues to allow “Cashout refinances” to 100% of the property value. However, with the latest VA Circular 26-19-05, some fairly significant changes have been made which could affect the amount of cash a Veteran receives at closing.
New Guideline for VA Cash-Out Refinance
Effective for any new VA loan started on or after February 15, 2019, the Veterans Administration now looks at a cash-out refinance as either a Type I Cash-out Refinance or a Type II Cash-out Refinance.
Type I Cash-Out Refinance: a refinancing loan in which the loan amount (including the VA Funding Fee) does not exceed the payoff amount of the loan being refinanced.
Type II Cash-Out Refinance: a refinancing loan in which the loan amount (including the VA Funding Fee) exceeds the payoff amount of the loan being refinanced.
For intents and purposes, Type I VA Cash-Out Refinances will be rare. There is no “cash out” going to the borrower. And since the new loan amount, including the VA Funding Fee can’t be higher than the new VA loan, either the borrower would need to pay the closing costs and Funding Fee out of pocket, or the lender would need to adjust the interest rate up in order to generate a lender credit to cover closing costs and Funding Fee.
Type II VA Cash-Out Refinance
Most VA Cash-Out Refinances will be Type II. This is where the Veteran will actually receive funds at closing, which is generally the purpose of a “Cash-Out Refinance“. The big difference between the previous guidelines and the new guidelines is how the VA Funding Fee is treated, The VA Funding Fee was not previously included in calculation loan to value when determining the max loan amount. The Veterans Administration allowed the “base” loan amount to be 100% of the appraised value with the VA Funding Fee being financed on top of the loan. The VA Funding Fee is waived for those Veterans with a service-connected disability rating. But for all others, the VA Funding Fee on a cash-out refinance will be either 2.15% (First-time user of VA financing), 2.4% (First-time user who was in Reserves or National Guard) or 3.3% (anyone who has used their VA entitlement for a home previously). Most VA cash-out refinances are to Veterans who already have a VA loan and they are now pulling cash out for home improvements, debt consolidation, investments, or some other purpose. As a “subsequent” VA loan borrower, the Funding Fee would be 3.3% of the base loan amount.
Comparison of VA Cash-Out Refinance for Los Angeles Veteran
For Example, let’s assume Jimmy Smith bought a home in Los Angeles in January 2014 for $500,000. Now, in 2019 his home is valued at $600,000. He has paid the loan balance down to approximately $470,000. He has $130,000 of equity in the home. Jimmy is planning to do a room addition and also has some credit card debt he’d like to pay off. Under the previous guidelines, his base loan amount could have to go all the way to $600,000 (the current appraised value). The VA Funding Fee would have been financed on top of the base loan for a resulting loan amount of $619,800 (base of $600,000 * 3.3% = $19,800. $19,800 + $600,000 = $619,800).
Now, under the new guidelines, the total loan amount, including the VA Funding Fee, cannot be higher than $600,000. To determine the maximum base loan amount, and still assuming Jimmy is a subsequent user of VA Financing, we can divide $600,000/1.033 to get a base loan of $580,832. The total loan with VA Funding Fee will be $600,000. ($580,833 * 3.3% = $19,167. $580,833 + $19,167 = $600,000).
The difference in available cash-out to Jimmy is the amount of the VA Funding Fee, in this case, $19,167. This is not necessarily a bad thing and may not even matter to Jimmy, especially if he wasn’t trying to maximize the amount of cash-out he needed. But for someone who had a specific purpose for the cash-out, the new calculation could have a big effect on the amount of equity available.
Three Things to Consider When Applying for a VA Cash-Out Refinance
Current interest rate versus the new interest rate. Is your interest rate going higher?
VA Funding Fee. For Veteran’s with a service-connected disability rating and therefore do not have a Funding Fee added to there loan there is no concern. But for a subsequent user, adding a 3.3% Va Funding Fee to the loan should be given serious thought. One of the primary reasons for the rule changes from VA is because Veterans were being taken advantage of and unknowingly adding big fees to their loan.
How long will you be in your home? If you plan to move in the next 3 to 5 years, then have your VA Loan Advisor run the numbers and review the breakeven. Especially if there is a VA Funding Fee, it may be best to find another way to pay off debts or pay for home improvements. A Home Equity Line of Credit may be a better option for some people depending on the amount of equity in the home.
Find a California VA Loan Advisor you Trust
Making the wrong decision on a VA cash-out refinance can cost a Veteran thousands of dollars in the short run, and maybe result in even more serious consequences down the line. There is a reason why VA has tightened the Cash-Out refinance guidelines. It is because lenders were taking advantage of the fairly liberal requirements to the detriment of Veterans. Make sure you are working with a California VA Loan Specialist who can prepare an analysis of the numbers and show you several options. Veterans deserve the best. Veterans deserve to have someone working for them with their best interest in mind.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Fairway Independent Mortgage Corporation NMLS 2289. 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
What is a VA Approved Condo? And why do you need to know what a VA approved condo is? If you are a Veteran planning to purchase a condo using your eligibility for a VA loan, then you need to know what a VA approved condo is and how to distinguish what is VA approved and what is not approved. First, let’s start with a few basics.
What is a Condo?
A condo, or condominium, is a building or community of buildings where the units are owned by individuals, but the land and common areas are owned jointly with all owners. You can not always tell from the outside whether a property is a condo or other type of property. Most condos are attached to other units, but many newer home projects in California are built as condo’s even if they look like single-family detached homes. And some attached homes that look like condos are actually single family homes. If you are using a VA loan to buy your next property, there are no restrictions if the property is legally a single family home. But if the property is legally a condo, detached or not, the condo project needs to be approved by VA.
Why Does the Condo Project Need to be Approved?
Why does a Condo need to be VA approved? VA wants to make sure a Veteran using the VA loan program is making a safe investment. Not all condo projects are VA approved. Some are in disrepair or have severe budget issues that will eventually result in all condo owners to pay higher HOA dues or pay a large assessment. As a VA loan home buyer, you won’t necessarily know if a condo project has plumbing or roofing issues. Hopefully, the HOA maintains the property and has regular termite inspections, etc. And hopefully, the HOA maintains sufficient funds in its reserves to cover anticipated and unexpected expenses in the future. Can you imagine if you were to buy a condo and 12 months later find out the HOA did not have reserves to cover new roofing, plumbing, or termite damage? In extreme situations, homeowners have been assessed $10,000 to $20,000 each to cover needed repairs. That would not be a fun surprise. Also, what if you bought a condo only to find out later that 75% of the units were rented out. Condo projects with high rental percentages tend not to hold value as much as a condo project with high owner occupancy rates.
To help to protect Veterans from buying into a condo project that may not be a good investment, VA has requirements that must be met. VA reviews the HOA’s CC&R’s (Declaration of Covenants, conditions, and restrictions), the Bylaws, the Budget, current financials, Minutes of the most recent HOA meetings, special assessments, and litigation statements. Through this review process, VA is able to determine whether a condo project is safe VA financing.
Who Gets the Condo Project VA Approved?
Anyone can start the condo project approval process. But in many cases, the builder will get the condo project approved. For established condo projects that are not VA approved, the HOA can submit a package to VA. Sometimes a Realtor or a VA Lender will prepare and submit a package. The process for getting a project approved requires some assistance from the HOA since much of the documentation will be provided by the HOA. The VA condo project approval process can take anywhere from 2 or 3 weeks to 2 or 3 months depending on the completeness of the package and the approvability of the project. In most cases, a Veteran planning to use a VA loan to purchase a condo will need to restrict their house hunting to just those condos that are in VA approved condo projects. But how do you find VA approved condo projects?
How to Find VA Approved Condos
You would think there would be an easy way. Unfortunately, it’s not always that easy to find VA approved condos. The VA Lookup Site is the best way to verify if a condo is approved, but in many cases the condo are not listed by name on the VA Lookup site. Depending on when the project was first approved, it may be listed based on the Legal Tax Tract code. This means you’ll need to figure out the Tract Code for the condos you are looking at. This is where it is important to be working with a VA Loan Specialist who can help determine which condo project are VA approved and which are not.
Below is a video that will walk you through how to use the VA Lookup site.
Easy Way to Find VA Approved Condos
The easiest way for a Veteran to find VA approved condo’s for sale is to work with real estate professionals with experience in VA lending. In some counties local real estate professionals who specialize in VA financing have built specialized home search websites specifically to help Veterans find VA approved condos. In Orange County, www.OrangeCountyVeteransHomes.com makes it very easy to find VA approved condos for sale. From the home page, a Veteran can simply click on the city they are interested in and see results immediately for VA approved condos for sale within that city. It doesn’t get much easier than that.
Get PreApproved for a VA Loan at the Beginning of the Condo Hunt
Just like it helps to know how much payment you can afford before shopping for a car, you should know how much of a mortgage payment you can afford before you start looking at homes. Figure out what your budget it. be realistic. You will need to talk to a Loan Officer who specializes in the VA loan program. The VA Loan Officer will provide custom VA loan scenarios with a complete breakdown of the mortgage payment, including property taxes and insurance. The loan officer can also retrieve your Certificate of Eligibility and get you PreApproved, which must be completed before you make an offer on a home.
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. 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 do you get a VA loan? Not every eligible Veteran takes the same path to homeownership, but those that follow a roadmap will have an easier time than those that go about buying a home in willy-nilly fashion. Knowing the steps and following them before you begin looking at homes will help to keep you from experiencing frustration when you find out you don’t qualify for the neighborhood you’ve been searching in.
Review your Household Budget
Knowing where your dollars are going is very important. You should have your budget under control before you buy a home. How much are you currently spending on housing/rent? How much for groceries? Dining? Entertainment? Utilities? Car, gas, insurance? And how much are you able to save each month? Some people use software to track their finances, but all you really need to do is right down the numbers on a sheet of paper. Or create your own spreadsheet. Make an honest assessment of your finances. Determine what mortgage payment you could handle. You may find that there are areas of your budget that you can cut back on and you may want to increase your savings.
Contact a California VA Loan Officer
Now that you have a good grip on your budget, it is time to contact an experienced, local, California VA Loan Officer. The loan officer will help you determine how much of a VA loan you will qualify for. The Loan Officer should be able to give you custom VA loan scenarios with a complete breakdown of the numbers. You will want to see how much the full PITI (Principal, Interest, taxes, and insurance) is for the home price you are Prequalified for. The Loan Officer will also be able to educate you on the numbers.The more you know prior to making an offer on a home, the better chance you will have of getting your offer accepted and eventually, closing the transaction. Too often loan real estate transactions fall apart because the buyer didn’t understand something with the payment or didn’t realize how much money would be needed to close on the purchase of their home. While using VA financing does not require a down payment up to the county loan limit, there are still closing costs that the buyer is responsible for. There are escrow, title, appraisal, credit report, and recording fees. Money is also needed for prepaid expenses such as interest, taxes, and insurance. There are ways to have those fees covered, either by negotiating to have the seller pay some or all, or having the lender adjust the interest rate higher to then get a lender credit. Either way, knowing what your strategy is going to be PRIOR to making an offer on a home is critical. And an experienced California VA Loan Officer will be able to get you the numbers you and your real estate agent will eventually need to confidently make an offer and buy a home.
Retrieve your VA Certificate of Eligibility
To make sure you are eligible for a VA loan you will need to retrieve your Certificate of Eligibility. The easiest way to do this is to have the VA lender pull it for you. VA Lenders can retrieve your COE in minutes since they have access to VA’s Automated Certificate of Eligibility (ACE) portal. The COE will verify your eligibility. It will also verify whether your VA Funding Fee is waived, or if you will have a subsequent user Funding Fee. The COE also will show if your Entitlement is not fully restored from a previous loan. These are all important things to know BEFORE you make an offer on a home.
Get PreApproved for your VA Loan
Now that you are already talking with a California VA Lender and the loan officer has created custom VA loan scenarios, it is time to start the VA Loan PreApproval. These days in California, a home seller will probably not even entertain an offer from a potential buyer who is not already PreApproved. PreApproval can be a different thing to different lenders, but at the very least you should be submitting your income and asset documentation to the lender along with a completed loan application. The lender will run your credit report and get an Automated Approval. Hopefully, the lender will also have an actual VA underwriter review the documentation to verify the numbers entered on the loan application. Once you have been PreApproved for your VA loan, the lender will issue a PreApproval Letter which can be submitted with any home offers you make.
Find a Real Estate agent who is comfortable with buyers using VA Financing
Not all real estate agents understand what it takes to get an offer accepted for a buyer using VA financing. Your California VA lender may be able to refer you to a real estate agent who has experience working with Veterans to buy a home. The real estate agent should know whether or not you will need the seller to pay your closing costs. And the agent should also make sure to include certain things in the purchase contract that are required by VA (like a clear termite report).
Find a Home
You are now ready to find a home that meets your qualifications, budget, payment comfort level, and other personal requirements. If you are planning to buy a condo then you will want to keep your California VA Loan Officer in the loop. The condo project needs to be VA approved for a VA loan to close. It will be easier to limit your search to those condo projects that are already VA approved. Your lender and help you and your real estate agent narrow down the search. The home search can take 1 day or 12 months. It just depends on the current real estate market and your qualification and needs. Once you find a home you will make an offer through your real estate agent. The California real estate market has been hot for the last few years, so it may take a few offers before you have an accepted offer and are “in escrow”.
You are “In Escrow”
When you are “in escrow”, this means you have an accepted offer and have given a deposit to the escrow company to “open escrow”. It typically takes between 30 and 45 days to close escrow. During escrow, the appraisal and inspections are completed, a title search is completed, and the loan is fully approved. Once the loan closes you will be given the keys to your new home. Depending on the terms of your sale contract, the sellers of the home you buy may have a few days to move out before you can move in. But at this point, you are a new home owner.
The entire home buying process can take several years for some people but may only take a month or two for those with a clear idea of the steps towards home ownership and a clear idea of the type of home (and location) they want to buy. The biggest hurdle for most home buyers is the down payment. For California Veterans, that hurdle is mostly eliminated since VA does not require a down payment up to the county loan limit. So for those California Veterans who are thinking of buying a home, figure out what your budget is and talk to a California VA Loan Officer who will prepare custom VA loan scenarios for you today.
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. 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.
There are many reasons a California Veteran should by a home. Property values in California have fully recovered in most counties compared to values in 2008 after the “mortgage meltdown”.Mortgage underwriting standards are now much stricter than they were prior to the crash, which has helped to stabilize the real estate market., Homebuyers are still optimistic about searching for and purchasing a home. Home prices have experienced nice appreciation rates over the past few years are expected to continue that trend in 2018.There are many reasons that it makes financial sense, especially for California Veterans, to purchase a home now. Here are a few of those reasons:
A home is one of the best leveraged investments currently available
When purchasing a home, the purchaser stands to potentially make significant gains on their investment. For example, say a borrower pays a 20% down payment on a $400,000 home. That is $80,000 down payment. If the value of the home they purchased rises 10% to a value of $440,000, they will have realized a 50% return on their initial investment. For every percentage point the value rises the borrower gets a 5% return on investment. If a mortgage has a smaller down payment, then the increase in ROI is even greater. In the case of a California Veteran that uses the VA program where no down payment is required, a rise in value would mean an exponentially immeasurable increase in ROI. It is, of course, important to also compare the total mortgage payment to a comparable rent payment and make sure the mortgage payment fits your budget.
Whether you own or rent, you are still paying for housing
In either case, you are likely paying someone’s mortgage principal. When renting you are paying the landlords principal plus a rate of return to help cover their costs. When owning, you will be paying your own principal and moving towards paying off your mortgage. You also get much more favorable tax treatment when owning your home.
Owning is a form of “forced savings”
Many individuals will delay saving money for the future due to current debt and current costs. Owning a home acts as a storage of value and can serve as a long-term asset. When purchasing a home with a mortgage, you have to pay into your home by paying off your mortgage. This is a forced savings since the money you paid to close out your mortgage is stored in the long-term value of your home.
There are significant tax benefits to owning
Compared to renting, there are many more tax-related benefits if you own your home. When you own your home, you are able to deduct property taxes and mortgage interest from your income. Of course, it is always important to consult with your CPA or tax preparer to see if there will be a tax benefit for you or not. Recent tax changes may have reduced or eliminated the tax benefit of owning a home at certain price ranges. Every situation is different.
Owning your home is a hedge against potential inflation
For potential homeowners with a fixed rate mortgage, their housing costs could be essentially fixed with only utility costs, insurance, and property taxes changing over time. When renting a home, rents and related costs will change over time with higher rates of inflation. The potential for future inflation provides homeowners with an attractive possibility for future savings. And in California, because of Proposition 13 (passed in 1978), property taxes are severely limited to increasing in step with inflation. Proposition 13 only allows the county to increase your properties assessed value by a maximum of 2% per year. Since 2000, the average annualized property appreciation rate in California is 5.03%. (from 1st Quarter 2000 through 3 Quarter 2017 – source https://www.neighborhoodscout.com/ca/real-estate ) That even takes into account the downturn in 2008. Somebody who bought a home in 2000 for $300,000 is now sitting on a home valued at $708,120. But their property tax bill is not based on the estimated value of $708,120. Because of Proposition 13, the assessed value would only be $420,000. Since the property tax bill is based on the assessed value, this works as a great hedge against inflation. The base annual property tax bill would be 1% of $420,000, or $4,200. But if someone new move into the neighborhood and buy a home valued at $708,000, their base property tax bill would be $7,080. The sooner you buy a home the better. Lock in that payment before property values go higher.
It is very important to make sure you have a clear understanding of the numbers involved in purchasing a home with VA financing. You want to make sure you know your budget so that after you buy a home you are still able to save for retirement and go out to dinner now and then. To understand the numbers, call a California VA loan officer prior to shopping for a home.This should always be your first step. Similar to shopping for a car, you need to know what payment you can afford and what that payment equates to in purchase price. Your California VA Loan Officer will be able to quickly assess your situation and prepare custom VA loan scenarios for you.
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. www.CaliforniaVALoanExpert.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.
Buying a home in California can be a challenge. The biggest hurdle preventing most potential homebuyers is the down payment. While there are loan programs, like FHA, that allow for down payments as little as 3.5% down, it can still take time to save that much money. Someone buying a home for $450,000 in California with 3.5% down would need $15,750 for the down payment. And that amount doesn’t include closing costs, prepaid expenses, etc, that could easily add up to another $10,000, bringing the total amount needed to close to over $25,000. But for California Veterans, there is a much better option. A program that doesn’t require any down payment. The VA loan program.
The VA Loan Program allows 100% Financing up to your County Loan Limit
The VA loan program has been around, in some form, since 1944. It was conceived as a way to help returning military Veterans purchase a home. (or farm, etc). Rather than give a cash bonus, VA would guaranty a percentage of the loan, making it a safe program for lenders to offer. In its current form, the VA guarantees 25% of the loan amount, for loans up to a specified county limit. That VA California county loan limit is determined once a year by the Federal Housing Finance Agency, or FHFA. The base limit for most counties in the country and throughout California in 2018 is $453,100. But there are higher cost counties in California, like Los Angeles County, Orange County, Contra Costa County, and many other, with limits as high as $679,650. In those high-cost counties, California Veterans can purchase a home for $679,650 with $0 down payment. For today I am going to give you an example of what a $450,000 purchase using VA financing will look like.
What Do the Numbers Look Like for a $450,000 Home Purchase with $0 Down Payment?
First, we do need to make a few assumptions. We are going to assume this is a single family detached home with no homeowners association dues. We are going to assume a property tax rate of 1.25%, which is fairly typical in California. There are some areas where tax rates are between 1% and 1.05%, and some areas where the property tax rate is nearly 2%. But most are close to 1.25%. I am also going to estimate the homeowner’s insurance using a factor at .25% of the loan amount divided by 12. The homeowner will need to shop for their own insurance, but .25% will work as a solid estimate. I am also going to assume this is the California Veterans first time using VA financing, resulting in a VA Funding Fee of 2.15%. For members of the Reserves or National Guard, the VA Funding Fee would be 2.4% for being first-time users of VA financing. A Veteran with a service-connected disability rating will not have a VA Funding Fee. And lastly, I am going to assume a FICO score of 720+. The example will break down the total payment, including principal, interest, property taxes, and insurance. I will also estimate the required income to qualify for this purchase price. I will also give an estimate of the typical closing costs and prepaid expenses, and give strategies for potentially having the closing costs and prepaid expenses covered using a lender or seller credit.
There is No Down payment required, so the VA loan will equal the purchase price. There is a VA Funding Fee equal to 2.15%, or $9,675 in this case, that is financed into the loan. This makes the total VA loan $459,675.
Interest rates vary from one day to the next, but as of February 12, 2018, and assuming a FICO score above 720, we’ll use 4.25% at 0 points (APR 4.521%). That results in a Principal & Interest (PI) payment of $2,261. Property taxes and homeowners insurance are also part of the payment. They are the “TI” in PITI. The total “PITI” monthly payment is $2,824.
What Income is Needed to Qualify for a $2,824 mortgage payment?
The Debt to Income ratio is the ratio or percentage that compares a borrower’s gross income compared to their monthly payments. The guideline Debt to Income ratio is 41% on VA loans. But realistically VA does not have a maximum Debt to Income ratio. It is not unusual for the DTI on a VA loan to be 50% or higher. If we assume that 50% of the California Veterans gross monthly income can go towards their total payments. And if we assume the Veteran has a car payment of $500 and a minimum credit card payment of $50, then the estimated income needed to qualify for a mortgage payment of $2,824 and other payments of $550 (total of $3,374) would be approximately $6,774. ($3,374/.50% = $6,674).
Closing Cost Breakdown
There are closing costs and Prepaid expenses on all real estate and loan transactions. Even on a VA loan. There are ways to have some or all of those costs paid for (by the seller) or credited by the lender, but one way or another the costs to close do need to be accounted for. Understanding this before getting an accepted offer is very important. Typical closing costs include lender fees, appraisal, credit report, escrow and title fees, and recording fees. In our example, I have estimated those fees to total $6,000. Some of these fees will adjust based on the loan amount or purchase price of the home. The choice of escrow and title companies are negotiated through the purchase contract, but in most cases in the current real estate market, the seller or their real estate agent will have the upper hand in choosing those companies.Also, for this loan example, I have chosen an interest rate at 0 points, meaning there are no Discount points associated with the interest rate. You do have the option of “buying” the interest rate down by paying Discount Points. One Point is equal to 1% of the loan amount. If the loan amount is $459,675, then 1 Discount Point would be $4,597, which would be added to the closing costs. One Point may lower the rate by .25%, which would lower the PI by $66 per month on a $450,000 Base VA loan amount. That may or may not make sense, depending on several factors that should be discussed with your California VA loan officer. On the flipside, it is also possible to go higher in rate. By doing this you would receive a lender credit that could be used to cover closing costs and/or prepaid expenses.
Prepaid expenses include mortgage interest, property taxes, and homeowners insurance.
Prepaid mortgage interest occurs when a loan closes at some time in the middle of the month. For example, if a VA loan closes on June 15 then there would be 15 days of “prepaid interest” due at closing. The time period covering June 16-June 30 is the 15 days. Your first mortgage payment would not be due until August 1, or 45 days after the closing, which is awesome. If the loan were to close on June 29, then there would only be 5 days of Prepaid interest. But the first payment would still be August 1, or only 31 days after the closing. Either way, the homebuyer is just paying for the interest covering the time period they are in the home that is not going to be covered by the first payment. In our example, we are estimating 15 days of Prepaid interest at $61 per day, or $910.
Property taxes are paid and/or prepaid/deposited to an escrow/impound account through the closing of the loan. Property taxes and homeowners insurance will be paid through each month along with your Principal and Interest. An Impound account is set up at the closing to make sure there will be enough funds to pay those bills when they come due. The number of months of property taxes deposited into the impound account is dependent on the month the loan closes. Loans that close in April will require 4 months of property taxes to be collected and deposited into the impound account. There may also be “prorated” taxes due to the seller based on property taxes they have already paid that will cover a time period the new buyer will be occupying the home. In the example, we are estimating 6 months of property taxes for the impound account, which is a good conservative estimate. This comes to $2,913. ($468.75 x 6).
Homeowners Insurance is also prepaid. At closing a 1-year premium is paid. Also, 3 months of insurance are deposited to the impound account. By depositing three months of insurance into the impound account, the lender is making sure there will be enough funds available for renewal 12 months after the closing. In our example, we estimate the 1-year premium and 3 months insurance to be $1,406.
The Impound Account is essentially a savings account for the VA buyer that is held by the VA lender. Your monthly mortgage statement will give you a breakdown of the balance, deposits, and disbursements in your impound account. It is important to keep on top of your impound account. It is also important to be aware that in many cases the lender will not pay the Supplemental tax bill when it comes due. The homeowner should be aware of the Supplemental tax bill in the first year after their home purchase.
In our example, the estimated Prepaid expenses are $5,129. The Closing Costs are $6,000. This means the total amount needed to close is $11,033. As mentioned earlier, the Veteran can negotiate to have the seller pay some or all of the closing costs and prepaid expenses. Another option is to choose a higher interest rate and then use “Yield Spread Premium” to help cover costs. For example, if you went with an interest rate of 4.75% (APR 4.874) you could get a YSP of 1.75%, or in this case, $8,044. ($459,675 * 1.75% = $8,044). This is enough to cover all of the closing costs and even $2,000 of the Prepaid expenses.
The important thing is to understand the numbers BEFORE you make an offer on a home. Make sure the total PITI payment will fit your budget. Make sure you have a way of covering the closing costs and prepaid expenses. Know ahead of time whether you will need to negotiate with the seller to pay costs because you’re not going to be able to negotiate after the offer is accepted and you’re in escrow.
Get PreApproved for a VA Loan Before you make an Offer on a Home
This all seems like a lot. But working with the right real estate professionals can help to make the process easy. You will want to get PreApproved for a VA loan before you make an offer on a home. At the very start of the PreApproval process, you will have a phone or in-person consultation with a California VA Loan Specialist. The VA Loan Officer will then be able to prepare custom loan scenarios based on your qualifications, taking into consideration your payment comfort level, credit, income, etc. Your California VA Loan Officer will also prepare a custom video of your loan scenarios, explaining the numbers and answering questions you may have. Going through this process will give you confidence when you begin making offers on homes.
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.