The VA Home Loan Program is designed to help California veterans who served honorably, and their surviving spouses, buy homes as they start to lay down roots here in California. The VA loan program does not require a down payment or mortgage insurance and offers interest rates that are usually below market. Best of all, there are no loan or income limits. Find out how a California Veteran can qualify for a VA Loan and get started today!
Here are the steps to qualifying for a VA loan.
=>STEP 1: Decide if the VA Home Loan is right for you
There are many reasons why someone might want to decide if the VA Home Loan is right for them. Some people may be interested in a VA home loan because they have very little money saved, or because qualifying for a Conventional loan is more difficult. Another big reason is that there is no down payment required with the VA loan. And of course, since interest rates tend to be low on VA loans and no mortgage insurance is required, the mortgage payment will be lower with a VA loan when compared to another loan (like an FHA loan). Lastly, another great benefit of getting a VA home loan is that there are no income limits and no loan limits.
=>STEP 2: Determine your eligibility and entitlement with the VA
The easiest way to determine eligibility for a va loan is to have a VA Lender submit your DD214 through the Va Lenders portal and retrieve your Certificate of Eligibility. But if you’re wondering what the basic requirements are then the information below will be helpful.
When did you serve? You meet the minimum active-duty service requirement if you served for at least this amount of time: Between September 16, 1940, and July 25, 1947 (WWII)
90 total days, or
Less than 90 days if you were discharged for a service-connected disability
Between July 26, 1947, and June 26, 1950 (post-WWII period)
181 continuous days, or
Less than 181 days if you were discharged for a service-connected disability
Between June 27, 1950, and January 31, 1955 (Korean War)
90 total days, or
Less than 90 days if you were discharged for a service-connected disability
Between February 1, 1955, and August 4, 1964 (post-Korean War period)
181 continuous days, or
Less than 181 days if you were discharged for a service-connected disability
Between August 5, 1964, and May 7, 1975 (Vietnam War), or
February 28, 1961, to May 7, 1975, if you served in the Republic of Vietnam
90 total days, or
Less than 90 days if you were discharged for a service-connected disability
Between May 8, 1975, and September 7, 1980 (post-Vietnam War period), or
Between May 8, 1975, and October 16, 1981, if you served as an officer
181 continuous days, or
Less than 181 days if you were discharged for a service-connected disability
Between September 8, 1980, and August 1, 1990, or
Between October 17, 1981, and August 1, 1990, if you served as an officer
24 continuous months, or
The full period (at least 181 days) for which you were called to active duty
Between August 2, 1990, and the present (Gulf War)
24 continuous months, or
The full period (at least 90 days) for which you were called or ordered to active duty, or
At least 90 days if you were discharged for a hardship, a reduction in force, or for convenience of the government, or
Less than 90 days if you were discharged for a service-connected disability
You separated from service after September 7, 1980, or
After October 16, 1981, if you served as an officer
24 continuous months, or
The full period (at least 181 days) for which you were called or ordered to active duty, or
At least 181 days if you were discharged for a hardship, a reduction in force, or for convenience of the government, or
Less than 181 days if you were discharged for a service-connected disability
If you’re on active duty right now then you just need 90 continuous days.
=>STEP 3: Find a lender that works exclusively with the VA
You may know this already, but the VA is not a lender. But VA does guarantee the loan for the lender as long as it is underwritten to VA guidelines. It’s up to you to find a lender who specializes in VA loans.
Here are some things to look for when you’re looking for a lender:
-Is the lender a VA-approved lender? If not, they can’t approve your loan documents with the VA and will need to coordinate this through another company.
-Does the lender have a good reputation? You’ll want to see if other veteran borrowers say something positive about their experience working with them.
-Can you reach someone on the phone to ask questions? This is important. Working with a VA lender who is difficult to get on the phone will be frustrating as you get through the process. The best of all worlds is to find a California VA Loan specialist who not only answers the phone but can also answer your questions and effectively guide you through the home buying process.
If you can answer ‘yes’ to these three questions, then they might be worth your consideration. You’ll want to make sure they have the ability to originate VA loans in California before you give them any personal information.
=>STEP 4: Submit a formal application with the lender to get PreApproved for the VA Loan program. The following is a list of steps that you will need in order to submit an application:
1) Complete and submit the VA Application Package online. The California VA lender will be able to provide a link to their secure online loan application. The application should be very intuitive and easy to complete.
2) Provide any additional required documentation (i.e., DD214, tax returns, W2’s, paystubs, LES statement, bank statements, etc). The lender should have a secure method that you can use to upload the documentation to them for review.
3) Stay in contact with your California VA Loan specialist. He will be able to answer your questions and will stay with you all the way to the end, acting as your “Home Buyer’s Guide.”
=>STEP 5: Begin house hunting – your VA loan is just a signature away!
You should now be PreApproved for your VA loan. It’s important to know that PreApproval means different things to different lenders. Some lenders will issue a “PreApproval Letter” without even reviewing the file or documentation. This is should be more of a Prequalification if even that. The best PreApproval is a “fully underwritten” PreApproval. This is where the lender processed your loan application as if you already have an accepted offer. You’re not going to get a fully underwritten PreApproval in 10 minutes or even 24 hours. It could take more than a week, maybe two, to get a fully underwritten PreApproval. But once you have it you are as strong as a cash buyer. All that is needed is a purchase contract, clear title, and appraisal.
Most house hunting is done online these days. But it will be helpful to work with a Realtor who is familiar with VA financing, especially if you intend to buy a condo. If you ARE planning to buy a condo then you’ll want to limit your search to VA-approved condos. And this again is where working with a VA loan specialist is critical. Otherwise, you could end up frustrated while looking at homes that are not VA-approved. Depending on where your home search is there are websites that can help narrow down the search to only condos in VA-approved condo projects. For example www.CaliforniaVeteranHomes.com and www.OrangeCountyVACondos.com.
=>STEP 6: Make an offer to purchase and close on your home.
It’s no secret that the housing market in California is tough. You have to be patient and persistent when buying a house. But with your VA loan PreApproval letter in hand, you will be in a very strong position when competing with other offers. Make sure to keep your California VA Loan Officer involved in the process so that he can provide updated numbers for the homes you are interested in. Remember, your California VA Loan Officer will be your Guide and is there to answer all of your VA loan questions.
=>STEP 7: Move into your new home
This is the best part. After a typical 30 days in “escrow”, you should be ready to close and then own your home. Schedule the moving van and make your new home your own. And again, keep your VA Loan Officer in the loop if you have any questions on how or where to make your payment. A good California VA Loan Officer will make sure you have a solid understanding of what to look out for after your loan closes, like Supplemental Property taxes which can be a surprise to new home buyers.
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 949-829-1846. I will prepare custom VA loan scenarios that 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.
We are about to destroy 3 myths about the VA loan program in California. The VA loan program is the best benefit available to Veterans, allowing them to purchase a home with no down payment. And as of 2020, there are no VA loan limits tied to the allowance for no down payment purchases. On top of that, VA has very aggressive interest rates and no monthly mortgage insurance. Even with these huge advantages there continue to be myths about the VA loan program that can make it tough to get an offer to buy a home accepted.
Myth #1 : VA Loans Take to Long to Close - FALSE
This depends on the experience of the lender, but if you're working with a California VA loan specialist then a VA loan can close very quickly. It all depends on the internal process of the lender and the initial prequalification of the borrower. Some lenders will even do a "fully underwritten PreApproval" prior to the offer being made. This is always the preferred method of VA loan PreApproval, but not all lenders will go through the extra step of actually have an underwriter review the initial loan package. If you go with a lender who has fully underwritten your loan package prior to making an offer, then you will be in a very strong position to not only get your offer accepted, but also to close very quickly. The only item you'll be waiting on is the VA appraisal. A good VA lender should be able to issue a "Clear to Close" in as little as 15 days from the day of your accepted offer.
Myth #2: VA Loans Cost the Seller More - FALSE
Accepting a VA offer does not cost the seller anything that would be different from any other offer. This myth stems from the idea that with a VA loan there are "non-allowable" closing costs, or closing costs the buyer is not allowed to pay. What someone who believes this myth to be true doesn't understand is that even fees that are on this list CAN BE PAID by the Veteran as long as the total amount of these fees are less than 1% of the VA loan amount. In California, where home prices tend to be higher than other parts of the country, and where most VA purchase loans tend to be with $0 down payment, 1% is a big number and more than covers these "non-allowable" fees. Most typical closing costs are not included in the calculation. For example, title insurance fees, loan discount fees, and the the appraisal fee are not included in the 1% calculation. A Veteran using the VA loan program in California can even pay for the required termite inspection report and can pay for any required repairs, just like with any other type of financing.
Myth #3: VA Loans are harder to close - FALSE
This may be true for some lenders, but again, this is where a California Veteran needs to make sure they are working with a lender AND loan officer who specializes in the VA loan program. A lender who specializes in the VA loan program will have more dedicated support and knowledge about the VA loan program that a lender who is a "jack of all trades". A California Loan Officer may run into one to three VA loans in a year. A California VA Loan Specialist may close more than 50 or even 100 VA loans in one year. The California VA Loan Specialist will have more knowledge about the VA loan program and will have seen many more scenarios and have solutions for almost any scenario versus a loan officer closing one to three VA loans in a year. So yes, a VA loan may be harder to close for some lenders, but if you are working with lender and loan officer who specialize in the VA loan program, then the VA loan program will be easier to close than other types of loan programs. Think about it. No down payment to verify. No max "debt to income" ratio to worry about. Very flexible underwriting requirements and FICO score requirements. It just easy.
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 714-478-3049. I will prepare custom VA loan scenarios that 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.
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
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.
Is an impound account required with a VA loan in California? That is a fairly common question once we get past the initial question, “What is an Impound Account?” There are only a few loan programs available to borrowers that require little to no down payment for a home loan. Since these borrowers are considered a higher risk to lenders, an Impound account is required as part of the loan. An Impound account, which is also known as an escrow account, is essentially a savings account that is held by the lender (or loan servicing company, which in many cases is a third party) on the VA loan borrowers behalf.
When the California Veteran makes a payment, the payment is not just Principal and Interest. It is also 1/12 of the annual property taxes and homeowners insurance. In California, any mortgage loan with less than a 10% down payment will require an impound account. (Many states require a 20% down payment to avoid an impound account). While VA does not have a specific requirement regarding when to have an impound account, most VA lenders do require it. Most VA loans initially have a down payment of less than 10%, so it would be required in California regardless. However, I have had some VA clients who were able to waive the impound account requirement when they had a large down payment (20% or more down). It is rare and is on a case by case basis. Even though a third party manages the impound account, you are still responsible for the property taxes and homeowners insurance payments. It is very important to monitor the impound account. Here in California, impound accounts do accumulate interest that is paid to the borrower. But don’t expect to be cashing in heavily because the interest rate is very low. (like your savings account)
An Impound Account Helps the Veteran Budget their Cashflow
Nobody wants a big surprise 6 months after they buy their home. By having an impound account that you are paying into each month, you should not need to worry about needing funds to pay that property tax or insurance bills when they comes due. The goal of an impound account is to help ensure that VA loan borrowers stay current on property taxes and Homeowner’s insurance.
Supplemental Tax Bills are not Paid from the Impound Account
The Supplemental tax bill is something that can be a big surprise. While the Supplemental tax bill affects all new home buyers, California VA loan borrowers need to be especially aware of the Supplemental Tax bill and why they are receiving it. The Supplemental Bill only comes in the 1st year after the closing of a home purchase and is the “catch up” tax bill that covers the difference between the previous owner’s tax bill and the buyer’s tax bill (since the previous owners assessed value is normally less than the buyers assessed value). The Supplemental bill is not automatically paid from the impound account like the normal secured property tax bill. The borrower needs to make sure the bill gets paid by either paying it on their own, or forwarding to the loan servicing company and having an impound account review completed. If the loan servicing company determines there are enough funds to cover the Supplemental tax bill then they (the servicing company) may pay it.
Your impound account balance will likely be shown on your monthly mortgage statement. It should be relatively simple to monitor the balance of your account. It is required that the lender reviews the account annually to ensure that you are paying the right amount each month and make any necessary adjustments. The lender does not want to come up short and also is not allowed to have too much money in the account.
Why Did my Impound/Escrow Payment Increase?
While the Principal and Interest portion of your VA loan payment is fixed (if you have a fixed rate), the impound account portion of your payment is not fixed. This is because property taxes go up each year. In California, your property’s assessed value can only increase a maximum of 2% each year as a result of Proposition 13, a bill that passed in 1978. Even if your property value increases 10% in a year, your assessed value is held down by Prop 13. This is a good thing because it helps to keep your mortgage payment, or full PITI payment, stable. It does go up, but not much.
It is very important to understand how your mortgage payment is calculated. The full Principal, Interest, taxes, and insurance. And that is why it can be very helpful to have a California VA Loan officer 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.
It’s no secret that the housing market in California is tough. You have to be patient and persistent when buying a house. But with your VA loan PreApproval letter in hand, you will be in a very strong position when competing with other offers. Make sure to keep your California VA Loan Officer involved in the process so that he can provide updated numbers for the homes you are interested in. Remember, your California VA Loan Officer will be your Guide and is there to answer all of your VA loan questions.
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.
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.
