How to Establish the Applicant’s Eligibility for a VA Loan

Eligibility means the veteran meets the basic criteria of appropriate length and character of service to utilize the home loan benefit.  Entitlement is the amount a veteran may have available for a guaranty on a loan.  An eligible veteran must still meet credit and income standards in order to qualify for a VA-guaranteed loan. 

Note: A Certificate of Eligibility (COE) is the only reliable Proof of Eligibility for the Lender (except in the case of an Interest Rate Reduction Refinancing Loan (IRRRL)


What the Certificate of Eligibility Tells the Lender

The lender may rely on a COE as proof the veteran is eligible for the home loan benefit.  Although eligible for the home loan benefit, veterans must still qualify based on income and credit before loan approval is granted.

Entitlement

Entitlement is the amount available for use on a loan.  The amount of available basic entitlement is $36,000.  This may be reduced if a veteran has used entitlement before which has not been restored.  The amount of basic entitlement will be displayed near the center of the COE.  For example it may say:

“THIS VETERAN’S BASIC ENTITLEMENT IS $_____.  TOTAL ENTITLEMENT CHARGED TO PREVIOUS VA LOANS IS $_____.”

For certain loans in excess of $144,000, additional entitlement may be available.  For loans greater than $144,000, but less than $417,000, the maximum entitlement is 25 percent of $417,000, which equals $104,250.  For loans greater than $417,000, the maximum entitlement is 25 percent of the appropriate “loan limit” which can vary by county. Please note county limits can change yearly.  VA will post the limits for each year on their website as they change. 

Even though the veteran may have entitlement for certain loans greater than $144,000, the COE will never reflect this potential “extra” entitlement.  Instead, an asterisk by the word “available” refers to a note, which explains the possibility of additional entitlemen


Fees a Veteran can be charged &
Fees that cannot be charged

Lenders must strictly adhere to the limitations on borrower-paid fees and charges when making VA loans.

The veteran can pay a maximum of:

•reasonable and customary amounts for any or all of the “Itemized Fees and Charges” designated by VA, plus
•a one percent flat charge by the lender, plus
•reasonable discount points.

Note:  Some special provisions apply to construction, alteration, improvement, and repair loans.

ALLOWABLE FEES THAT A VETERAN BORROWER CAN BE CHARGED


The following fees are always allowed regardless of the 1% origination fee being charged:
  • Appraisal fee – per allowable maximum appraisal fee schedule for that state
  • Compliance inspection – only if required by the NOV
  • Credit report – in most cases it should not exceed $50
  • Recording fees, taxes and stamps
  • Prorated tax and insurance escrow
  • Hazard insurance – if it was not paid directly out of pocket by veteran outside closing
  • Survey and plot plan
  • Title insurance, title policy, title exam, title search, title endorsement and any fees required to prepare title work
  • Environmental protection lien endorsement
  • 1% origination fee
  • VA funding fee
  • Discount points
  • Closing protection letter – sometimes just listed as “CPL” (should not exceed $35, except in Pennsylvania it is $75)
  • Interthinx DISSCO fraud protection report
  • MERS fee
  • Well and Septic inspection fees
  • Express mail fees (only for cashout refinances and IRRRL’s) – actual cost should be reasonable. If not question it (over $50 should be questioned – ask for actual invoice)

Whenever the charge relates to services performed by a third party, the amount paid by the borrower must be limited to the actual charge of that third party. 

Example:  If the lender obtains a credit report at a cost of $30, the lender may only charge the borrower $30 for the credit report.  The lender may not charge $35, even if it believes that a $5 handling charge is fair.


FEES & CHARGES A VETERAN BORROWER CANNNOT PAY IN CONJUNCTION WITH THEIR LOAN

The following fees are always un-allowed if the 1% origination fee is charged:

  • Lender’s appraisal – the veteran can only be charged for 1 appraisal unless VA deemed a second appraisal mandatory
  • Lender’s inspection – if it is not required on the appraisal/NOV, it can not be charged to the veteran
  • Settlement fee, escrow fee, closing fee
  • Document preparation fee
  • Underwriting fee
  • Processing fee
  • Application fee – a veteran can be charged up front the cost of the appraisal and credit report to ensure the loan officer is not stuck with those fees if the veteran walks away from the deal.
  • Pest inspection fee
  • Attorney fees if for something other than title work
  • Assignment fee
  • Copying fee
  • E-mail fee
  • Cleveland Regional Loan Center
  • Closing Cost Information for Lender
  • Fax fee
  • Photographs
  • Postage fees if not a cashout refinance or IRRRL
  • Amortization schedule
  • Notary fee
  • Commitment fee
  • Trustee fee
  • Truth in lending fee
  • Mortgage broker fee
  • Tax service fee

SELLER CONCESSIONS

Seller concessions include, but are not limited to,
the following:

• payment of the buyer’s VA funding fee
• prepayment of the buyer’s property taxes and insurance
• gifts such as a television set or microwave oven
• payment of extra points to provide permanent interest rate     buydowns
• provision of escrowed funds to provide temporary interest       rate buydowns, and
• payoff of credit balances or judgments on behalf of the           buyer.

Seller concessions do not include payment of the buyer’s closing costs, or
payment of points as appropriate to the market.

Example:  If the market dictates an interest rate of 7½ percent with two discount points, the seller’s payment of the two points would not be a seller concession.  If the seller paid five points, three of these points would be considered a seller concession.

The Four Percent Limit

Any seller concession or combination of concessions which exceeds four percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans. 





Credit History & Some Facts-vs-Fiction
Regarding Bankruptcy / Consumer Credit Counseling
& Foreclosures

Absence of a credit history is not generally considered
an adverse factor. It may result when:

• recently discharged veterans have not yet developed a credit history,
• applicants have routinely used cash rather than credit, and/or
• applicants have not used credit since some disruptive credit event      such as bankruptcy or debt pro-ration through consumer credit           counseling.  In these cases, develop evidence of timely payment of     noninstallment obligations such as rent and utilities since the             disruptive credit event.

ADVERSE CREDIT

Reestablished Credit:  In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date the last derogatory credit item was satisfied.  For example, assume a credit report reveals several unpaid collections, including some which have been outstanding for many years.  Once the borrower has satisfied the obligations, and then makes timely payments
on subsequent obligations for at least 12 months, satisfactory credit is reestablished. 

Collections:  Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval.  For example, a credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections.  In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval.  However, collection accounts must be considered part of the borrower’s overall credit history and unpaid collection accounts should be considered open, recent credit.  Borrowers with a history of collection accounts should have reestablished satisfactory credit (see previous paragraph) in order to be considered a satisfactory credit risk. 

Disputed Accounts:  Lenders may consider a veteran's claim of bona fide or legal defenses regarding unpaid debts except when the debt has been reduced to judgment.  Account balances reduced to judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments.  For unpaid debts or debts that have not been paid timely, pay-off of these debts after the acceptability of applicant's credit is questioned does not alter the unsatisfactory record of payment.

Consumer Credit Counseling Plan

If a veteran, or veteran and spouse, have prior adverse credit and are participating in a Consumer Credit Counseling plan, they may be determined to be a satisfactory credit risk if they demonstrate 12 months’ satisfactory payments and the counseling agency approves the new credit. 

If a veteran, or veteran and spouse, have good prior credit and are participating in a Consumer Credit Counseling plan, such participation is to be considered a neutral factor, or even a positive factor, in determining creditworthiness.  Do not treat this as a negative credit item if the veteran entered the Consumer Credit Counseling plan before reaching the point of having bad credit.

Bankruptcy

    The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.  Develop complete information on the facts and circumstances of the bankruptcy.  Consider the reasons for the bankruptcy and the type of
bankruptcy filing.

    Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law. You may disregard a bankruptcy discharged more than 2 years ago.

   If the bankruptcy was discharged within the last 1 to 2 years,
it is probably not possible to determine that the applicant or spouse is
a satisfactory credit risk unless both of the following
requirements are met:

• the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and

• the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified.  Divorce is not generally viewed as beyond the control of the borrower and/or spouse. 

THE VA FUNDING FEE

In order to defray the cost of administering the VA home loan program, each veteran must pay a funding fee to VA at loan closing.
Congress may periodically change the funding fee rates to reflect changes in the cost of administering the program, or to assist a certain class of veterans.

The lender must :

•  verify the status of any veteran who may be exempt from paying the funding fee;
•  determine the amount of funding fee owed by any non-exempt borrower;
•  collect the appropriate fee from all non-exempt borrowers at loan closing;
•  electronically remit the funds to VA in a timely manner through the VA Funding Fee Payment System (FFPS);
•  print proof of payment of the funding fee; and
•  submit proof that the funding fee has been paid or that the veteran is exempt from paying the funding fee to VA with the closed loan          package.
Note:  The funding fee may be paid from loan proceeds or cash from borrower.


WHO IS EXEMPT FORM PAYING THE FUNDING FEE

The following persons are exempt from paying the funding fee:

• Veterans receiving VA compensation for service-connected disabilities.
•  Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
  Veterans who are rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating.
•  Veterans entitled to receive compensation, but who are not presently in receipt because they are on active duty.
•  Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are            veterans with their own entitlement and whether or not they are using their own entitlement on the loan).


The lender must verify exempt status by obtaining one of the following:

•  a properly completed and signed VA Form 26-8937, Verification of VA Benefits, indicating the borrower’s exempt status,
•  for a veteran who elected service retirement pay instead of VA compensation, a copy of the original VA notification of disability rating        and documentation of the veteran’s service retirement income, or
•  indications on the Certificate of Eligibility (COE) that the borrower is entitled as an unmarried surviving spouse.


How to calculate the Funding Fee

For all loans except Interest Rate Reduction Refinancing Loans (IRRRLs), apply the appropriate percentage (from the funding fee tables) to the loan amount.  If the funding fee is to be paid from loan proceeds, apply the percentage to the loan amount without the funding fee amount added to it.  For IRRRLs, calculate the funding fee by completing VA Form 26-8923, IRRRL Worksheet.

The lender must find the appropriate percentage in the tables using the following parameters:

Is the veteran eligible for VA loan benefits through service in the regular military or the Reserves/National Guard?  Examine the COE.  For Reserves/National Guard, the COE bears the notation, “RESERVES/NATIONAL GUARD - INCREASED FUNDING FEE,” and is buff-colored rather than green.

Is the veteran a subsequent user of VA home loan benefits or obtaining his or her first VA loan?  Examine the COE.  An entitlement code of “5” indicates subsequent use, as does a loan number entered in the “Loan Number” column.
What type of loan is the veteran obtaining?  The funding fee varies depending upon whether the loan is a purchase or construction loan, an IRRRL, or a cash-out refinancing loan. Is the veteran making a downpayment of at least five or ten percent?

Calculate what percentage of the sales price of the property the veteran is remitting as a downpayment. The downpayment may come from the veteran’s own resources or borrowed funds.  Except, if the purchase price exceeds the reasonable value of the property, the difference between the purchase price and the reasonable value must be paid by the veteran in cash without borrowing. For construction loans only, equity in the secured property counts as a downpayment for calculating the funding fee.
 

PURCHASE & CONSTRUCTION LOANS

The funding fee for ALL subsequent use loans closed on or after October 1, 2006, and before October 1, 2007, is 3.35 percent.  This applies to all purchase loans where no downpayment of 5 percent or more is made as well as cash-out refinances where the fee would have been 3.3 percent.  Effective October 1, 2007, the subsequent use fee reverts back to 3.3 percent.














VA PURCHASE, IRRL & REFINANCE LOANS!

Refunding Overpayments To The Veteran

A refund is appropriate if:

•an exempt veteran paid a funding fee, or
•a miscalculation of the fee caused an overpayment.

Using the VA FFPS, lenders can make appropriate corrections that may result in refunds being due. 

If the veteran was overcharged, the following applies:

•A veteran who paid cash for the funding fee receives a cash refund for the amount of the overpayment.
•In the case of a veteran who paid the funding fee out of loan proceeds, the lender must apply the overpayment against the loan balance.  Submit evidence to VA that the refund was applied to the loan’s principal balance

INFINITY Home Mortgage Company, INC.
7 Carnegie Plaza, Suite 200
Cherry Hill, New Jersey 08003

A Licensed Mortgage Banker of The New Jersey
Depsrtment of Banking & Insurance
NMLS # 121461

Also Licensed in CT, DE, MD, MI, NC, PA



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