Lots of BAD Intel
You are about to read a story about a travesty of justice with regards to VA Loans. Too dramatic? I don't think so. Credit unions and inexperienced loan officers are giving out wrong information and bad advice to our Service-members and Veterans. There is so much bad Intel, but I'm here to talk about the Coup-De-Gras... the brutality of brutalities: Using your VA Home Loan benefits again even if they are "in use".
Contrary to popular belief, in most cases you CAN use your VA benefits again if your VA loan is tied up, and you CAN structure financing up to 100%. Forgive me in advance for a bunch of technical jargon and calculation.
I have a story… and I'm sticking to it
A Veteran is buying a home, but he used his VA loan eligibility to buy his current property. I tell him that he can use the VA loan again and we can structure "no money down" financing for his new purchase. In this case it was done using a second mortgage, but that's not always necessary.
For the purposes of this article, I'll be addressing the ways to get 100% financing while having your eligibility "tied up" and I'm going to start with how the VA feels about 2nd mortgages. Here is an excerpt from the VA guidelines.
“From an underwriting standpoint, the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.”
Before getting too far
For many years, military personnel and veterans alike have been told that they cannot use their VA loan to purchase a new home with no down-payment if they've already done so. WRONG. The only time you can't use your VA loan again is if you have ZERO entitlement, which in my experience, is rarely the case.
When you use your VA benefits for a loan, you use entitlement. The entitlement "charged" is 25% of the base loan amount you get. So, if you previously financed $200,000, you used $50,000 of entitlement. The maximum entitlement available to you for another VA Loan is based on the county loan limit where you are buying. For example, if you buy in Fairfax, Virginia, your max entitlement is $765,600 (the county limit as of 14 May 2020) x 25% = $191,400. Subtract out the $50,000 you have "tied up" and you are left with $141,400 of entitlement remaining. That means you could buy up to a $565,600 home with no money down. The new max VA Loan is the Sales Price x 75% + remaining entitlement.
Special Note: This "calculation" is only relevant if you have entitlement tied up in another home. If you have full entitlement, you can use your VA loan for as much house as you want, up to 100%. Yes, the VA would allow no money down on a $5,000,000 home with full entitlement!
The Main Issues
So that covers the most common way to finance with 100% financing again, but allow me to point out a common challenge with regards to your VA Loan and second mortgages. The second mortgage comes into play mainly in higher priced home sales where the maximum VA Loan won't get you to where you need to be. In those cases, the borrower may get a 2nd Mortgage to make up the difference. This is where most lenders don't know what to do and start giving bad advice.
Borrowers are told they can’t get 100% financing and are given the following bad advice:
- Asking borrowers to refinance an existing VA loan to “free up” their VA eligibility.
- Recommending that borrowers liquidate savings or retirement assets to afford a large down payment to “make up the delta” between the max VA loan and the sales price.
Borrowers are also being told that a second mortgage option is non-viable simply because it is non-assumable.
Let me address assumabilty first. An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a buyer. By assuming the previous owner's remaining debt, the buyer can avoid having to obtain their own mortgage.
The VA Guidelines read: "The second mortgage should not restrict the veteran's ability to sell the property any more than the VA first mortgage. That is, it should be assumable by creditworthy purchasers."
This is where the rubber meets the road. It’s the statement that most lenders are hanging their hat on and why they say "NO". VA loans are errantly being denied across the country because the proposed second mortgage is not assumable.
Let me let you in on a little secret… in over 20 years of mortgage banking, I have never seen an assumable second mortgage. My father always told me to question everything, which is why when I see a statement or guideline like this, I ask, “why was this written?” The answer lies in the preceding statement, specifically, “the second mortgage should not restrict the veteran’s ability to sell more than the first mortgage.” The following, “That is…” statement appears that a second mortgage is not viable or beneficial to the borrower because it is not assumable. This is NOT what the VA is trying to say.
Second mortgages do not put the veteran in a worse financial position
If my main goal as a lender is to not make it more difficult for the veteran to sell (i.e. to not put the veteran in a substantially worse financial position), then I must first consider whether having a non-assumable second mortgage hurts or hinders the veteran in any way. Let’s take a look at the guidelines once again:
"The second mortgage should not restrict the veteran’s ability to sell any more than the VA first mortgage."
Rick’s translation: If a non-assumable second mortgage makes it more difficult for a veteran to sell than if he only had one mortgage, then using a VA loan with a second mortgage should not be allowed.
There's no scenario in which a veteran is put into a substantially worse financial position by acquiring a second mortgage. To prove my point, let's consider the following questions.
Will having a non-assumable second mortgage hinder the veteran from selling their home?
Of course not. When a buyer submits an offer on a home, they typically come with new financing options (such as a full pre-approval on a mortgage) or, if possible, they pay cash. Because of this, all liens (loans) on the home are paid off as a part of the purchasing transaction, with the veteran (seller) keeping any net proceeds after all expenses are settled. So, to answer the above question: NO, the second mortgage would play no part in hindering the sale.
But wait Rick, if the veteran received a 50K non-assumable second mortgage, which put him at a 100% total combined loan value, wouldn’t he need to bring cash to closing when he sells!? Wouldn't this hinder the sale and put the veteran in a difficult position?
Absolutely not. If the borrower had full entitlement, he would have financed 100% (or more) and be in the same position as with two mortgages. Having a second to 100% does not put the veteran in a substantially worse financial position.
But Rick, there's more! What if the buyer is also a veteran and wants to assume the existing mortgage? Won’t the existence of a non-assumable second mortgage hinder the transaction?
No. The veteran buying the home can still assume the existing VA (first) loan, but would need to bring the delta of that assumed loan balance and the sales cost to pay off the second mortgage. This is no different than if there was no secondary financing. The new buyer would still need to make up the difference.
The key here is this. Remember earlier on I called your attention to this statement:
From an underwriting standpoint, the veteran must (not) be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.
The key phrase here is “From an underwriting standpoint." In short, it is left to the judgement and discretion of the lender as to whether having a non-assumable second mortgage will put the veteran in a substantially worse position.
Here is my stance
I take the position that NOT allowing a second mortgage is more likely to have a negative impact on the veteran's financial situation. How, you say?
Unless there is sufficient (or full) entitlement available, there are only two ways to make a new VA loan happen. The veteran either needs to get their eligibility back or scrounge up the cash to make up the difference between the sales price and the maximum VA loan. Let's examine why both of these options aren't ideal.
Freeing up entitlement with a refinance
This is a BAD idea. It really jerks my chain when borrower are advised to refinance their current VA loan to free up their VA eligibility. This is in most cases terrible advice because the loan they are refinancing is probably at a much lower rate than the new mortgage would be. Also, any conventional refinance on a departing residence should be handled as an investment loan (which means higher rates) because the borrower does not intend to occupy for at lease 1 year.
BE CAREFUL! Many loan officers have advised borrowers to refinance their current home as a primary residence in order to switch out the loan. They recommend doing this before the home is put on the market. They want to refinance it as a "primary residence" because rates are better and you can finance a higher percentage of the value of your home. Don’t ever fall for this one! It’s pure fraud to call a home that you do not intend to occupy for one year a primary residence.
Scrounging up the Cash
Let’s say you don’t choose to free up your VA entitlement (smart choice) and you instead try to pull together the money for down payment. From experience, I know that the average borrower doesn’t have these down payment funds just sitting in a checking or savings account. It’s tied up in investments, or worse yet, in their IRA. Unless these funds are coming from a TSP or 401k, pulling money from these sources are a taxable event and could even carry severe financial penalties. In addition, taking money from these sources means that the veteran would lose the growth potential on their investment.
Providing more financing opportunities for our borrowers using their VA benefits is a good thing. I’m not trying to bad-mouth institutions who aren’t allowing this financing option; on the contrary, I’m hoping to encourage our industry—those whom have taken the “we won’t do this” stance—to reconsider. Approving 100% financing for a second, non-assumable VA mortgage loan will not put veterans in a worse financial situation than denying the loan outright and forcing them to pursue other more financially-taxing options.
That’s my story and I’m sticking to it.
For more information, visit www.loanwithrick.com. ~Rick