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VA Loans: Again and Again

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | May 5th, 2017

All military personnel are told about their Department of Veterans Affairs (VA) housing benefits when they muster out of the service. But far fewer seem to be aware of their second-tier entitlements: the fact that they can use their no-down-payment mortgage benefit more than once.

There are rules, of course. Aren’t there always? But if you are a qualifying veteran, it’s possible to buy a second house with a VA loan while you still have your first VA-mortgaged house. You might even be able to use your second-tier benefits to buy another house after you’ve lost your first one to foreclosure or a short sale.

It shouldn’t come as a surprise that most veterans are unaware of what their second-tier benefits are. A recent check with several lenders at a trade show found that most lenders -- even those who claim a specialty in VA lending -- don’t know much about them, either.

But there are at least a few people out there knowledgeable on the subject. One is Joe Murin, a former president of Ginnie Mae under presidents Bush and Obama. Ginnie Mae is the little-known government-sponsored enterprise that buys government-backed mortgages from primary lenders, then packages them into securities.

Another expert is John Burke, a loan officer at Great Plains National Bank in Austin, Texas. Burke’s website (VAloansdoneright.com) explains VA loans in great detail.

Murin, now vice chairman at Chrysalis Holdings, which includes companies in the analytics and mortgage sectors, says “most people don’t even know that second-tier entitlements exist. A lot of veterans don’t even know they have first-tier benefits.”

With that in mind, let’s start with the basics: The VA doesn’t make loans itself. Rather, it guarantees loans made by local lenders to service members, veterans and eligible surviving spouses who want to buy a house. (You can find out if you’re eligible at benefits.va.gov/homeloans/purchaseco_eligibility.asp.)

There are limits, though. The most a veteran can borrow anywhere in the country without any money out of his or her own pocket is $424,100. But there are some 50 counties, largely on the coasts, where the maximum is considerably higher. For every $4 borrowed above the maximum, however, the vet must put up $1.

The VA’s guarantee is limited to the lesser of 25 percent of the county loan limit or 25 percent of the loan amount. So, if the borrower has his full entitlement and is buying a $300,000 house in a county where the loan limit is $424,100, the VA will guarantee $75,000 and the lender will not require a down payment.

Later, if he pays off the old loan and buys another house with a VA loan, the full entitlement will be restored. If he then buys, say, a $400,000 house in a county with the standard limit, the VA will guarantee $100,000 of the loan amount and, again, a down payment should not be necessary.

Second-tier entitlements normally come into play when a service member transfers duty stations: If a soldier has a VA loan on a house at her current post and wants to buy a house at her new one, she can use her remaining entitlement on the new house.

Typically in these cases, the new post is temporary, or the service member intends to keep the old place as a rental. Either way, the borrower’s debt-to-income ratio will be scrutinized to make sure she can handle the payments on two houses. And if the old house is rented instead of sold, the borrower will be required to produce a lease that spells out the rental terms and amounts.

Since the maximum guarantee entitlement in counties with a ceiling of $424,100 is one-quarter of that amount ($106,025), the veteran borrower in the above example (who used $75,000 of his entitlement on his first house) would still have $31,025 available.

“Just because he’s tied up with a prior VA mortgage doesn’t mean he can’t have another one,” says Burke.

Of course, veterans in this scenario can borrow more than the remaining entitlement amount; they’ll just have to pony up some of their own money. And if the county limit where they’re buying their next house is higher -- say, $815,000 -- the maximum guarantee goes up as well ($203,750), along with the remainder available.

There are a couple of caveats: Borrowers must have been current on payments for the previous 12 months, and must meet the lender’s debt-to-income ratios.

Now suppose a vet bought a house with a no-money-down VA loan, using part of his entitlement. If he lost that house in a distress sale, that portion of his entitlement would be gone. But he would still have the remainder, meaning he would be eligible -- if he passed the necessary waiting period and re-established a clean credit record -- for another partial VA loan with nothing down.

VA borrowers also can use their second-tier entitlements to buy larger houses for their expanding families and to bring their elderly parents or grandparents into their homes.

For more on this admittedly complicated topic, find a lender that is an expert in VA financing or contact your local VA Regional Loan Center.

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Parents: Tired of Being Landlords? Buy Your Kids a House

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | April 28th, 2017

Parents who would like to see their adult children leave the nest are increasingly buying their offspring their own places.

Once upon a time, Mom and Dad would wait until their kidlets were starting their own families to help them buy a house or apartment, if they offered any help at all. But now, that kind of assistance is coming earlier and earlier -- and continuing longer and longer.

Leonard Steinberg, president of the New York real estate chain Compass, sees this trend as the vanguard of an enormous shifting of assets that will happen over the next 20 years, as wealth accumulated by baby boomers is transferred to their heirs.

How much wealth? A staggering $30 trillion, Steinberg says, adding that it will be “the greatest transfer of generational wealth ever.”

And this isn’t an isolated occurrence -- it’s a real trend, says Steinberg. As an example: Parental deals benefitting their children make up 21 percent of activity at one of Compass’s buildings in New York’s booming Lower East Side.

While the trend is nationwide, Steinberg says it is more concentrated among larger cities where the cost of renting is sky-high. The reasoning: Why waste enormous amounts of money on rent -- a “reckless” expenditure, in Steinberg’s words -- if a parent can help a child get started in homeownership instead?

Hopefully, doing so will give the children a leg up on all the financial benefits from building equity, and foster values necessary to homeownership, like commitment. It also helps grown kids who have gotten themselves into the financial netherworld of bad credit -- perhaps due to the burden of scholastic debt -- or who have no debt, or credit history, at all. In those cases, their debt-to-income ratio is either so high or so nonexistent that it’s all but impossible for them to qualify for financing on their own.

It may sound as though this kind of maneuver is the exclusive province of millionaires, but Steinberg says he sees it over all niches of wealth. “A $50,000 cash infusion can make all the difference,” he says, and can help an adult child make as much as a $50 million investment.

In New York City, parents are buying their children all manner of housing, from condominiums and co-ops to semi-detached homes and brownstones. In Manhattan, the property is likely to be an apartment. But in the outer boroughs, you can still find a brownstone for $700,000 to $800,000 -- and, of course, into the millions.

According to The New York Times, assistance for kids who’ve left the nest comes largely in the form of helping with rent and other living expenses. And the amounts can be substantial.

Some 40 percent of 22- to 24-year-olds receive financial help from their parents, at an average of $3,000 per year. Children working in the arts and design fields get the most help, typically $3,600, while those in blue-collar trades and the military receive the least, about $1,400. More than half the young adults working in arts and designs get parental aid, but only 29 percent of those working in personal services get such help.

In real estate, the child beneficiary is usually an adult, but he or she can be of any age. Steinberg says his Compass clients have bought property for children as young as 12. In those cases, the parents rent out the property until the child is old enough to have his own place.

For some parents, that time can’t come soon enough: According to a Money magazine survey, adult children expect to be financially independent at age 27, while most moms and dads expect them to hit that landmark by age 25.

-- Freelance writer Mark Fogarty contributed to this report.

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Getting Tax Quotes Right

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | April 21st, 2017

The one thing lenders seem to have the most trouble with at closing is estimating the borrower’s property taxes. They invariably get it wrong, and borrowers pay the price.

Not immediately, of course. Borrowers go along merrily in their first year of ownership, paying into their escrow accounts each month exactly what their lenders said they should. And then, BAM! They are told their tax accounts are short of funds, sometimes woefully so.

Sometimes they are required to send a check immediately to make up the difference. If their lenders are more magnanimous, borrowers will be allowed to make up the shortage over the next 12 months. But that amount is added to new, often markedly higher tax payments to avoid having a deficit in the future. And borrowers have no choice but to ante up. After all, not keeping up with your property taxes is grounds for foreclosure.

Why do tax estimates often miss the mark? Because there is no standard method. Lenders and closing agents make use of various resources, including websites, local real estate agents, and tax authorities.

Determining the proper amount is particularly difficult for out-of-state and internet lenders who are not always familiar with the local tax codes, says Brian Koss, executive vice president of Mortgage Network.

Now, there’s an automated solution. Property Tax Estimator, from California-based data company CoreLogic, can estimate taxes in two minutes, speeding up a process that often takes humans 10 or 20 times that long. And the program gets it right 99.5 percent of the time, says Kirk Randlett, a vice president at CoreLogic.

The power behind the software comes from CoreLogic’s extensive database on 148 million-plus real estate parcels countrywide, plus information from the company’s tax services business and a built-in calculator that predicts future values.

The program can also estimate the property taxes on new construction and in jurisdictions that have ceilings on annual tax increases on existing houses. Here, the accuracy rate for the tool runs from 60 to 90 percent, depending on the complexity of the state’s tax code, according to Randlett.

California is probably the state best known for limiting the levy on current owners with its Prop 13 rule. But Florida, with its Save Our Homes legislation, also has restrictions on assessment changes, as do Massachusetts, Maryland, Michigan, Texas and Oklahoma. In those states, owners are protected against significant run-ups in their property taxes. But when the home changes hands, the assessment can increase significantly. And humans frequently calculate the change incorrectly.

And then there are the numerous places that have more than one taxing authority. Take Homer, New York, for example: The town levies a property tax, as does the incorporated village and the school district.

Estimating the tax is also important for lenders, since nowadays, if they regularly miss the mark in the early stages of the lending process, they can be flagged and fined by federal regulators. Furthermore, an accurate estimate later in the process helps underwriters determine whether a would-be borrower can afford all the costs associated with the mortgage.

“The tax estimating process is critical to several stages of the mortgage cycle: disclosures, underwriting and servicing,” says Randlett, who calls property taxes “a hidden cost.”

Unfortunately, the Property Tax Estimator is a B2B product that’s not available to homebuyers directly. But it has just recently been integrated into Ellie Mae’s mortgage management program, and several major national lenders also are now using the software.

The bottom line is this: Ask your lender how the property tax was calculated. If it was done using the CoreLogic program, there’s a good chance it was on the money. If not, you should prepare for a jump in your monthly escrow -- maybe a big one -- in 12 months or so.

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