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The calendar is pointing to a new year and along with it, some changes in loan programs for home owners. If you are planning to take advantage of a VA loan to purchase a home this year, it’s important to know whether any changes could affect your loan.
The VA home loan program was created to allow veterans to buy homes with favorable loan terms, including an interest rate that is typically lower than the rate charged for other mortgage loans. The program is available to active duty service personnel, members of the selected reserve and certain categories of spouses.
Private lenders, such as credit unions, banks and mortgage companies, provide the loans. The VA guarantees a portion of the loan, enabling these lenders to provide more favorable terms than they could otherwise.
The biggest change for mortgages in 2014 is likely to have no impact on VA loans; However, a new class of loans, called Qualified Mortgages or QMs, has been created, along with a new regulatory body for oversight, the Consumer Financial Protection Bureau.
While the requirements for a Qualified Mortgage have garnered their fair share of press and consumer attention, these changes are not really news to lender, most of whom have already been following these guidelines in the post-crisis home lending era. Unfortunately, misinformation and assumptions have caused confusion about what these changes mean to service members and their families.
The most important thing to know about QM requirements is that the VA loan program has long been following these guidelines, so VA borrowers should not anticipate any new bumps in the road.
The new QM classification came about as a result of congressional action seeking to protect borrowers and the mortgage industry from repeating the practices that led to the housing industry crisis, specifically loans that were made to people who were very unlikely to be able to repay them. So-called subprime mortgages were at the center of the recent economic crisis and subsequent collapse of the housing market.
Qualified mortgages force consumers to meet a set of requirements designed to ensure the borrower will be able to repay the loan. QMs are also designed to safeguard lenders from charges that they approved bad loans. Loans that do not meet QM requirements cannot be resold by the original lender, providing strong incentive for lenders to follow QM guidelines when making loans.
Unlike earlier loan products, QMs cannot include:
The new regulations also stipulate eight credit and underwriting requirements that must be met for QM status. Together, these form the foundation of the Ability to Repay rule. These eight requirements include:
There are other changes associated with QMs. For example, costs and fees can generally not exceed 3 percent of the loan amount. There’s also a maximum Debt-to-Income (DTI) ratio of 43 percent, but loans guaranteed by the Department of Veterans Affairs are highly unlikely to be impacted by this cap or the other requirements of a QM. Like other loans already qualifying for purchase or guarantee by a government entity, such as Fannie Mae, Freddie Mac, or FHA, VA loans are already presumed to be Qualified Mortgages.
There are a few small changes for 2014 that may affect your VA loan, depending on your location. Although the standard limit for most counties across the nation remains at $417,000, just as it was in 2013, there are certain areas where the cost of living is particularly high that the VA has allowed higher loan limits. If you are unsure whether your area might be affected, you can review changes to loan limits, sorted by county, by visiting here.
As in the past, VA loan participants have two "layers" of loan entitlements. The first is $36,000, while the second is $68,250, for a total of $104,250. The loan limit is calculated as $104,240 x 4 or $417,000, based on the VA’s commitment to guarantee about a quarter of the loan amount, representing the maximum VA borrowers can receive without putting money down (in most areas of the country).
VA loans remain one of the only zero down mortgage loan programs available. In addition, the VA doesn’t require borrowers to pay Private Mortgage Insurance (PMI), a common requirement of other loan programs where low down payments are allowed.
Although labeled as "limits," you can still seek a loan above the limit for your county by making a down payment.
The funding fee in 2014. remains at 2.15 percent for first time use, rising to 3.3 percent for subsequent use. You could be exempt from the funding fee if you are receiving compensation for a service-related disability or have otherwise been identified as having a disability due to your military service. Surviving spouses of veterans who died on active duty or from a service-related disability are also exempt from the funding fee.