HawaiiVALoans.com Blog

VA Loan Benefit: VA Not Subject to “Loan Level Price Adjustments” Based On Credit Score & LTV

I remember when having above a 700 Fico (credit) score was superb. If you had a 720, you were in elite status and able to get the best loan rates around. Fast forward to 2008 - and a 720 Fico score no longer guarantees a borrower the lowest mortgage rates.

Here’s how this all started. In December 2007, Fannie Mae (FNMA) & Freddie Mac (FHLMC) (the two government sponsored agencies in charge of buying and selling mortgages on the secondary market which helps replenish the supply of capital in the mortgage market) implemented new Loan Level Price Adjustments based on credit score & loan-to-value.

Translation: FNMA & FHLMC implemented a tiered price adjustment matrix which increased closing costs for borrowers with lower credit scores and lower down payment. Why did they do this? To compensate for the losses FNMA & FHLMC were taking on the secondary market due to the increased amount of defaults and foreclosures occurring in the real estate market.

Initially, these Loan Level Price Adjustments or LLPA’s only affected borrowers who had less than a 680 credit score - but a few months later, FNMA & FHLMC increased their matrix to include everyone who had a 719 credit score or lower.

Now starting October 1st, 2008 - FNMA (FHLMC is expected to follow) LLPA matrix will now include those with Fico scores 739 or lower….you see where this is going.

How This Affects You

What does this mean to you if you are in the market to buy a home? Here are scenarios based on three home buyers shopping for a $500K home loan:

• Mark has a 679 Fico score and has 20% down payment
• Mindy has a 719 Fico score and also has a 20% down payment
• Janet has a 640 Fico score, doesn’t have a down payment but is currently in the military and eligible for a VA Loan

Mark, Mindy & Janet all shop around and find out that they can get a fixed 30 year mortgage at 6.000%.  Even though Mark & Mindy have a 20% down payment, because they are getting a conventional loan, they will both have to pay additional closing costs because both of their credit scores are below 739.

Additional Closing Costs:

• Mark: 1.750 in additional points (based on his 679 Fico score) or $8,750.

• Mindy: .750 in additional points (based on her 719 Fico score) or $3,750.

Janet with her VA Loan

Even though Janet does not have a down payment and her credit score is considerably lower than Mark & Mindy - Janet will pay less for her loan because she is VA eligible.  Since VA loans can be sold to Ginnie Mae instead of FNMA & FHLMC and currently & Ginnie Mae does not implement a LLPA based on credit score and price adjustment, Janet will not have to pay additional closing costs like Mark & Mindy.

Just another reason why VA loans stand out as the best home loan option for those who are eligible.

Posted by Gabe Amey. Filed in Closing Costs, Points, VA Loan Benefits

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VA Loan Benefits: No Mortgage Insurance Required

When it comes to insurance (auto, health, homeowners, etc.) they all have the same thing in common: it is never fun having to pay the premiums, but always a relief when the insurance company foots the bill. But what if you have to write the check to pay the premiums, yet you are not the one being insured?

This is the case with Private Mortgage Insurance (PMI). PMI is insurance the lender requires their borrowers to pay when they don’t put a minimum of a 20% down payment on a home purchase. Not to be confused with homeowners’ insurance, PMI does not insure the homeowner, instead – mortgage insurance insures the lender in the event the borrower goes into default and the lender needs to foreclose on the property. In this circumstance, PMI insures the lender (up to a certain percentage of the loan) to offset loses incurred during the foreclosure process.

In the case of a VA mortgage, the VA Department serves as the insurer for all VA loans. So if a lender has to foreclose on a VA loan, the VA Department will be responsible to cover any losses during this process (again, up to a certain amount). From a lenders perspective, they don’t care who insures the property, as long as they are protected in the event that the homeowner (who does not put at least 20% down) defaults on their mortgage.

What does this mean for a VA eligible buyer? No mortgage insurance required on a VA loan. This translates to monthly savings of around $200-$400 (depending on the loan amount & if applicable, down payment). Without having to pay PMI, a VA borrower has two distinct benefits vs. getting that same loan with a conventional mortgage:

1. Pay a lower monthly housing payment.
2. Qualify for a higher loan amount with the same monthly payment.

Posted by Gabe Amey. Filed in Mortgage Insurance, VA Loan Benefits

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VA Loan Benefits: 100% Financing

The last 5 years or so, finding financing to purchase a home with no down payment was relatively easy - granted you had a decent credit score. There were an abundance of 2nd mortgage products available so you can do an 80/20 loan (80% first mortgage and 20% 2nd mortgage) and avoid paying Private Mortgage Insurance (PMI).

Now if you didn’t want to pay the higher rate with the 2nd mortgage - you could just do one loan and pay the PMI. The PMI would add a few hundred dollars to your monthly mortgage bill, but at least you didn’t have to place a hefty down payment to buy the property.

Well things have drastically changed over the last 6-8 months. The lax mortgage lending guidelines that were in place during the recent real estate boom we’ve experienced has finally caught up with many lenders. Even with Hawaii’s real estate market not seeing the same dramatic drop in values as the case with most cities in the continental US - we are still affecting by this.

Lenders across the board have now tightened their mortgage guidelines, by increasing their credit score and down payment requirements. On top of that, mortgage insurance companies have made it increasing harder to obtain PMI without a down payment. The combination of these two factors are making “No Down Payment Loans” a thing of the past.

100% Financing Still Available With VA Loans

The one thing that has remained constant is that government loans (FHA & VA) have not changed their guidelines. VA eligible buyers can still buy a home here in Hawaii without a down payment as long as their loan amount does not exceed $625,500. On top of that, no PMI is required for VA loans.

No down payment - no PMI required. VA loans - such a great loan product for those who are eligible!

Posted by Gabe Amey. Filed in 100% Financing, Tips, VA Loan Benefits, VA Purchase

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VA Loan Benefits: Streamline Refinance

Many people know the benefits that VA Loans have when purchasing a property. No down payment required, no Private Mortgage Insurance, reduced closing costs, among others. But many VA mortgage holders don’t realize that they have another huge benefit. When interest rates drop - VA mortgage holders can easily reduce their rates through a streamline process - also known as the Interest Rate Reduction Refinancing Loan (IRRRL) Program.

The IRRRL Program, or VA Streamline Refinance, allows a current VA mortgage holder to reduce their interest rate without extra requirements needed by conventional mortgage holders.

• No Appraisal Required
• No Income Verification
• No Asset Verification
• No Out-of-Pocket Expense

Often times when I speak with a VA homeowner and tell them about this program I get a reaction like, “This sounds too good to be true”, and “What’s the catch?”. Well, there’s really no catch and if you look at the dynamics involved, you can see how this is all possible.

The VA Department, who guarantees all VA loans in the event of default, allows this streamline process to make it as easy as possible to help all VA mortgage holders reduce their payments. By helping them reduce their payment they drastically reduce the default risk within their pool of loans they must guarantee. Decreasing the amount of defaults mean less money the VA Department will have to pay out to lenders who are stuck with VA foreclosed properties.

In this situation everyone wins; homeowners pay less in their mortgage, VA Department has less loan defaults they will have to cover which means more funds they can retain.

I guess the only thing left to do is find out if current VA rates are lower than the rate you have now.

Posted by Gabe Amey. Filed in IRRRL, Streamline Refinance, Tips, VA Loan Benefits

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