Restoring VA entitlement vs. FHA/conventional

[Anonymous]

Hi there.

My husband and I are hoping to buy a house within the next year.  Our scores are in the 660-670 range, no collections/judgments/late payments (yay, all the bad stuff fell off).  Our DTI ratio (~41%) and utilization (~70%) are high right now so we've been focusing on paying down our credit cards.  

He is a veteran with a service-connected disability, so eligible for VA financing.  But he had a foreclosure on his first VA loan in 2009 before we were married.  We've been told that in order to restore the full entitlement we would need to repay $36,000 to the VA.  That's going to be tricky to do within a year but probably not impossible.  But we could not do that and also pay down the credit cards.  So we've been wondering about strategy - would we be better off attempting to do FHA/conventional vs. restoring the VA entitlement?  We would have an easier time coming up with the 3.5% FHA down payment, but 20% for conventional would be unlikely.  We are in a high COL area so likely looking in the $475K range. 

So basically we're trying to decide whether to continue throwing all our money at credit cards, or if we should begin to divert that to save up $36K for the entitlement restoration.  I'd be grateful for any strategy advice you might have.

[NC_Mtg_Loaner]

If you need to pay $36k to restore your VA entitlement you are likely to have a "cloudy" CAIVRS, so you might be able to go Conventional with 5% down vs. using a govt. loan program, but you'll greatly benefit by bringing this to the attention of a lender now so that they can confirm and verify potential requirements.

[ShanetheMortgageMan]

Did you know that in addition to the $36k of basic entitlement, you also have bonus/2nd tier entitlement?  

Exactly how much entitlement was used up from the foreclosure, $36k?  If so, and you are buying in a county that has a VA loan limit of $500,000 (let's say for example) then your bonus/2nd tier entitlement is $89,000 (the total entitlement between basic + bonus is always 25% of the county loan limit).  That will allow you to still obtain 100% VA financing on a sales price up to $356,000 (lenders require available entitlement equaling at least 25% of the sales price to do 100% VA financing).  For every $1 of sales price over that amount, you'd need to put $.25 down, so if you buy a home for $475k then you'd need to put $29,750 down (25% of the difference between $356k and $475k). 

If your county VA loan limit is higher than $500k, then less than $29,750 down would be needed in the above example.

You can look up the county VA loan limit by going to https://entp.hud.gov/idapp/html/hicostlook.cfm and on the "Limit Type" select "Fannie/Freddie" and the county loan limit is the 1-family amount.  For example, here in Orange County, CA the VA loan limit is $679,650.   What is your county VA loan limit?

The answers to the above questions I asked will help determine if using a VA mortgage again is a viable option.

[Anonymous]

We sought a mortgage through Veterans United in 2016 and at that time, yes, they told us that $36K was used in the foreclosure and by repaying it, we would restore full eligibility.

Looks like our math is the same as yours - our county limit is $494,500, so we would expect to have $87,625 remaining in 2nd tier and could go for up to $350,500.  He recently requested his COE so we can verify that the $36K figure is correct.

Unfortunately, $350,500 won't get us a lot of house in our current ZIP code.  So if we wanted to stay here we'd need to go for something bigger.  My understanding is that if we paid back $36,000 we could get the full $494,500 restored - or if we paid anything in between we'd get 4x that amount added onto the $350,500 (as you said).  So I began to wonder if saving up that amount is the best route vs going for a different kind of financing with whatever the down payment may be, given our DTI and utilization.  Our income is high enough to support the housing payment at that cost even with our current debt but of course lenders want to see lower risk.

I'm unfamiliar with CAIVRS so didn't anticipate that particular wrinkle.  

[ShanetheMortgageMan]

Your LO can check CAIVRS for you.  

If you buy a $475k home with FHA then your down payment is $16,625.  If you bought that same home with VA then your down payment would be $31,125... about double.  You could choose to repay the $31,125 of entitlement and then be able to get 100% financing on $475k.  With VA you wouldn't have PMI, which on FHA would be $324/mo.  

Paying off revolving debt would increase your credit scores, however I'd speak with a LO first to go over your numbers, as you may not need to pay off anything to qualify for VA or FHA.  You could compare what potential terms you could qualify for if you paid off debt/increased your credit score, and determine if it's worth it to make that your goal.

[JVille]

I think there may be a CAIVRS issue. That needs to be checked first before investigating any further.

[Anonymous]

As I said earlier, I hadn't heard of CAIVRS, but in the little amount of reading I've done it seems like you stay in for three years. Is that correct? I understand that the lender would need to check for sure but it's been nine years since my husband's divorce and foreclosure and according to the property records, the home sold for both more than he paid and more than the VA reassumed it for within the same year. That might not be relevant though. I don't know.

[VALoanMaster]

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@Anonymous wrote:
As I said earlier, I hadn't heard of CAIVRS, but in the little amount of reading I've done it seems like you stay in for three years. Is that correct? I understand that the lender would need to check for sure but it's been nine years since my husband's divorce and foreclosure and according to the property records, the home sold for both more than he paid and more than the VA reassumed it for within the same year. That might not be relevant though. I don't know.

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I'm 99% sure that your husband is not in CAIVRS because the foreclosure was 9 years ago. As a lender, I check CAIVRS at pre-approval so there are no surprises.

In my opinion, VA is the best program available so I would make that the priority. I would also run the numbers like Shane said to see whether or not you need to pay off the credit cards to qualify.

The best thing you can do is have a loan officer review you scenario & come up with a plan of action.