Frequently Asked Questions About VA Loans

Sep 30 2014

iStock_000004276434XSmallBy Joe Gladden, Veteran Realty Serving America’s Military, Inc. and Susan Wallace, Senior Loan Officer Access National Bank

This is a follow up to our previous posts about VA Loans. It is an accumulation of questions we have seen over the years covering various personal circumstances and dual eligibility. We hope you find these helpful.

Entitlement…What is it? Entitlement can be explained as the amount of money available to you from the VA to use as a guarantee for the lender providing your VA Loan in the event that you default.

Why is it important? Entitlement is the reason you can have a 100% loan with no down payment. When the VA gives a guarantee of your entitlement to the lender, it is kind of like a down payment to the lender. No money is exchanged, but there is a written guarantee from the VA that if you default the VA will pay the lender that specified amount.

Here are some common questions about VA entitlement:

Q – I purchased a home with my VA loan. I am now divorced but my ex-husband still lives there. Can I get another VA loan?

A – Yes, in most cases you can. You would use 2nd tier entitlement. Please see the article specifically addressing it here.

Q – When I was married my husband used his VA loan to purchase our home but we have since divorced. I have VA eligibility as well based on my service. Can I assume the mortgage in my name only?

A – Yes you certainly can. You also have the option of refinancing the home in your name only and substituting your entitlement for his. You would still need to credit qualify in either instance.

Q – We purchased a home using my eligibility for a VA loan. Both my wife and I have eligibility. We have to move and would like to purchase a new home but I don’t have enough entitlement without selling the old one. Is there any way to still get a new home?

A – Yes, you would use dual entitlement. That means you could use a portion of each of your entitlements to get the home. Or you could use your wife’s eligibility of entitlement.

Q – Both my wife and I have entitlement. Can we use both to double our county limit buying power?

A – No. The VA guarantees only up to the county limit even if there is more entitlement available.

Q – Ten years ago my VA financed home was foreclosed on. How does that affect me today?

A- This is the instance mentioned in the beginning of this article. It means that the VA paid out to the lender a specific amount of money and that money was then charged against your entitlement unless you repaid it. To find out the exact amount of money charged against your entitlement you would need to obtain a copy of your certificate of eligibility. That amount would then be deducted from the amount of entitlement you have available today based on the county/state you are purchasing or refinancing in.

Example:
You are purchasing in TX with a $104,250 of entitlement available to you. That is reduced by the $36,000 paid out by the VA to the lender for your foreclosure which leaves an entitlement of $68,250. $68,250 x 4 = $273,000 which would be the maximum 100% loan (zero down payment) amount available.

Q – I heard that you can only have your entitlement restored only one time, is that correct?

A- No. If you sell the home you financed with your VA entitlement, you can apply for restoration of your entitlement as many times as you would like. If you still own a home that is now PAID OFF that you used your VA entitlement to buy, then you may ask for a one time restoration to purchase another home. However once you purchase another home with that one time restoration, you would not be able to use the VA loan again until you sold the original “paid off” home.

Remember, this only applies to a paid off home, meaning you own it free and clear. If you own a home that has a VA loan on it still, you can more than likely qualify for 2nd Tier Entitlement and have a 2nd VA loan.

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Lured Out of Your TSP

Sep 25 2014

piggy_bank_savingsThere’s been a good deal of press lately about federal workers and uniformed service members being lured from their Thrift Savings Plan (TSP) after leaving government employment. The TSP is the 401k retirement savings and investment equivalent. The spin is that TSP participants are victims of unscrupulous financial advisers.

Here are some of the issues behind the TSP decision after federal service.

When you leave federal service, you can keep your TSP, transfer it to your IRA, transfer it to your current 401k, or withdraw the money and put it in your pocket. According to the TSP office, around 45% close their TSP account after leaving the government. The reasons given for closing their TSP come down to paying debts, making purchases or desiring more investment options.

None of the reasons given above for closing their TSP accounts indicate victimhood. Withdrawing assets from these accounts prior to retirement is a problem for several reasons but that’s on the individuals.

The main reason for the victim spin is based on costs. It is undeniable that the TSP is the cheapest investment account you will ever own. The fees are so low, it’s practically free—an average of 29 cents for $1000 invested. An inexpensive index fund in a do-it-yourself/no help brokerage account with an on-line firm will run around $1.70 to $5.50 per $1000. Full-service firms may charge around 1% of assets under management or have an upfront sales charge of up to 5.75% of the initial invested assets. There could also be accounts with commissions for each account transaction.

Just because you pay more, doesn’t make you a victim. It may be worth it to you to pay for full-services. The TSP offers minimal service. I worked with plenty of clients who needed all the help they could get. I also worked with clients who chose to pay full-service prices because they wanted to focus their personal time on other life priorities or they wanted professional services or they wanted professional experience.

The TSP investment choices are 4 simple index funds, a super pseudo-money market fund called the G Fund (2.33% return to date), and several asset allocation funds (these adjust your portfolio based on your retirement timeframe). These are familiar and comfortable choices for many TSP participants. But some people want more investment options. Or they want a product not offered by the TSP.

There are many good and bad reasons for closing your TSP. There are some wolves looking to take your money in all facets of your life. To jump to a conclusion that you are a victim is presumptuous.

Interested in learning about your investment options?  Check out MOAA’s Investors’ Manual, available for PREMIUM and LIFE members.  MOAA’s Investors’ Manual is packed full of solid investment concepts based on history and experience, so now you can relax about your investments and future and concentrate on your life.

Not a Premium or Life member? Join or upgrade your membership now.

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Divorce Issues within the Uniformed Services Pay and Benefit Programs

Sep 16 2014

Service members’ and veterans’ benefits are administered by either the Uniformed Services or the Department of Veterans Affairs (VA). Since there are no VA benefits for former spouses, all potential benefits for former spouses come from the Services. This summarizes the major programs affecting divorcing Service member couples.

For detailed or personalized information, you need to consult legal or functional experts within the Services. Look to the Uniformed Services Former Spouse Protection Act (USFSPA) for greater detail (http://www.dfas.mil/garnishment/usfspa/legal.html) into Service information

Retired pay

The USFSPA allows state courts to treat “disposable” Service retired pay as property of the marriage (definition of “disposable”: http://www.law.cornell.edu/uscode/text/10/1408). This means that disposable retired pay can be split between the divorcing couple. There are some misconceptions about the law and how it works.

The law allows disposable retired pay to be treated as property. It does not state it has to be split. Also, the law does not state the former spouse gets 50% of the retired pay automatically. State divorce courts will award whatever amount they feel is appropriate within their laws to a former spouse. Many courts use a formula to determine what portion of the retired pay a former spouse gets.

The 10/10 Rule. If the marriage and the member’s Service time overlap by at least 10 years, then the pay agencies (like DFAS for the military Services) can directly pay a spouse up to a maximum of 50% of the disposable retired pay amount—assuming the court awarded the former spouse 50% or more.

Note the nuance in the paragraph above. This is an administrative limitation on the amount of retired pay a pay agency can directly pay to a former spouse. The court can award more or less than 50%. If 50% or less, the former spouse can be paid directly by the pay agency. If more than 50% (yes, it can be more than 50%), then the Service member must figure out how to get any amount over 50% to the former spouse.

By law, a Service member’s Service disability compensation is not considered part of the divorce property eligible for award to a former spouse. Specifically, Service disability pay under the medical retirement law (10 USC Chapter 61) is not considered “disposable” retired pay for division as marriage property. However, VA disability compensation is not protected from the requirements of family or child support by a state divorce court as is commonly believed.

So again note the nuance of the two paragraphs above. The court doesn’t have to award, meaning specifically assign, disability compensation whether from Service retired pay or VA disability compensation to a former spouse. A court may order a general amount to be paid by the Service member to a former spouse or family. Where the money comes from is up to the Service member even if disability pay has to be tapped.

Other Service Benefits

20/20/20 Rule. For a former spouse to be entitled to Service benefits (health care, ID card, base benefits), the Service member must serve for 20 years and the couple has 20 years of marriage with 20 years of overlap. This is the rule of law used to determine a former spouse’s eligibility for the following Service benefits (10 USC, Sections 1072, 1078a, 1086a). There are a few exceptions to the 20/20/20 Rule but they are based on old rules from 1980s that probably won’t apply to current day cases. There are also some special rules for abused spouses.

Health care. The 20/20/20 rule must be met before a former spouse is eligible for Tricare health care. But there are two catches:

#1, the former spouse can’t remarry. Once remarried, the former spouse loses Tricare forever (one exception, you get Tricare if you remarry a retired military member).
#2, the former spouse can’t have an employer-sponsored health care plan or a purchased health care plan. You must choose between your employer/purchased plan or Tricare.

There are a few exceptions to the 20/20/20 rule above but they involve at least 15 years of overlap or limited Tricare eligibility (no more than 1 year) or eligibility for the Continued Health Care Benefit Program (CHCBP) which is like purchasing a plan through the health care marketplace. CHCBP is for unremarried former spouses and is limited to 36 months.

ID cards. Processing the application for an ID card will require the following documents:

  • Certified copy of marriage certificate.
  • Certified copy of final divorce decree.
  • Notarized statement that you have not remarried.
  • Notarized statement that you do not have medical coverage under an employer-sponsored health plan. Provide the name, address, and telephone number of your employer.

Spouses previously enrolled in DEERS can get service from any ID card office. To locate your nearest ID card office, go to: www.dmdc.osd.mil/rsl/owa/home.

Initial applications must be accomplished by the parent service.

Base benefits.

If you have an ID card, you have base benefits; commissary, exchange, MWR, and other benefits that come with an ID card. Any questions can be addressed to the parent service or to the nearest Uniformed Services ID Card issuing office for advice.

Unlike the Tricare health care, if you get remarried and the remarriage ends because of death or divorce, a former spouse can get base benefits back by re-applying for an ID card.

The Survivor Benefit Plan (SBP)

The SBP is the only program that provides a monthly lifetime income to a beneficiary that is based on the Service member’s retired pay amount. A beneficiary gets 55% of the Service member’s base amount which is usually the amount of retired pay.

The 20/20/20 rule does not apply to the SBP. If a divorce decree states a former spouse is to get SBP, it happens, if timely notification is made to the pay agency by the Service member or the former spouse.

The former spouse provides an official copy of the court document to the Service pay agency and declares a “deemed election.” This means the former spouse makes a claim for the SBP based on legal grounds whether the Service member is involved or not.

The deemed election changes the beneficiary on the SBP to “former spouse.” It also allows “former spouse and child” coverage. The deemed election must be made to the pay agency within a year of the divorce date.

Remarriage does not cancel the coverage but it will be suspended until the remarriage ends in death or divorce and the SBP is reactivated. If the former spouse is receiving survivor payments because of the Service member’s death and the former spouse remarries, payments are suspended if remarried prior to age 55 and can start again if the remarriage ends. Remarriage by the former spouse at or after age 55 does not stop the payments.

The Service member is not allowed to have another beneficiary as long as the former spouse has the beneficiary status. If a former spouse dies as the SBP beneficiary while the Service member is still alive, the Service member loses the SBP as the policy is cancelled.

VA benefits

There are no benefits for former spouses under the Department of Veterans Affairs (VA). If you want to make sure there are no special circumstances in your situation, you can contact a local Veteran Service Office to determine eligibility for VA programs. Find your local Veteran Service Office at http://www.va.gov/statedva.htm.

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SBP Terminates at Death of Covered Former Spouse

Aug 29 2014

retiredcoupleUpon divorce a retiree must notify DFAS to either suspend Survivor Benefit Plan (SBP) coverage or provide the former spouse SBP coverage. Former spouse election is made either by the ‘retiree election’ or by a court-ordered divorce decree.

A June 2013 legal review of Defense Finance Accounting Service (DFAS) practices determined that SBP is irrevocably terminated upon the death of a covered former spouse SBP beneficiary – meaning the military retiree does not possess the option for resuming SBP coverage for a current or a future spouse.

In addition, DFAS recently suspended SBP payments already being paid to a widow after it was determined that the current spouse coverage should never have been permitted following the death of the covered former spouse. The SBP annuity payments were later grandfathered and resumed in this particular case.

This “wrinkle” appears to stem from a statutory interpretation that a former spouse must be alive in order for the beneficiary to be changed, and in some cases, this would mean amending the divorce decree to consent to termination of their former spouse SBP coverage. In other words, the SBP insurance terminates upon the death of the former spouse and cannot be reassigned.

Prior to the June 2013 legal ruling , following the death of a former spouse SBP beneficiary, DFAS allowed retirees to resume SBP coverage for current spouses within 12 months; or if not married at the time of the former spouse’s death, within 12 months of remarriage.

MOAA does not agree with this reinterpretation and supports the long standing practice of allowing retirees to resume SBP coverage after the death of a covered former spouse, similar to the practice of allowing retirees to resume SBP coverage after a living former spouse provides consent to no longer being the SBP beneficiary.

The situation is very complicated and affected MOAA members are encouraged to contact MOAA’s Benefits and Financial Education Staff for more details.

Email BenInfo@moaa.org or call (800)234-6622 (MOAA).

 

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Yes, You Can Have 2 VA Loans…At the Same Time. The VA 2nd Tier VA Loan

Aug 25 2014

Published by under VA Benefits

HouseSoldBy Joe Gladden, Veteran Realty Serving America’s Military, and Susan Wallace, Senior Loan Officer, Access National Bank

If you weren’t aware of this, you certainly aren’t alone. In fact, many lenders experienced with VA loans, and Realtors, are not aware of this very powerful financial tool.

Clearly, purchasing a second home is not for everyone. Occupational required moves, financial goals and planning are very individual in nature. But when purchasing a second home is a consideration, with a first home financed with a VA loan, a 2nd Tier VA Loan should be considered. Generally speaking a 2nd Tier VA Loan is a good option when the first home was purchased in an area with a lower entitlement than the area where the second home would be purchased. The entitlement amount for the 2nd Tier VA Loan will be based on the current maximum entitlement in the county where the second home is to be purchased. Otherwise stated, generally, when the first VA financed home is in a lower cost area than where the second home is located, the 2nd Tier Loan is more likely to be an excellent option.

Confused? Consider this example with our fictitious military family:

Colonel Smith and his wife purchased a home with a VA loan during an early career tour in Florida for $200,000. After transferring, they kept the home and VA loan for 20 years hoping to retire in the home, renting it out much of the time. Since there is only a modest balance on this loan that will be paid off in a few years, they would like to keep the home and financing in place.

Colonel Smith recently received orders to the Pentagon for his final tour and expects to work in the DC area in defense contracting after retirement from the Air Force for at least five years. They have two children in college and have used most of their cash reserves for tuition and expenses. They both have excellent incomes and credit, and have found the perfect home in Fairfax County for $700,000. They initially assumed that since their VA loan was tied up in the Florida home, they would have to get a conventional mortgage by putting 10% ($70,000) down, which would be a stretch.

On a whim the Smith’s Googled “VA Loans” and came across an article about a little known VA Loan option called the 2nd Tier VA Loan. Upon further research, here’s what he discovered:

He could in fact have two VA loans at the same time. Using what is called 2nd Tier or Bonus entitlement, Col Smith found that in his situation he had $492,500 available at 100% financing for a 2nd tier VA loan. With the purchase price at $700,000 his loan officer explained that he would need a down payment, but it was only $51,875 vs $70,000 for a conventional loan and since private mortgage insurance (PMI) isn’t required with VA loans, their monthly payment was over $300 less with a VA loan, compared to a conventional loan.

Conventional Loan

Purchase Price 700,000
Down Payment 70,000 (10%)
Loan Amount 630,000
Interest Rate 4.375%
Principal and Interest 3145.50
Mortgage Insurance (90% loan to value) 362.25
Total Payment 3507.75

VA Loan

Purchase Price 700,000
Down Payment 51,875 (7.41%) ($700,000 – $492,500) x .25
Loan Amount 648,125
Interest Rate 4.0% (VA rates are typically .25% to .375% lower than conventional)
Principal and Interest 3094.25
Mortgage Insurance (90% loan to value) none – VA loans to not charge mortgage insurance
Total Payment 3094.25

By financing with a 2nd tier VA loan, the Smiths enjoyed both a significant advantage in monthly cash flow and cash reserve. Like their first VA loan, the 2nd Tier VA Loan is assumable, and the funding fee may be rolled into the loan or, is waved entirely with any documented VA disability.

The background math for determining entitlements was not presented in this article. For interested parties, it can be viewed by going to the following link: http://www.moresam.net/Forum/aft/1062

Note: All applications for VA loan require a declaration by the applicant that they intend to use the home as their primary residence. Also, applicants must meet all lender underwriting credit, income and debt ration requirements.

We hope this helpful, and as always, sincerely thank you for your service. We are always happy to answer questions regarding our articles.

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