The guarantee extended by the Department of Veterans Affairs (VA) makes it easier for veterans to purchase or refinance residential properties without any hassle. In addition to availing reduced interest rate, they can further avoid the regular credit checks and property appraisal associated with conventional mortgage loan processing. But according to VA lending guidelines, the lenders are required to evaluate the income of the veteran borrower in detail to decide if he can pay the home loan EMIs. The lenders are required to calculate debt-to-income ratios that represent the relationship between monthly obligations and payments, and gross monthly income. According to the standard issued by the VA, the debt-to-income ratio of a borrower must exceed 40.

Normally, the income of a veteran borrower is determined based on his wages or W2 income. But the gross figure considered does not exclude the deduction. If the borrower is self-employed, his income is determined based on the average of his tow most recent year's income as the figure reported on his tax returns.  There are always chances that a borrower may not quality for a VA mortgage loan purely based on his primary income. Therefore, he must understand how to use other incomes that are acceptable for calculating the debt-to-income ratio.
Five Other Incomes that can be used to qualify for a VA Loan

  1. Overtime: If the borrower is earning wages at an hourly rate, his overtime income will be considered for calculating debt-to-income ratio. However, he has to provide documentation to prove that he is earning overtime consistently over last two years.
  2. Bonus: The consistency of a borrower’s bonus income will decide if it will be taken into account while calculating the debt-to-income ratio. For instance, the Christmas income cannot be considered due to its inconsistent nature. So the borrower has to provide documents to prove that he will receive bonus continuously over a period of time. 
  3. Commission: Similar to bonus, the commission income of a veteran borrower can also be considered if it is consistent and will continue in future. The borrower also needs to submit documents to determine the history of earning commission.
  4. Net Rental Income: If a veteran borrower is receiving rent from an existing property, the rental income will be considered for calculating the debt-to-income ratio. But the rental income must be reported on the Schedule E of the federal income tax return.
  5. Interest or Dividend: If a veteran borrower is receiving interest or dividend by investing funds, the other income can also be considered while calculating the debt-to-income ratio. However, he has to provide income tax returns and investment statement to establish the history of such income.

In addition to these major other income types, the alimony and support payments, or annuity income of a borrower can also be considered for the purpose of calculating debt-to-income ratio. However, the lender will check the income history to ensure that each of these additional income sources is consistent, and will continue in future. The borrower also needs to provide adequate documentation to indicate the additional income, along with the consistency and continuity of the income source.
 
 
According to a recent report posted on SunSentinel, “A landmark achievement got lost amid the government shutdown last month: A record-breaking year for the VA home loan program. The Department of Veterans Affairs backed nearly 630,000 mortgages in the fiscal year ending Sept. 30, an all-time high for a benefit borne of the original GI Bill. VA loan volume has tripled since 2007, driven by low interest rates and tighter lending requirements that have squeezed veterans and military families.

The report further highlighted how many of these veteran borrowers do not qualify for conventional mortgage loans.  So a veteran borrower still has options to avail the distinct advantages of VA mortgage loan without having a high credit score. Unlike conventional home mortgage loans, VA loans are guaranteed by the VA. The guarantee protects lenders from incurring any loss, in case the borrower fails to pay back the loan. So the lenders always evaluate a VA loan application without referring to the conventional lending terms and standards.

The VA income and credit standards also differ from general consumer credit standards. The VA credit standards does not emphasize of the credit history of the veteran borrower. So a borrower, who is not meeting the general consumer credit standards, is still eligible for a VA mortgage loan. However, he must meet the other requirements to avail a VA home loan. Also, the borrower has to choose from the lenders who participate in the VA lending program. In other words, he has to apply for the loan with a bank, mortgage company or credit union approved by VA.

At the same time, the borrower also needs to obtain Certificate of Eligibility from the VA. The certificate will indicate his eligibility to apply for a VA home loan. However, the lenders who have access to the Web LGY system can apply for the Certificate of Eligibility on behalf of the customer. However, the borrower is also required to provide documentation for payments made towards various expenses like rent, insurance and utilities. The lender will use the payment records as the base to establish credit history of the borrower by creating credit analysis report. These simple criteria also contribute towards helping more veteran borrowers to avail VA loans despite not qualifying for conventional financing.

 
 
Mortgage Backed Security/Mortgage Rate News

Nothing at all happened today.  There were no significant market moving events.  Data didn't matter--or at least no one cared to trade it today.  Obama's speech didn't matter.  Market participants are either tired of Fed Chair speculation that doesn't bring substantive new information or simply aren't around to respond.  There was no scheduled Treasury operation today, so we didn't have that going for us, which is neither bad nor good.  Even the overnight data deposited bond markets right where they'd left off yesterday so they could generally end today at the same levels after a wholly inconsequential sideways drift.  So to be clear, that's an inconsequential day to end and inconsequential week.  To make all of the above as simple as it can be: last Friday's latest price on Fannie 3.5s is exactly the same as today's.  10yr yields are 2.58 vs 2.59 last Friday.  We may begin accelerating next week as more relevant data starts up, but the better bet for a return of a pulse to market participation is the following week and infinitely more so the first week in September when get post-Labor-Day NFP.

 
 
Last week mortgage backed securities (MBS) lost -49  basis points from last Friday's close which caused 30 year fixed rates to move higher.  This ended the bond rally that had lasted for the two weeks prior to last week.
As we have discussed, MBS sell off when there is positive economic news.  We certainly could have sold off even more given last week's data with Durable Goods Orders much stronger than expected (4.2 vs 0.5) and the Consumer Sentiment Index rising from 84.1 to 85.1.  Existing Home Sales missed the market expectations but was still robust.  New Home Sales enjoyed some nice gains in terms of unit sales and price increases.
Demand for our 7 year Treasury auction saw some decent demand but our 5 year and 2 year auctions saw decreased demand.
MBS would have lost more ground (even higher rates for you) if it weren't for a WSJ article that speculated that the Fed would change their language at this week's FOMC meeting to calm the markets that they would not be increasing their rates for a long time.  We agree.  They will certainly leave their Fed Funds rate alone but they will eventually have to start to pull back on bond purchases and those bond purchases are what impacts your mortgage rates...not their Fed Fund rate. 

 
 
In comparison to conventional home loans, a VA mortgage loan offers a number of specific advantages. Along with lower mortgage rate and zero down payments, the borrower also gets the options to streamline the mortgages through the Department of Veterans Affairs or the Federal Housing Administration. A VA mortgage loan can be further streamlined without going through normal paperwork and procedures.

The loan can be streamlined without any additional credit appraisal or check. So the borrowers are not required to provide any documents to prove their employment or income. The option makes it easier for the unemployed or the people having credit problem to reduce VA mortgage rates. However, the lenders will check the payment history of the existing mortgage loan. Similar to Interest Rate Reduction Refinance Loan (IRRRL) program, the streamlining process also require borrowers to keep their home loans current.

It is also essential for the borrowers to meet certain eligibility criterions. For becoming eligible for VA streamline refinance, the current loan must be in good standing for at least twelve months. Further, the borrower must be applying for refinancing with the sole objective of reducing his payments and interest rate. Also, the borrower is not allowed to take any part of the refinanced mortgage in cash.

At the same time, the borrower cannot obtain a streamlined mortgage loan whose amount exceeds the original loan amount. Along with possessing Certificate of Eligibility issued through the Veterans Administration, the borrower has to refinance the investment property only through the no-appraisal process. Also, the streamlining facility is available only for the prior service veterans and active-duty military personnel.

A borrower has option to streamline his loan through several lenders. Some lenders even customize the streamline mortgage offer by including additional features. For instance, some lenders allow borrowers not to pay the loan closure charges upfront in cash. Also, you can choose a borrower who charges you lower interest rates. Lenders may also increase the borrowed amount by adding the closing cost to the new loan amount. 

 
 
In comparison to conventional mortgage loans, a VA mortgage loan offers several advantages to a borrower. Along with availing reduced interest rate and zero down payments, a borrower is also not required to pay any private mortgage insurance premium and penalty fee for loan foreclosure. Also, you can refinance a conventional home loan into a VA loan through the Cash-Out Refinance Loan program. However, the VA loans are designed only for veterans and service members. So the borrower has to meet certain eligibility criterions to possess a residential property by paying special VA mortgage rates.

Along with having adequate income and suitable credit, the borrower also have to obtain the Certificate of Eligibility (COE) to become eligible for the loan. However, it is also important that the borrower has to use the property for his personal occupancy. You can always visit the official VA website to understand the requirements to obtain a COE. If you meet the requirements specified by VA to get a VA-guaranteed home loan, you have to apply for the COE by following specific procedures
According to VA website, the veterans, service members, and National Guard and Reserve members can apply for COE online, through the lender, or by applying online. But the surviving spouses have to follow a different procedure to obtain the COE.
If you decide to apply online, you have to use the eBenefits portal. The portal will require you to access the account using your login credentials. If you do not have login credentials, you have to complete the registration process by clicking on the Register box, and following the instructions displayed on the pages.

You also have options to apply for the COE through the lender. Most lenders have access to an Internet-based application or the Web LGY system. The application can establish eligibility of a borrower for VA mortgage loan, and get an online COE issued within a few moments. However, there must be sufficient data in VA records to process your application through the Web LGY. You can always check with your lender about the most convenient way to obtain a COE
If you want to apply for a COE through mail, it becomes essential to download the VA Form 26-1880 from the official website. The application form is available in PDF form. After downloading the form, you have to take a print out, and complete it by submitting the required information. After completing the form, you have to mail it along with the relevant documentation to the address: “Atlanta Regional Loan Center, Attn: COE (262), P. O. Box 100034, Decatur, GA 30031”.

The surviving spouses of the deceased service members have to apply for COE through mail. They have to download and complete the VA Form 26-1817, and send the completed application form through mail for determination of loan guaranty eligibility of unmarried surviving spouses. However, the spouse must allow adequate time to the VA for establishing that the death was due to a service-connected disability.

Based on your convenience, you have several options to obtain the COE. But you must decide the options that help you in getting the COE as soon as possible so that your VA mortgage refinance can be done immediately.

 
 
Markets started quietly this morning with interest rates continuing relatively unchanged over the past two weeks. The stock indexes in pre-opening trade were hardly changed from yesterday’s unchanged levels. 8:30 data didn't generate much response in either the bond or stock market. 
 
Weekly jobless claims were expected to be 6K were down 5K at 371K; last week’s claims revised from 36K to 371K. Unemployment claims still holding at what many see as not much improvement in the labor markets. Claims above 350K seem to be the level that analysts think is the pivot point for improvement. The Labor Dept. said there were no unusual effects in this report and no states were estimated. Recent claims data were considered distorted due to quarterly revisions and weather issues that required Labor to use estimates for some states. The four-week moving average of jobless claims, a less- volatile measure, fell to 350,500, the lowest since March 2008, from 352,750.
 
Q4 productivity was expected down 3.1%, as reported it declined 2.0%, the decline was the most in the last two years. Q3 productivity was +3.2%. When productivity falls unit labor costs increases; Q4 unit labor costs were thought to be up 3.1%, as reported costs increased 4.5%. The decline in productivity may imply employers have run out of methods to keep frm new hires. In Q3 unit labor costs were +2.3%. 
 
At 9:00 the DJIA futures were -1; the 10 yr note unchanged at 1.96% while 30 yr MBS prices were -1 bp. All markets flat at 9:00. At 9:30 the DJIA opened -19, NASDAQ -2, S&P -1; 10 yr note 1.97% unchanged while 30 yr MBS prices were unchanged from yesterday’s close. 
 
Since the end of January the 10 yr note based in a closing basis has traded in a 6 bp range. The stock market since the end of January hasn't moved much, the DJIA unable to break above 14K but also able to hold without seeing any significant selling. We still look for a correction in the bond and mortgage markets that will push interest rates down a little, however the longer outlook will remain bearish as long as the economic outlook and the stock markets continue to improve. Most of this month’s attention will be on discussions about the sequestration coming on March 1st. $85B of mandatory spending cuts set up by Pres. Obama back in 2011 to get the debt ceiling increased are going to kick unless the parties can agree on another ‘push the can down the road again’ deal. Much of the automatic cuts will be on defense; even Republicans agree that is a serious cut but so far the party is standing firm on no tax increases that Democrats and Obama want. Investors may sit out buying this month as the debate heats up through the month. 

 
 
The day started with stock indexes better and interest rates
unchanged from yesterday’s selling. All global stock markets are
better today with the belief that the US will avoid going over the Cliff in 12
days. Negations are still rather fragile, at least based on the rhetoric coming
from both sides; nevertheless based on how markets are reacting here and around
the world there will be a deal before the end of the year. At 9:00 the 10 yr
note traded unchanged while mortgage prices were slightly better than the close
yesterday. In late trading yesterday MBS prices did improve from levels we
marked at 4:00. So far today there isn’t anything out of Washington on the
Cliff negotiations. 
Nov housing starts at 8:30 were down 3.0%, building permits +3.6%
both about in line with forecasts. Starts fell to 861K annual units
frm revised  888K in Oct, originally 894K. The average rate of housing
starts from September through November was the strongest since the three months
ended August 2008. Permits increased to 899K units. Construction of
single-family houses fell 4.1% to a 565,000 rate. Yesterday the Dec NAHB
housing index increased for the 8th straight month. 
Mortgage applications decreased 12.3% from one week earlier,
according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage
Applications Survey for the week ending December 14, 2012. The Refinance Index
decreased 14% from the previous week to the lowest level since week ending
November 2, 2012.  The seasonally adjusted Purchase Index decreased 5%
from one week earlier. The refinance share of mortgage activity decreased to
83% of total applications from 84% the previous week. The HARP share of
refinance applications fell to 25%. The adjustable-rate mortgage (ARM) share of
activity increased to 3% of total applications. The average contract interest
rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500
or less) increased to 3.50% from 3.47%, with points increasing to 0.44
from  0.36 (including the origination fee) for 80% loans. The average
contract interest rate for 30-year fixed-rate mortgages with jumbo loan
balances (greater than $417,500) decreased to 3.73%, the lowest rate in the
history of the survey, from 3.77%, with points decreasing to 0.29 from 0.35
(including the origination fee) for 80% loans. The average contract interest
rate for 30-year fixed-rate mortgages backed by the FHA increased to 3.34% from
3.32%, with points increasing to 0.54 from 0.51 (including the origination fee)
for 80% loans.  The average contract interest rate for 15-year fixed-rate
mortgages decreased to 2.83%, the lowest rate in the history of the survey,
from 2.85%, with points remaining unchanged at  0.26 (including the
origination fee) for 80% loans. 
Investors continue to move into more risky investments and away
from safety of treasuries. The same can be seen in Europe; today’s
stronger than expected German Ifo Business Climate survey (102.4 actual v.
101.9 expected) is the latest spark for the ongoing flight into risk assets,
causing investors to shed safer ones. 
This afternoon at  1:00 Treasury will auction
$21B of 7 yr notes; yesterday’s 5 yr and Mondays 2 yr auctions didn’t see
strong bidding.
At 9:30 the DJIA opened -2, NASDAQ +5, S&P +1. The 10 yr note +4/32
at 1.81% -1 bp; 30 yr MBSs +15 bp, FHAs -17 bp. 
Yesterday the 10 yr note increased to 1.85% where there is very
solid support. The 10 yr note has traded over 1.85% for one day since last May
(9/14/12). Although the 10 yr yield is presently over its 200 day average at
1.76%, 1.85% has successfully held on five occasions. The momentum oscillators
on the note are signaling an oversold market. We expect some improvement at
these levels but we do not expect interest rates will decline in an substantial
way. Take advantage of price improvements in the mortgage markets. 

 
 
Treasuries headed for the biggest advance in 11 weeks after President Barack Obama won re- election. U.S. equity-index futures declined, erasing earlier gains and gold climbed for a third day. At 8:30 the DJIA futures traded at -123, yesterday the DJIA closed +133.
 
Treasuries and MBSs are rallying strongly this morning on the results of the election based on the view that the Fed will continue easing whereas if Romney had won he was thought to be ready to end the monetary stimulus, at least at the magnitude is now. He said he would not re-appoint Ben Bernanke when his term ends early 2014. In that regard Bernanke will not likely seek another term even with President Obama winning the election. Nevertheless this morning traders and investors are betting on weaker growth and more Fed stimulus. So far the Fed has helped keep the U.S. economy growing by purchasing $2.3 trillion of Treasuries and mortgage-related bonds and instituting a plan to buy $40 billion of home-loan securities a month. Romney talked about increasing taxes, that didn’t go down well, while Obama must deal with the “cliff” coming he is seen as less cuts and less tax increases than Romney. President Obama got 303 electoral votes compared to 206 for Romney (Florida still hasn’t yet been decided),  but Republicans held the House while Democrats remained in control of the Senate. In that respect nothing is different now than prior to the election. 
 
According to Bloomberg data, since Lyndon Johnson defeated Barry Goldwater back in 1964, when a Democrat has won the White House the 10 yr note yield has fallen 40 basis points in the following month, while when a Republican wins the note yield increased by 19 basis points. If that holds this time the 10 yr note would test the low yield set back in July at 1.40%. Whether or not that will occur again is questionable but the decline in the 10 yr note rate this morning is adding additional bullish technical bias.
 
The impact on markets from the election results are not likely to be well defined for a few days or more. Nothing has changed in terms of the make-up of the White House, the House or the Senate. Looking beyond the election Europe is climbing back into focus. The European Commission today cut its growth forecast for the euro zone. The 17-nation euro economy will expand 0.1% in 2013, down from a May forecast of 1.0%. It cut the forecast for Germany, Europe’s largest economy, to 0.8% from 1.7%. Europe’s economies are declining leading to slower growth in the US. Retail sales decreased more than economists estimated, a report showed today. Sales fell 0.2% from August, when they rose 0.2%, the European Union’s statistics office in Luxembourg said. Economists had forecast a decline of 0.1%. German stocks fell, erasing yesterday’s gains, as the European Commission cut its growth forecast. Greek lawmakers vote today on an austerity bill that contains austerity measures demanded by the so-called troika that oversees euro-area bailouts insists. A 31.5 billion-euro ($40B) aid payment has been frozen since June.
 
At 9:30 the DJIA opened -143, NASDAQ-39, S&P -15. The 10 yr note yield 1.64% -11 bp; 30 yr MBS price +79 bp frm yesterday’s close. 
 
This afternoon at 1:00 Treasury will auction $24B of 10 yr notes; yesterday’s 3 yr auction was on the weak side in terms of demand. At 3:00 Sept consumer credit is expected +$10.0B.
 
Let’s give this a few days for markets to settle down. Today and yesterday have been quite volatile, the implications of volatility is uncertainty; look for more of it today and over the next week or so. That said, the election and the renewed interest in the EU debt mess are combining to drive interest rates down. Some are now outwardly calling for the 10 yr note to fall to 1.40%, the low last July, and possibly below it. We still don’t agree with that, but we have to respect the action and this morning it looks quite bullish at the moment. The 10 yr this morning is 25 bp frm the July low, not an insurmountable task but to get there the economic outlook has to weaken for the US and Europe, and the Fed has to add more stimulus---both possible but at this point we don’t agree.

 
 
At 8:30 August housing starts and permits were reported; starts were expected up about 2.5%, as reported starts increased 2.3%. Building permits were expected to have declined 1.5%, as reported down 1.0%. Generally close to forecasts and there was no noticeable reaction to the data. Construction of single-family houses climbed 5.5% to a 535,000 rate, the fastest since April 2010. Permits for the building of one-family homes increased 0.2% to a 512,000 annual pace, the highest since March 2010. Work on apartments and other multifamily homes dropped 4.9% to an annual rate of 215,000. New home sales are still 50% below the average rate over the past 40 years. Almost 11 million families are “underwater” -- saddled with more debt than their homes are worth after five years of declining home prices. The stock indexes were trading better before the report and didn’t move with the DJIA futures up 20 points. The 10 yr note at 1.79%, down 2 bp remained unchanged while MBS prices were up 6 bp increased to +15 bp.
 
Yesterday started strong in the mortgage markets but by the end of the day MBS prices while still holding some gains had fallen back; down 11 bp frm the level at 9:30 yesterday. There wasn’t much movement in either stocks, bonds or mortgage markets yesterday as traders still trying to get a handle on last week’s FOMC announcement that surprised markets with the intensity the Fed is going to apply to purchasing MBSs. 
 
Spain’s Deputy Prime Minister out today saying the nation will consider seeking external aid if the conditions were acceptable. Spanish bonds are headed for their biggest monthly gain in a year after the European Central Bank said it will act to reduce borrowing costs if countries request assistance. Spain is scheduled to sell as much as 4.5 billion euros of debt due in October 2015 and January 2022 tomorrow. 
 
Mortgage applications for home purchases declined in the September 14 week, down 4.0% following an 8.0% increase during the holiday shortened prior week. Applications for refinancing rose 1.0%. Mortgage rates moved mostly lower in the week including for 30-year fixed mortgages with conforming balances (under $417,500) which averaged 3.72% (with points) for a three basis point decline in the week and a new record low in Mortgage Bankers Association data.
 
At 9:30 the DJIA opened +17, NASDAQ -2, S&P +1. The 10 yr note at 9:30 1.76% -5 bp; MBS 30 yr price +43 bp, 15 yr fixed +10 bp. 
 
At 10:00 August existing home sales out; forecasts called for an increase of 2.2%. Sales +7.8%, a nice improvement and a 2 yr high. Sales up 11% yr/yr; there are 2.47 million units for sale down 18% yr/yr. The median sales price at $187,400.00, +9.5% yr/yr. According to NAR there is a 6.1 month supply. Homes under $100K declined. Based on the data the housing sector continues its slow improvement, any gains are welcome but there is still a long way to go. 
 
Japan joins in on the increased asset buying stimulus following the US; the Bank of Japan increased its asset-buying fund by 10 trillion yen ($126B), following new debt-purchase plans by the U.S. Federal Reserve and the European Central Bank this month.  
 
Last Friday the bellwether 10 yr note yield increased and closed above its 200 day average; but it didn’t hold and the rate fell back below it on Monday. A positive sign that the 200 day average is holding any increase in rates; the average was tested on 8/16, 8/20 and 8/21 but held and rates declined on treasuries and mortgage markets. Momentum oscillators however are still slightly negative but all are improving. Japan’s easing today, the ECB debt purchase plan, and the Fed’s commitment to purchase $40B of MBSs for an extended period have strengthened the technicals in the MBS and treasury markets.