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When you apply for a VA loan, your loan officer will provide you with all the necessary information needed to evaluate your future loan. You’ll be provided with a list of estimated closing costs as well as how much money you’ll need when you finally arrive at your loan closing. Your loan officer will preapprove your loan application partly based upon your credit as well as your debt to income ratios. Your debt to income ratios is a comparison of your gross monthly income along with your monthly credit obligations such as your automobile payment and your mortgage payment.
When your mortgage payment is calculated, part of the payment is known and part of it is estimated, ate least until you get certain parts of the monthly payment verified.
The Principal and Interest Payment
The main part of your payment is the amount paid toward your VA loan. Each payment carries interest to your VA lender as well as part to pay down your loan balance, called your principal balance. Your loan is fully amortized, meaning your payment schedule is determined in advance while paying off your loan at a predetermined date. A 30 year fixed rate loan will have its balance reduced to zero in 30 years for instance.
The interest rate is applied to the outstanding balance each month, which results in more interest included with early payments and less with later payments. For example, if you have a 30 year rate at 4.50 percent and your original loan is $300,000, more interest will be included with your monthly payment compared to a loan balance of $295,000. As your loan balance is reduced, less interest is applied and more goes toward principal.
There are three primary factors included when calculating your principal and interest payment; loan amount, interest rate and term. With these three pieces of information, the principal and interest payment is calculated. In fact, if you have any three of the four, you can arrive at the missing piece of data. For instance, if you know your monthly payment, your loan amount and term, you can arrive at your interest rate.
Included in your monthly payment is an amount going toward your annual or semi-annual property tax bill. These monthly amounts fund an “escrow” or “impound” account. For instance, say the property taxes on a home are $2,000 per year, your monthly payment will include 1/12th of $2,000, or $167 per month.
You’ll pay the lender $167 per month and when the property tax bill arrives, the lender automatically pays the taxes on your behalf from the fund you’ve established. When you get your initial estimate of your monthly payment from your loan officer, the loan officer will estimate the property tax escrow amount until the validated amount is provided by the local tax assessor or appraiser.
Also included in your monthly payment is an escrow amount for your annual homeowner’s insurance premium. Similar to property taxes, the insurance premium is initially only an estimate and won’t be confirmed until you contact an insurance agent who will evaluate your property, discuss coverage and issue a policy.
Each month, 1/12th of your annual premium is collected by your lender then disbursed when due. The exception will be for properties that do not require property insurance but require a “walls in” policy, applied to condominium homes.
Finally, any other required housing related fees may be included in your monthly payment, as required by the specific VA lender. For instance, if your property is a condominium, you won’t have a hazard insurance policy, the condominium project covers that, but you will have a homeowner’s association fee paid to the management of the condo.
When establishing escrow accounts for taxes, insurance and extras, the VA lender may require a “cushion” to be established at the settlement table to cover shortages that may occur. For example, should the property taxes be $2,100 instead of $2,000, the lender will pay the extra $100 using funds from the padded escrow account. These accounts are initially funded by no more than two months’ worth of escrow payments.