The VA Loan: Servicemember’s Best Benefit

The VA Home Loan is the most valuable benefit servicemembers and veterans are eligible for earned from their time in service. The VA Home Loan is a benefit offered by the Department of Veterans Affairs, which enables millions of servicemembers to finance a primary residence for as little as 0% down payment. Thousands of military families use their VA Home Loan each year to buy their first, second, or forever home. Some families even utilize the VA loan to forge their way into the landlord world and build equity over multiple homes across many duty stations.

There are five type of VA Loans: a VA-backed home purchase loan, a direct VA loan, Native American Direct Loan program, the Interest Rate Reduction Refinance Loan, and a Cash-Out Refinance Loan (more about these). However, today we are just discussing the typical, VA-backed home purchase loan, which will be referred to as the ‘VA Home Loan’ moving forward.

VA Loan Benefits

The VA Home Loan can be used to purchase a single family home, duplex, triplex, or quadplex. The servicemember must occupy the house within 60 days of closing as a primary residence, and reside in the home for 1 year (notwithstanding PCS orders of course). Violations of these rules are considered mortgage fraud.

The VA Home Loan offers borrows to put 10%, 5%, or 0% down payment, lower interest rates than other loans such as FHA or conventional loans, no private mortgage insurance or up-front mortgage insurance premiums, which would add to your monthly mortgage payment, and the ability to borrow up to the federal conforming loan limit based upon the county.

For servicemembers and veterans with the full VA loan entitlement, first time borrowers have no purchase price limitations for their first loan. This is especially helpful in high cost of living duty stations (San Diego and DC) where a typical townhome or single family home is upwards of $750,000. However, it is wise not use your full VA entitlement on your very first home because there is a high likelihood you will move in the future. Additionally, just because you may qualify for a purchase price of $900,000 does not mean that you and your spouse should purchase an $900,000 home. This is a real mortgage with real liabilities. Failure to pay your mortgage can result in foreclosure.

The Red Tape

The servicemember or veteran must obtain a certificate of eligibility (COE) from the Department of Veterans affairs stating the servicemembers VA loan eligibility and entitlement amount.

The servicemember or veteran should shop around local lenders for a competitive mortgage rate. Shopping around lenders could potentially save you hundreds monthly. Historically, rates sit at about 6% average. The days of 2 and 3% mortgage rates will likely never occur again.

The servicemember or veteran and the spouse must qualify for a home loan based on their credit history, income, and assets such as investments, savings, and retirement accounts.

Borrowers can conduct the no down payment option as long as the appraised value of the home meets (or exceeds) the sales price.

In the real estate world, VA loans are misunderstood. When using a VA loan to purchase a home, the home must pass an additional Wood-Destroying Organisms (WDO) inspection which assesses for wood rot, and wood-destroying organisms such as termite damage, etc. Some sellers perceive this as an extra hoop for their home to pass through and will likely not want to choose your offer. However, stick it out in the multiple offer market. The WDO inspection is protecting you from a potentially hazardous home. Whether utilizing the VA loan or not, I would be ordering a WDO inspection to make sure the house I am purchasing is pest-free.

General Homebuying Tips

• Use a local lender. Big box lenders (such as the blue and white bank that most of us use for our checking accounts) don’t answer the phone past 5pm. Most real estate deals are conducted and signed after hours or on the weekends when the banks are closed. A good local lender will answer the phone afterhours and can produce a pre-approval letter within the day to submit with your offer and get you into the highly-sought after home.

• Research your market for knowledgeable Realtors who have plenty of experience using the VA loan. Homes for Heroes is a great website that can point you to Realtors in your area that help military families often. Additionally, by using a Homes for Heroes affiliated Realtor, you are eligible for a credit of thousands toward your closing costs! (More info.)

• Get a home inspection including: a 4-point wind mitigation inspection report, a home inspection, and the WDO inspection report (required for VA).  This will be the best $500 you have spent in years. Use findings as leverage to negotiate repairs or credits. The 4-point wind mitigation report can be submitted to your homeowners insurance company and could help lower the cost of your annual premiums, which have recently skyrocketed due to natural disasters and fraudulent claims.

• Save 1-2% of the cost of the home for closing costs in addition to your down payment.

• Set aside up to 1% of the cost of your home for continue home repairs and improvements. Our first month of homeownership brought a new purchase of an AC unit and refrigerator. We set aside funds to prepare for that un/expected cost.

• Many families choose to utilize their VA loan to purchase a home for 0, 5, or 10% down, live in it for the duration of their orders, rent it out, and continue to build equity. There are an abundance of resources online about house hacking, but THIS s a good one.

• Some states allow you to Homestead the property and file a Homestead Exemption, reducing your property tax basis by thousands and therefore stabilizing your property taxes against inflation.

• Monitor your equity semiannually and assess whether it may be time to let go of the home or continue renting it out. There are massive tax breaks on the income made from the sale of a home for owners who owned for two or more years.

Welcome Home

As military families, our sense of home is cherished dearly as it is the only factor we can control at the assigned duty station. Homeownership adds another layer of responsibility to military life that should not go unnoticed. Appliances break when deployments happen. Always.  Natural disasters are always posing a threat to one’s safety and home. Property taxes and homeowners insurance will continue to rise. Additionally, if one decides to keep the home and house hack, there are massive responsibilities with becoming a landlord. Once you move away from the home it is critical that one emotionally detaches from the home and the feelings it brought in order to make sound monetary choices as a landlord moving forward.

Some tempos require us to move every 18 months where buying may not make sense. Run the numbers with your significant other and determine which path helps you to reach your financial goals and whether you would like to rent or buy at your current or next duty station. Welcome home!