VA loans are a great benefit to veterans but can take longer to close.
I inevitably find myself lucky to work with many veterans who are looking to buy houses. So it surprised me to learn that that about one percent of the American population today has served in the post-9/11 era according to a report by Pew Research.
Despite such a small percentage, it seems to me that people in the metro Detroit area take up the call to service in much larger numbers. For them, I always look to see if a VA loan might be the right answer for them—and it often is.
Regrettably, given the current conversations around our collective water coolers on VA loans, the topic is much like the current gluten-free diet fad. Everyone has heard about VA loans, most have a vague understanding of its health benefits, but few people actually qualify for it. Kind of like how very few people are actually allergic to gluten. Which reminds me, what the heck is gluten anyway? Who knows, but many will go on asking their waiter for gluten-free dishes anyway.
VA loans are the same way. It’s a popular topic in real estate circles even when the vast majority of the population doesn’t qualify for it: even non-veterans engage in conversations with veterans saying, “Oh you’re a veteran, that’s great! You get to qualify for VA loans,” even when the veteran herself isn’t even in the market for a house.
Everyone knows about VA loans because their zero downpayment feature gets a lot of press; yet, beyond this, the details get a little foggy.
The phrase “VA loan” is a bit of a catch-all to begin with. When people use it in conversation, they’re usually referring to the VA Home Loan which is provided to a buyer by a private lender and backed by the government. “VA” stands for Veteran’s Affairs, which is short for The Department of Veterans Affairs, which is the government agency that oversees and administers veterans programs, including VA loans to veterans.
Everyone has heard about VA loans, most have a vague understanding of its health benefits, but few people actually qualify for it. Kind of like how very few people are actually allergic to gluten. Which reminds me, what the heck is gluten anyway? Who knows, but many will go on asking their waiter for gluten-free dishes anyway.
The VA has many loan options besides the popular VA Home Loan. Other options include the Interest Rate Reduction Refinance Loan (IRRRL) which helps veterans get a lower mortgage interest rate by financing their existing mortgage. Also, Cash Out Refinance Loans through the VA allow veterans to take cash out of their home equity to take care of concerns like paying off debt, funding school, or making home improvements. There are several others, including loans for Native-American veterans and for those who veterans struggling to secure housing.
Why Use a VA Loan
For the sake of this article, when I say “VA loan,” I am referring to the renowned VA Purchase Loan used to actually buy a new home. A VA Purchase Loan allows a veteran to purchase a home at a competitive interest rate without requiring a downpayment or private mortgage insurance. In other words, the VA can provide you up to 100 percent financing for your house, whereas conventional mortgages typically provide only up to 80 percent without extra restrictions.
Look alive though, while many of my veteran clients buy a house without a downpayment, one is necessary if the lender requires it; or if the purchase price is more than the appraised value of the property.
Both the zero downpayment and the lack of PMI are potentially huge benefits. While there are conventional mortgage lenders that will give home buyers a zero down loan, these loans require private mortgage insurance. Private mortgage insurance, commonly called “PMI,” is insurance that you are required to pay that protects your mortgage lender in the event you stop making your mortgage payments.
Ugh! Who wants to pay extra payments in addition to their mortgage with PMI? Veterans can avoid this by using a VA loan (and if you’re a non-veteran, you can avoid this with a downpayment of typically 20 percent).
The real magic of the VA loan is that Uncle Sam will guarantee a portion of the loan. In fact, for loans greater than $144,000, the VA guarantees either 25 percent of your total loan amount or up to $104,250 (whichever is less). The great thing about this guarantee is that it allows your lender to give you a lower interest rate because they feel better protected from loss.
How to Check Eligibility
If you’re a veteran, verify with the VA to make sure you’re eligible. Check the official VA website as the eligibility criteria changes depending on when you served in the military. If you’re a post-9/11 veteran, you’re eligible with 24 months of continuous service with an other than dishonorable discharge. If you have never served as active duty but are in the reserves, you need at least 6 years of service to qualify. You don’t have to be a first time home buyer, but you do have to intend to live in the house after you buy it.
How to Apply for a VA loan
Once you determine that you’re eligible, you’ll need to obtain a Certificate of Eligibility (COE) that you can obtain with your DD-214 or—for those who are still active—a statement of eligibility signed by your commander. To get your COE, you can apply through the VA’s eBenefits portal. You can also get your COE directly through your lender through an online internet application that many lenders have access to called ACE (Automated Certificate of Eligibility).
Your COE is used to show your lender that you are eligible for a VA loan. I always recommend to veterans that they shop around for a lender who understands and is used to dealing with VA loans because not every real estate agent is knowledgeable. If you pick a real estate agent whose knowledge is lacking it can make your experience more difficult. Additionally, check Facebook pages of veterans groups or commands in your area and see if anyone in the community has recommendations. Or, ask fellow friends and family members in your area who are veterans or active-duty military.
Once you show a lender that you have a COE, they can rest assured that you’re eligible for a loan backed by the government. You’ll still want to get your pre-approval letter from your lender to prove to sellers that you have the ability to get a mortgage—your COE is not a substitute for your pre-approval.
Benefits and Costs of VA loans
The VA provides a guarantee to lenders that allow them to provide you with more favorable terms including no downpayment unless the purchase price is more than the reasonable value of the property.
VA loans also protect you from the “death by a thousand cuts” costs that occur during the home-buying process. VA loans limit the amount that you can be charged at closing. The lender also cannot charge a fee if you pay the loan off early. Additionally, the VA does not require the veteran to pay an escrow fee.
Additional benefits include: The lender can’t charge you a penalty fee if you pay the loan off early. The VA may be able to provide you some assistance if you run into difficulty making payments. You don’t have to be a first-time home buyer to qualify for a VA loan. Still active-duty and plan to PCS soon? You can reuse the benefit on your next house.
However, realize that you’ll have to pay some costs, including a one percent origination fee, fees by title companies, title report and insurance, and possibly an appraisal fee. To cover these closing costs and assuming no downpayment, I recommend that veterans save up six to eight thousand dollars to cover some of these costs before closing the sale.
You’ll also have to pay a VA Upfront funding fee which goes directly to the VA to help with the costs of managing the VA loan program. The fee is about one to three percent of the loan amount if you pay it upfront. What exact percentage is charged depends on your duty status and whether or not it’s your first time using a VA loan. Some of these costs can be included in your mortgage and, if it is rolled into your loan, are not paid at closing.
A catch with the VA loan is that it requires a separate VA home inspection which can add some time between your offer on a house being accepted and the date of the sale actually closing. The VA home inspection covers parts of the house like the foundation and structure, the plumbing, roof and electrical. This inspection is to make sure that the condition of the house meets the VA’s Minimum Property Requirements (MPRs) which are minimum safety standards to make sure the house is safe for the veteran or military member.
Overall, VA loans can be a great benefit for a veteran or active-duty military member with features like zero downpayment and no PMI. However, make sure you get a pre-approval in addition to your COE before you start searching and have some money set aside for the closing costs.