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VA Home Loans

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For some strange reason, VA Home Loans are an under-utilized benefit that Veterans can use to their great advantage. Perhaps it is myths about the program and perceived drawbacks or maybe so few know about it. It is a great resource to get a great loan with or without a down payment.

I have seen several stats show the number of vets that have a VA loan and all of them are lower than 10%. That seems crazy, especially since home loan rates have been extremely low pretty much this entire decade. With rental prices constantly increasing and great rates, it makes little sense in most cases to rent. Maybe the myths keep that number down.

VA Home Loan myths

  • The VA makes loans
  • It takes forever to close the loan
  • Can’t get a loan on just property, new build, condo or manufactured home
  • Can only use it once
  • Need a credit score north of 800
  • Interest rates on VA loans are higher than other loans
  • You can’t refinance a home that has a VA guaranteed loan
  • You can’t get a VA if you have a bankruptcy or foreclosure on your credit report
  • You have to have a job

These are all completely false with two minor exceptions.

VA guarantees a portion of the loan, a bank or credit union will make the loan. How much is guaranteed depends on the amount of the loan and it changes from year to year. 50% of loans under $45,000 are guaranteed. $45,000 to $144,000 is guaranteed up to 40% with a ceiling of $36,000. For loans over $144,000 up to $417,000($625,500 in Guam, Alaska, Hawaii and the US Virgin Islands) it is 25% with a maximum of $104,350. You can still get a VA loan over the maximum value but the bank will likely want 20% down payment on the excess amount.

It takes one or two days longer than any other loan, in worst cases. If the VA inspection comes up with problems that may make it take longer. Any other reasons it might take a lot of extra time would be the same problem with any other loan. My VA loan was ‘clear to close’ in 17 days.

You can get a VA loan on empty property along with a new build or manufactured home. New builds are tricky because the VA has to sign off that the house is livable so you may need to get a builders loan and on completion move it to a VA loan if you do this make sure your lender is very experienced in VA loans.

Manufactured homes can be approved for a VA loan, the problem is that since they depreciate, few legitimate lenders give loans on them and you should only use legitimate mortgage brokers. There are scammers out there offering loans at 12% or higher and the VA would not likely approve it nor should you want that. Also, make sure you own the land underneath your manufactured home. If you don’t own the land forego these types of homes. If you rent the land you get the worse case of buying a home (depreciation) and the worst part of renting (forever increasing rent) and it costs a lot of money to move your home elsewhere.

Condos have their own issues discussed under VA home appraisals but they can be approved for VA home loans.

You can use your loan multiple times, even two at the same time if you did not max out your entitlement. It is a little tricky because you generally have to have your old loan paid off first if you don’t have enough entitlement but it can be managed. The only way to lose eligibility is if you get foreclosed on a loan and the VA has to pay all or part of the guarantee, which would happen if it sold for less than the balance on the loan. The amount paid is deducted from your entitlement and it can’t be restored.

Because of the VA guarantees, required credit scores are generally lower than other types of loans. It is up to each bank but it is typically 620. Vets as a group have higher than average credit scores, which is not surprising since many vets had to keep clean credit for security clearances and even without that, it is not fun to be in the service and fall behind bills. Of course, the higher your score the better your rate but on a comparison with the same score and VA vs. conventional or VHA loan, you are likely to get a rate that beats both. Get your score as high as possible, pay off all revolving debt and try to avoid any car loans. Typically, you can be approved for 45% of your income for the monthly payment but that 45% will include car and credit card payments.

Because of the VA guarantees, interest rates are typically lower than other types. With great credit, you will often get quoted lower rates than their very best advertised rates. With the lower rates, you can stretch into a nicer house with a VA over any other type of loan, provided you have little to no debt.

You can refinance a VA home loan. There is even a program called Interest Rate Reduction Refinancing Loan (IRRRL). It is often called Streamline Loan. You can do this to lower your interest rates or if you took out an ARM loan or you are going to roll in energy efficient upgrades into the loan it does not need to lower your rate. This can be done with little or no out of pocket expense as any fees or home improvement money can be rolled into the loan provided that there is enough room between what you owe and the amount being loaned. Of course, being underwater on the loan makes it ineligible. With the rates being so low this decade it is unlikely anyone getting the lowest rates will ever qualify for it. I got my loan at 4% and I don’t expect rates to be this low in my lifetime much less go under 3% to make it worth it.

You can qualify with bankruptcy and even foreclosure (assuming it was not a VA loan where the VA had to fork over money) in as little as two or three years after the event. Of course, you need enough income and a decent credit rating.

Usually, you need a job to buy a home but if you get enough disability money, you can certainly get a job. Especially if you are 100% or higher and it is deemed permanent.

Requirements to qualify for a VA loan

Typically, it is two years of active duty in the Navy, Army, Air Force, Marines or Coast Guard and either still be on active duty or have been discharged under any condition except dishonorable to qualify for VA loan benefits. There are other ways to qualify. Ninety days or more of service, some of which under wartime. Service before 1980 is typically 181 continual days of active service. A visit to a VSO can help you here if you aren’t sure if you qualify or simply just apply for benefits.

Surviving spouses (either through dying in service or from a service-connected disability) are also eligible for VA loans.

For the loan itself, you need to certify that it is your primary home. You cannot typically use it for investment property purchases. I have read of exceptions like an active duty member being transferred and still having enough entitlement to buy a new home at the new duty station while keeping the other house as a rental. I am not 100% sure this is true though. Once you have the VA loan and down the road you get refinanced with an IRRRL, you only have to certify that you previously occupied it.

How to apply

To apply you need to request a Certificate of Eligibility (COE). This is the document you use, along with your DD-214 or a statement of service signed by your commanding officer or a VA form 26-1817 through your bank or snail mail if you are a surviving spouse.

The easiest way to get your COE is to go to ebenefits; you can download your COE in a matter of minutes if the VA has access to your military records. If you do not have an account there you will need to register.

You can apply through many banks if you bring in all the paperwork.

You can also apply through snail mail using this form

Benefits

The biggest is no down payment and no mortgage insurance. This alone makes home ownership more viable over FHA and conventional loans for many. It also can put you in a nicer home over an FHA loan that requires mortgage insurance or if you already have your dream home in mind it will make it cheaper.

Fewer fees, well sort of. One thing you might notice when shopping around for rates is that some places charge high closing costs. I found that to be true with the big banks and credit unions that cater to service members and vets. VA loans restrict what fees are allowable and what is not. The problem is that origination fees are allowed and that is just a catch all of nonsense type fees that are not allowed by VA. So origination fees tend to be inflated, so shop around and try to negotiate. When I was shopping around I found a vet-centric lender that had closing costs more than twice as high as the credit union I eventually used.

Lower interest rates. With a middle score of 793, I got locked at 4%, a conventional loan would have been about 4.05% and an FHA loan was about 4.2%. Your mileage may vary but at the very least rates for VA loans are very competitive.

No prepayment penalty, outrageously some loans will penalize you for paying your loan early. The VA does not allow it.

The loan is assumable, you can have someone take over your loan as long as they otherwise qualify. If interest rates ever skyrocket and you need to get out from under your loan this is an attractive selling point because the terms of the loan do not change. The downside is that in most cases you don’t get back your entitlement until the loan is paid off.

Help if you are having financial problems. The VA does not want to have to write checks for foreclosed homes so they will assist you in negotiating with your lender to avoid foreclosure if you find yourself in trouble.

Finding a lender

In my opinion, local credit unions are the best places to look at. There are also online places like Veteran’s United and USAA but I found them to be expensive and they are mostly online only so you don’t have a person you can see face to face. Big banks seem to be the worst, higher rates and fees and they have lower closing rates.

I would say try at least 4 or 5 places and get as much information as possible. Loan rate, APR and estimated closing costs are all vital so you can do a reasonable evaluation. The lowest rate might not be the best deal because they have high closing costs or they have a low closing rate. What good is the low rate if the deal doesn’t close?

Find a VA approved lender if possible, it is not a requirement but it is easier because they can electronically access your Certificate of Eligibility for you. My credit union wasn’t but the loan officer had a lot of experience with VA loans so it was almost as easy. I did have to bring in copies of my DD-214 and COE which was annoying. At the end of the day, the VA approved lender label is not the most important thing.

Shopping around will cause multiple ‘hard pulls’ on your credit reports which typically hurt your score for some reason but when shopping for home loans it is expected you will fill out multiple applications so if they are all in a small window of time they will really only count as one hard pull. It is funny before getting cleared to close I had to write down the reason for each hard pull in the past year, even the credit report request from that credit union! For some strange reason, setting up service with Comcast caused a hard pull which was so upsetting I canceled the order and stuck with my phone company. It made me feel dirty even thinking about using Comcast so it was very easy to dump them after such an outrageous action. Even my last car loan did not trigger a hard pull but getting internet access set up did?

Sorry for another rant. I feel better now.

VA Home Appraisal

Don’t be fooled, this appraisal and inspection is done for the VA, not you. However, it does have some benefits for you. First, it is another opinion on the value of the house. House pricing is such crap and filled with insanity but it helps you know you are not paying more than the ridiculous concept of ‘market value’. I should write a rant about this, it basically boils down to why should I pay more just because some idiot down the street paid a lot of money for a somewhat similar house? There is no invisible hand.

Anyway, another benefit is that the home has to meet the standards of livability. The VA is also on the hook so they will not guarantee ‘fixer uppers’ so don’t even try to get one of these types of houses with a VA home loan. They will check similar items as the inspector you hire but they have to check off certain boxes. Some requirements are a working stove and heating system, along with a good foundation and access to water, sewer, and power. Any gas appliances need to be properly vented no mold or leaky pipes, things like that.

If you are getting a rural property, be aware that there are more hoops to jump through if the house uses its own well.

Condos also have a potential snag: the condo association has to be approved by the VA. If the condo is not already approved it will take more time and add complexity to getting approval from the VA.

This is required and you have to pay for it. The fees vary depending on the state you live in. I had to pay $800 for it. This was $500 more than my home inspector spending 3 hours at the property.

Do not forgo your own inspection; the VA won’t care about some defects that you might care very much about. The VA’s inspection does not guarantee the house is free of serious defects.

Funding Fee

The VA charges a funding fee to help pay for this awesome program. It ranges from 0.05% to 3.3% of the purchase price depending on if you are active duty or reserves or a vet and whether it is your first home or not, a manufactured home, and if you did put money down. The fees are detailed here.

If you are receiving money for service-connected disability or receiving retirement pay in lieu of VA disability payments you are exempt from the funding fee. Surviving spouses of those that died during service or died due to their service-connected disability are also exempt.

Ways to reduce and flatten your cost of living

Buying a home is a great way to flatten your costs of living. Of course, things like electricity, sewer and property taxes all seem to increase every year but you might be able to do something about some of it. All of that is rolled into rent along with a profit margin for your landlord so buying at least removes that.

Most states have benefits for vets and particularly disabled vets. This can range from property tax reduction and in some taxes no property taxes at all. The benefits and requirements vary from state to state and link to each state can be found here.

In my state, you have to be 100% and permanently disabled and make less than $42,000 or so. Happily, my disability money is not counted as income so I qualify for the biggest discount. My property valuation for tax purposes gets frozen and then reduced 60% and only those taxes that were approved by my city counsel, county commissioners or state legislature count. All the taxes and levies put to the people for a vote like fire, roads and school bonds are 100% exempt. My county is taking for freaking ever to approve me but I estimate I will save $160 a month, minimum. It might be closer to $200. I pay around $280 a month on property taxes so that will be a nice discount and since my valuation is frozen, increases will be very minor since I have to pay so few items under the banner of property taxes. I will also get a 25% discount on my sewer bill which is a small amount but just more money to be saved.

General home loan tips

These are important for any home loan.

  • Pay down your credit cards and don’t touch them from application to closing.
  • Do not under any circumstances buy a new car or furniture on credit until after closing
  • Do not try to pay any closing fees or down payment with cash.
  • If you get gifts to help with closing or down payment, use bank-to-bank transfer not cash

If you do anything to mess up your income to debt ratio you can suddenly not qualify to get a loan on the home you want to purchase. Buying a car also lowers your credit rating for a time so that could make your rate higher if you still meet all the other requirements. Same goes for buying new furniture on credit. Leave your cards alone, only lower the balance if they are not at $0.

Using cash is problematic because the bank needs a trail of all money transactions during the closing process. This is because of draconian federal anti-money laundering laws. If you use cash, prepare for a mountain of paperwork to explain where it came from. It is awful nice that your parents want to give you a gift, talk to your loan officer for an acceptable way to transfer the money without causing you more headaches and possible delay.

I had to use a certified check to deposit the earnest money because who has checks anymore and my loan officer told me that using cash would upset the process and cause delays. Even if I used cash and had a bank receipt to prove it came from my account that was no bueno.

In short, leave your credit and money situation alone and try to avoid anything new on your credit report or something significantly different with your bank account(s), including unusual large cash deposits into your account.

I am done writing for today!

It is a very good program that more vets should take advantage of, it is far better than being on the rising rent treadmill and home ownership has so many benefits.

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