Buying a home will likely be one of the biggest purchases of your life. Having a knowledgeable real estate agent to walk you through the process is imperative for a smooth transaction. This is especially true if you’re purchasing with a VA home loan.
VA mortgages come with a host of benefits, including no down payment, low interest rates, and no private mortgage insurance. Along with these benefits come some unique loan requirements. Here are three key reasons why using a military-friendly real estate agent benefits VA home buyers.
1. They understand the unique needs of VA home buyers
Active-duty service members relocate frequently. When receiving permanent change of station (PCS) orders, service members receive 10 days of leave to scope out the new duty station and complete a home search. Choosing an agent who understands this short time frame and can dedicate the time necessary to find a home during this compressed period of time is essential.
Due to frequent relocations, it’s also important for agents to understand the importance of strong resale value. Agents who work with active-duty service members understand they’ll need to identify a home that not only fits the service member’s current needs. The agent also needs to make sure the home has the potential for a quick and profitable resale if the service member receives PCS orders again.
2. They’re passionate about serving those who’ve served
Agents who identify as military-friendly frequently have a passion for serving those who’ve served. Some have served themselves, others have close ties to someone who has, and others simply have a desire to give back to those who’ve given so much for our country.
They’re also passionate about educating veterans and service members about VA home loan benefits. Many of these agents now ask every buyer “Did You Serve” so they can identify buyers who may be eligible for a VA loan.
3. They understand the unique requirements of the VA loan
The Department of Veterans Affairs has created a few unique requirements for VA loans, to ensure buyers purchase homes that are a solid investment. The VA established a set of minimum property requirements (MPRs) to ensure all homes purchased by veterans and service members are safe, sanitary, and structurally sound.
VA appraisers are tasked with the responsibility of outlining any features not meeting the MPRs, and any issues will likely have to be fixed prior to closing. An agent who’s worked with VA buyers and understands MPRs is a great asset when doing a walk-through on a potential property—he or she can point out possible MPR issues before going under contract.
Home-Buying Benefits for Veterans & Military Buyers
Veterans, service members, and their families believe in homeownership. In fact, the homeownership rate among veterans far outpaces that of civilians.
But the financial toll of military service can make it tough for some veterans to get a financial foothold, let alone land a home loan.
The good news is those who serve have access to a host of home-buying benefits and protections, from what’s arguably the most powerful home loan on the market to financial safeguards and more.
Let’s take a closer look.
VA loan program
Since the VA loan program’s inception in 1944, the Department of Veterans Affairs has backed more than 21 million loans for veterans, active-duty military members, and their spouses. This program has made buying a home more accessible to those who most deserve the American dream they helped build and protect.
VA loans feature many benefits that help make home buying possible, including the following:
- No down payment requirement
- No mortgage insurance
- Lower average interest rates
- Limits on closing costs
- More lenient credit requirements
VA home loans have boomed in recent years, attracting many veterans and military members who may not qualify for conventional loans, which have stricter credit requirements.
Still, many eligible buyers are unaware of the benefits of VA home loans and the protections they offer. Some buyers also make the mistake of assuming a government-backed loan comes with endless red tape and miss an opportunity to benefit.
Typically, veterans and active-duty service members are eligible for a VA home loan if they served in the following capacity:
- 90 consecutive days on active duty during wartime
- 181 consecutive days on active duty during peacetime
- 6 or more years in the National Guard or Reserves
Some spouses of military members who died in the line of duty or of a service-related disability may also be eligible for a VA loan.
Talk with a VA Lender about obtaining your Certificate of Eligibility and getting a sense of your purchasing power.
Occupancy & power of attorney
VA loans are focused on getting buyers into homes they’ll live in full time. But the program makes exceptions for some veterans and active-duty service members.
For example, a spouse or children may be able to fulfill the occupancy requirement on behalf of a VA buyer. Also, a VA buyer who is deployed or otherwise unable to manage the loan process can typically assign a power of attorney to a spouse or family member to manage the loan process and sign documents.
There are two types of power of attorney, general and specific. The type needed depends in part on what loan-related documents the VA buyer can sign.
The occupancy and power of attorney options mean an eligible VA buyer’s spouse and children could buy a home during a deployment or unaccompanied assignment, helping alleviate the emotional toll of multiple moves on military families.
Basic allowance for housing
Many active-duty military members who receive a monthly housing allowance are surprised to learn that they can use this money to qualify for a home loan. Lenders can count Basic Allowance for Housing (BAH) as effective income. That can help service members make the leap from renting to owning, especially in higher-cost areas.
BAH is based on several factors, including the location of your duty station, your pay grade, and your family size. The housing allowance can change on an annual basis. To calculate your BAH, refer to the BAH calculator on the Defense Department’s website.
Even after becoming homeowners, active-duty service members can face unique financial challenges. Deployment and changes of station can strain a family emotionally and financially.
The Service members Civil Relief Act (SCRA) provides active-duty military personnel and their families financial protection involving interest rates, income tax payments, eviction, foreclosure, and more.
For example, military personnel can ask creditors—including their mortgage lender—to cap their interest rate at 6% during their term of service. The SCRA also forces lenders and servicers to seek a court order to foreclose on active-duty military members during their time of service and up to nine months afterward.
Veterans Affairs also offers foreclosure avoidance protection assistance for homeowners. The VA has a team of experts who work with lenders and servicers on behalf of struggling homeowners to find alternatives to foreclosure. Their efforts have helped nearly 500,000 veterans and service members avoid foreclosure in the past six years alone.
Understand Your Loan Options
Qualified veterans and military buyers can tap into what’s become the most powerful home loan on the market. VA loans feature no down payment, no mortgage insurance, and more forgiving credit requirements than most other loan types.
Still, they’re not the best fit for every veteran. The key is to find the right home loan for you.
Getting a better understanding of all your home loan options can help you make the best financial decision. Let’s take a closer look at the four major types of home loans.
- Who can use it: Eligible veterans, active-duty military members, and qualified surviving spouses. The VA doesn’t set a credit score benchmark, but most lenders will have one. A 620 FICO score is a common minimum.
- What it’s all about: VA home loans are backed by the government but issued by private lenders. VA loans offer no down payment requirements, no mortgage insurance, and looser credit requirements. VA loan guidelines account for borrowers whose finances may have been affected by their service. Credit score requirements are typically lower than those for conventional loans, and the program allows for more wiggle room when it comes to debt-to-income ratios, credit scores, and assets. They also tend to have lower average interest rates than other loan types.
- What to watch out for: The VA loan program is designed to help veterans and military members purchase safe, structurally sound homes they’ll occupy as their primary residence. VA loans are not available for investment properties or vacation homes. A funding fee of no more than 3.3% of the loan amount helps keep the program going and can be paid upfront or rolled into your loan amount. Buyers who receive compensation for a service-connected disability don’t have to pay this fee.
- Who can use it: Anyone with at least a 580 FICO score (or lower in special cases), adequate income, and at least 3.5% down may be eligible to use an FHA loan.
- What it’s all about: Much like the VA program, the FHA program helps increase access to homeownership through lower down payment options, competitive interest rates, and less rigorous underwriting guidelines. FHA loans also tend to have the lowest minimum credit score requirements of all the loan types. Depending on their individual approval guidelines, some lenders will even allow for exceptions to the minimum credit requirement. The FHA’s 203(k) program allows borrowers to purchase and repair fixer-uppers, lending based on a home’s projected value after rehab work is completed.
- What to watch out for: FHA buyers pay both an upfront funding fee (called a mortgage insurance premium) as well as an annual mortgage insurance charge. The latter can easily add $150 or more to your monthly mortgage payment, and it’s a cost FHA buyers now pay for the life of their loan, regardless of their equity status.
- Who can use it: Buyers looking to settle in an approved rural area who have adequate (but not excessive) income and an acceptable credit score can use the USDA loan program. USDA lenders often look for at least a 640 FICO score.
- What it’s all about: Much like the VA loan, the USDA program allows qualified buyers to purchase a primary residence with no money down. USDA-eligible homes are located in what the agency deems qualified rural areas. Buyers need to verify that a property is located in one of these eligible areas. Along with no down payment, another big benefit of USDA loans is that buyers can finance their closing costs.
- What to watch out for: USDA puts a cap on income for eligible borrowers. These limits vary by region and family size and can change annually. Like FHA loans, USDA loans come with both an upfront mortgage insurance premium and an annual mortgage insurance fee.
- Who can use it: Anyone with qualifying credit (in the ballpark of a 660 FICO or higher), adequate income, and a 5% down payment in most cases. Some lenders may offer conventional financing with just 3% down.
- What it’s all about: In terms of credit scores and debt-to-income ratios, these loans have higher barriers to entry than the government-backed options. Conventional lenders are looking for borrowers who have well-established credit, solid assets, and steady income. The upside is that when it comes to the kind of property you can purchase, you’ll have more freedom with conventional financing. That means you can use this type of loan to buy a second home or an investment property.
- What to watch out for: Buyers putting less than 20% down will pay PMI, or private mortgage insurance, until they build sufficient equity in the property. These fees can easily add $100 or more to your payment every month. Unless you have excellent credit—think 740 or above—a conventional loan may come with higher rates and fees
The 5 Biggest Mistakes Veteran and Military Home Buyers Make
Having a place to call your own—whether you’re going to be there for four years or forever—is an essential part of the American dream. The U.S. Department of Veterans Affairs offers plenty of great programs to help those who have served in the military get there, but the process isn’t foolproof. People can (and do) make mistakes buying their first home, second home, or 10th home.
You can avoid your own tale of woe (or head-banging frustration) by avoiding those mistakes before you start your home search. We asked VA-savvy Realtors® to tell us which missteps they see the most—and how you can do the whole thing correctly right from the start.
Mistake No.1: Not getting a Realtor who knows VA loans
If you’re getting a VA loan, make sure you work with a Realtor who understands the process.
“I see a lot of people go with an agent who doesn’t understand the VA system,” says Renee Lambert, a Realtor with RE/MAX Town & Country in West Chester, PA. “The VA won’t underwrite [just] any house. It is a huge, huge, huge deal to use an agent who understands the VA system, the VA appraisal process, and what that all really looks like.”
When you’re buying through the VA, you’ll need to find a home that meets VA property requirements. A VA appraiser will have specific criteria; for instance, fixer-uppers (and even some newer homes) won’t qualify. Save yourself the headache of making an offer on a house that may not get approved.
Mistake No. 2: Not communicating with your lender
Veterans have access to arguably the most powerful mortgage option on the market, but about one in three home-buying veterans don’t know they have a home loan benefit, according to the VA. When you first meet with your lender, be sure to discuss your military status so you can be informed about all the potential advantages.
One of the biggest benefits you’ll get with a VA loan is the ability to buy with 0% down (yes, we’re totally serious). VA loans also come with low-interest rates, don’t require mortgage insurance, and have more forgiving credit requirements.
“Veterans should ask their lender if they offer any incentives for veterans,” adds Stephen Rinaldi, broker with Central Lending in Yardley, PA. “I’ve seen lenders waive appraisal fees, offer a waiver of origination fee if the veteran has a certain credit score, or other lender credits.”
That’s right—pretty much everything will get easier as soon as your lender knows your military status, so speak up!
Mistake No. 3: Forgetting about all the home-buying costs
While you’ll have a ton of financial advantages with your VA loan, you will have some costs to deal with.
“Probably the biggest mistake I see is active-duty members coming into the home-buying process and not knowing there are other costs and fees necessary for buying a home,” Rinaldi says.
When you’re buying a home, you’ll likely have to plunk down a bit of cash for things like a home appraisal and inspection. It might not cost much in the large scheme of things, but it’ll help speed things along if you come prepared knowing what you’ll have to shell out for.
Mistake No. 4: Not thinking of your home as an investment
Maybe you think there’s no sense in buying if there’s a chance you might be relocated in the next few years. But that doesn’t mean you shouldn’t buy; in fact, that home could end up being a smart investment.
By searching in high-demand areas or choosing a popular home style and size (like 1,500 to 2,000 square feet), you’ll give yourself a better chance at resale if you need to move later. Or, you can hang on to it and rent it out.
“[My clients and I] often go out and look for their first rental home, not just a home for their family,” Lambert says. “With so many in transition, they’re able to purchase a home and it becomes an investment property for them when they go on to their next duty station or they move.”
Don’t like the idea of becoming a landloard? A VA loan is assumable (meaning you can transfer the loan and the property to another vet), or you can just sell the home to a nonmilitary buyer. And don’t forget: You can use your VA home loan benefits again and again, so you can own a rental property and a new home.
Mistake No. 5: Making other big purchases before closing
Once you’ve found a home and your offer is accepted, you’ll probably be excited to just move in already and make it yours. Maybe you have an eye on a new big-screen TV, and you’re looking into financing a new living room set you love. But don’t do that yet.
“Opening a line of credit or making a big purchase after loan approval is a common mistake,” Rinaldio says. “This can oftentimes change the veteran’s credit score and make them ineligible for the loan.”
Wait until after closing to make any other financial moves, just to be on the safe side.