My Experience With the VA Home Loan
by John Cooney on Sep 28, 2017
If you are a veteran and in the market for buying a house, chances are you have heard about or have looked into using the VA Loan benefit for this purchase. I am in the middle of buying a house for the second time and for the first time, I am using the VA Loan Benefit, so I thought I’d take a few minutes and talk about what the VA Loan is, my personal story with the VA Loan, and tips for anyone looking to use it in the future.
What is the VA Loan Benefit?
First, the VA does not loan you any money to buy a house, instead, the VA guarantees the loan on behalf of the veteran, lowering the risk of default for the lending institution or bank. This can allow a qualifying veteran to purchase a loan without putting down a large down payment or being subject to primary mortgage insurance. Not every veteran is eligible for the benefit, and you will want to check the eligibility page here and see if your service qualifies you for the VA Loan. If you are qualified, your next step is to secure a Certificate of Eligibility (COE) from the VA. You have a couple options for obtaining the COE, the first and probably easiest is to log into eBenefits and click on the link for applying for the Certificate of Eligibility. You will need your basic information as well as some proof of service like a DD-214. Once you have provided the VA the necessary information you will be notified by the VA of the approval and given a copy of your COE. You will then take the COE and give that to potential lenders as proof of your qualification for the VA Loan benefit. A couple things that are important to note, the VA Loan benefit does NOT guarantee you will be approved for a loan; that approval is still determined by the private lenders and will be based on your income, debt, credit history, etc. Also, while the VA Loan does allow the veteran to avoid paying PMI, there is a funding fee required of the veteran by the VA that acts as an insurance payment to the government. The funding fee is paid at closing and can range from 1.25% to 3.3% of the loan’s value based on a number of factors, including amount of down payment made and military service status. If you receive a service connected disability payment from the VA, the funding fee can be waived, but you will want to ensure that your COE reflects the waiver.
My Personal Experience with the VA Home Loan
When my wife and I decided to look for a new home, we wanted to make sure that we made the best decision for us financially and took advantage of every opportunity we had earned through the VA. That led me to applying for the COE and it only took about 2 days for my request to be approved and for me to get a copy of the COE delivered via email. We then took the COE and provided that to several lending companies to see what types of loans we could qualify for and at what rates. We looked at it from a number of different options; from buying the house with no down payment, using the VA Loan to avoid having to pay PMI, all the way to putting 20% down payment with or without the VA guarantee. We had three primary goals; first, limit our monthly PITI (Principal, Interest, Taxes, and Insurance) payment to an amount, that when combined with our other debt, did not exceed 36% of our total income.
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Secondly, we wanted to be able to ensure we had enough cash on hand after purchasing to pay for updates we wanted done on the new house. Lastly, we did not want to have to finance any of our closing costs. After running the analysis with a few different lenders, the scenario that worked best for us was to use the VA Loan, while at the same time putting an approximate 10% down payment on the house. By structuring the purchase this way we were able to get a monthly payment that we were comfortable with paying, while at the same time, preserving some of our cash to put into improvements in the new house. A big factor in our decision coming out this way was the fact that I do receive a VA disability payment, so for us, there was no VA Funding Fee required. I believe there would have been a couple scenarios where if the funding fee was present, we would have been better off using a conventional loan and putting more down. Up to this point, the VA and the VA Loan process was fairly easy. eBenefits is easy to navigate through, and the COE was available very soon after I provided my DD-214. Once we had put an offer in on a house and it had been accepted, we did have a few issues directly related to the fact that we were using the VA Loan. First, the VA requires some very specific things to be done during the home inspection that may or may not be required by your lender or the state you live in. One is a requirement for a termite test, not just that it has to be done, but specifically that the buyer cannot pay for it. Another VA specific issue that came up was private well water testing. The house we are buying has a well as its main water source, which we did not have tested at the inspection. Unfortunately, it is a requirement for the VA and we had to go back to the sellers and our agent to arrange for a well water test. This delayed final approval on the loan and pushed us outside our contracted dates for securing financing, causing us to go back to the sellers and ask for an extension. This brings up a second VA specific item that you should be aware of when using this benefit; adding the VA Option Clause to your Purchase and Sale Agreement. This is a clause that protects you in the event you are not able to secure VA guaranteed financing. This can be important because the VA has a stringent appraisal process and requirements. We did not have the Clause in our Purchase and Sale, and fortunately it did not negatively impact us, but do not take the chance, make sure your agent or legal representative gets this into the Purchase and Sale prior to you signing it. Once you have completed the inspection, signed the Purchase and Sale, and secured financing you are in a good position for closing on the house. While the VA Loan is a great benefit, the added steps to the process can raise the already high stress levels that come with purchasing a home. Do yourself a favor and make sure you understand the additional requirements so that you are better prepared to navigate through the home buying process.
Recommendations and Resources
1. Use VA Loan Experienced Professionals
I cannot stress this enough, at every step in the process, seek out professionals who are well experienced in working with VA Loans. Do not take their word for it, ask them how many VA Loans they have worked with, what problems they have encountered with VA Loans, and what other real estate professionals they recommend with VA Loan experience. You should be asking this about your lenders, inspectors, lawyers, and real estate agents. Don’t feel bad quizzing them; you will not only be saving yourself a lot of stress and heartache, but you will be saving those professionals as well if they are not VA Loan experienced.
2. Run the Numbers
Just because you qualify for the VA Loan does not mean you have to use it. Make sure you do a complete assessment of what you can qualify for, what you can afford, and what payments make the most sense for you. Use the lenders and financial professionals to help you understand the different options available to you and select the one best for you. Also, even though you do not have to make a down payment with the VA Loan, that doesn’t mean you can’t make a down payment! Again, look at what you can afford, how the down payment can impact your monthly and closing costs, and make the decision that is the most sensible for you.
3. Educate Yourself on the Benefit
I’ve listed a few resources below, read them, study them, know how best to use the benefits and protect yourself throughout the process.
Good luck, buying a home is an exciting time, and as a veteran you have earned the right to the VA Home Loan Benefit, make sure if you use it, you use it in a way that is most beneficial to your individual situation.