Using your VA loan benefits to purchase a home is exciting, but if you are new to the process you may need some pointers along the way.
Buying a home using your VA loan benefits can be one of the most exciting transactions you'll ever make. But it can certainly come with moments of frustration and uncertainty. Maybe that's not entirely unsurprising when you're talking about a six-figure purchase. The highs and lows of the homebuying process are often amplified for first-time homebuyers. There's a whole new language littered with strange acronyms like GFE (Good Faith Estimate), APR (Annual Percentage Rate) and MPR (Minimum Property Requirements).
Loan officers and underwriters are asking for pay stubs, tax returns and other documents you haven't touched in years. And there's a joy and sense of accomplishment when a seller accepts your offer that's tough to find outside the world of homebuying. The reality is this doesn't have to be an emotional roller coaster. Sure, hiccups and unexpected issues can and do arise.
But both experienced and first-time military homebuyers who come into the process with some education and preparation in hand are setting themselves up for the best possible experience. Here's a look at 28 must-read VA loan tips to help VA homebuyers get the most from their hard-earned benefits.
You don't need to have your VA Certificate of Eligibility to start the VA loan process. It's common for lenders to get this document for you a little later down the road. By all means, you can certainly obtain yours if you're concerned about your entitlement amount or just feel better having proof of your benefit. Using the VA's eBenefits portal is typically the quickest way when possible. But don't let the absence of your COE stop you from contacting a VA approved lender like Veterans United to start the prequalification and preapproval process.
Your credit profile will play a crucial role in your ability to land a home loan and the type of rates and terms available. Before you pursue loan prequalification, get a free copy of your credit report from Annual Credit Report.com (this truly is free and requires no credit card information or monthly credit monitoring). Examine it with an eagle eye for errors, which can be anything from accounts that aren't yours to reporting errors regarding late payments. About a quarter of all credit reports contain errors serious enough to derail a home loan, according to the U.S. Public Interest Research Group.
Your free credit report will not contain your credit score. This is something you have to pay to see, and as far as mortgages go it's often best to not waste your money. That's because lenders see different scores than consumers, and they use a formula weighted especially for mortgage lending. What your loan specialist pulls can and often does look different from the "consumer" score you shelled out money to see. The only way to really know where you stand is to have a lender pull your credit.
Lenders ideally want to see you've had your job for at least two years. That's not always feasible, especially for veterans who recently separated from the military. So it's possible to have fewer than two years and still secure financing, but it'll require a closer look by your loan specialist. They'll want to see continuity between your previous work, education, MOS or experience and your current employment. But even if there is continuity, if there was a gap of unemployment you'll likely need to wait until you've been back to work for a certain number of months — the length can vary by lender and often corresponds to the duration of your job gap.
Once you earn the VA home loan benefit, it's yours for life. This isn't a one-time lending option or a program exclusively for first-time homebuyers. You can use these benefits over and over again. In fact, it's possible to have more than one VA loan at the same time. So don't let anyone claim you're ineligible because you had a VA loan a decade ago. You may even be able to get another VA loan after defaulting on a previous one.
There isn't a ton of sense in looking for homes before you've got a clear idea of what you can afford and how much a lender is likely to extend. VA loan prequalification and preapproval will help with exactly that. Preapproval in particular is important in that it shows sellers you're a serious candidate who's likely to make it to closing day. A prospective VA homebuyer with a preapproval letter is a welcome sight among home sellers and real estate agents.
Your preapproval amount isn't a suggestion. It represents the ceiling of what you can afford based on your current financial situation. It's easy to get caught up in the excitement of the home search. But remember: Just because you're preapproved for up to $250,000 doesn't mean it's in your best interest to purchase a $250,000 home. Homeownership comes with an array of new expenses, from homeowners insurance and property taxes to maintenance costs and more. VA loans have some safeguards in place to help veterans avoid becoming "house poor," but it's something you should consider from the outset.
VA loans are an incredible benefit for those who've proudly served our country. They're also a specialized product that some real estate agents and lenders are more familiar with than others. You don't want a novice in your corner when the time comes to utilize these hard-earned benefits. A real estate agent who understands the promise and potential of this program can save you time and money in a host of ways. One of the most important is by steering you away from properties that could pose problematic for the VA appraisal process, which can save borrowers time and money. Check out Veterans United Realty for help finding an agent near you.
It's always a good idea to compare costs, VA loan rates and terms from multiple lenders. Those don't always have to be the deciding factors, although they'll certainly play a significant role. It's true that a "hard inquiry" on your credit can cause your score to dip a few points, but it doesn't happen every time. More importantly, the credit bureaus will treat multiple inquiries from mortgage lenders within a month or so as just one single pull, rather than have each one possibly drag down your score. That allows you to shop around with confidence.
The VA wants veterans purchasing homes that are "move-in ready." To that end, independent VA appraisers have to make sure your home purchase meets a set of minimum property requirements as part of the VA appraisal process. Any defects or issues noted by the appraiser have to be completed before the loan can close. The issue is you -- the veteran purchasing the home -- can't be the one to make those changes. That's why fixer-uppers and questionable foreclosure properties are so difficult. You also want to be careful regarding unique properties (log cabins, geodesic domes, large acreage) for which it can be tough to find good comparable recent home sales. A good real estate agent who understands the VA program can help you avoid properties that are likely to pose problems during the appraisal process.
Nine in 10 VA homebuyers purchase without making a down payment. It's also not uncommon for the seller to pay all of your closing costs. But you'll still need money up front to cover things like an earnest money deposit, the appraisal and a home inspection. You may get all of that money back at the closing table.
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This one is simple enough that you might not even think about it at first. The VA wants borrowers to have a debt-to-income ratio (DTI ratio) of 41 percent or less. If you're uncertain about the health of your DTI ratio, don't head into the loan process wedded to a specific loan amount. Lenders calculate that ratio using the anticipated monthly mortgage payment for the loan amount you're seeking, including taxes and homeowners insurance.
If your DTI ratio is too high, one way to bring it down is to simply seek a lower loan amount. You can play with the numbers until they work, provided you can still find what you want at a lower price point. Otherwise, you'll need to come up with additional income sources.
Residual income is an incredibly important financial requirement unique to VA loans, and it's a major reason why no other loan program has had a lower foreclosure rate over the last five years. The VA wants veterans to have a minimum amount of money left over each month after the mortgage payment and other major expenses in order to cover everyday expenses like gas, groceries, health care and more. The benchmark varies by family size and geography. Heading into the VA loan process it's important to understand that you're going to have to meet this guideline. This is another area where you may have to tweak your desired loan amount to make the numbers work.
Work with your real estate agent to make sure the offer you make on a home includes contingencies that protect you. One common contingency is to stipulate that you get your earnest money back if you decide to walk away because of a problematic home inspection. Another is to make the purchase contingent upon your ability to sell your current home.
This is more of a rule than a tip. We're talking about one of the biggest investments of your life. Why wouldn't you want a clear look at what you're getting and any problems lurking in the shadows? The home inspection allows you to renegotiate items with the seller and helps ensure you don't purchase a lemon of a house. Unlike the appraisal, a home inspection isn't mandatory. But you should think of it that way.
The VA program has occupancy requirements because it's a program for primary residences. Generally, you're supposed to occupy the property within 60 days of closing. A spouse can fulfill the requirement, which is one of the ways deployed or otherwise unavailable military members can purchase homes while serving. But this requirement can present obstacles for married couples who might need one spouse to stay behind, or for military contractors who spend the majority of the year living abroad. If you and your co-borrower are expecting some potential occupancy issues, talk through them with your loan specialist as soon as possible.
You can ask the seller to pay all of your closing costs, regardless of the the total amount. The VA does cap what a seller can contribute in concessions -- which are things like paying your prepaid taxes and insurance or the VA Funding Fee -- at 4 percent of the loan amount. But feel free to ask for the moon when it comes to the closing costs. There's no guarantee the seller will bite, but you won't know if you don't ask.
Mortgages are a product and people in the industry don't work for free. There are always going to be costs that come with securing a home loan. It's more a matter of who pays them and how. Lenders offer "no closing cost" loans because they still make money on them -- off of you, to be more precise. The reason you don't pay closing costs on these is because the lender pays them for you. Here's how: The lender covers those additional costs by giving you a higher interest rate, which you're stuck with for the life of the mortgage or until you refinance. That means you're paying more each month.
You can absolutely use the VA loan program for new construction. But you will likely struggle to find a VA lender willing to actually front the money to pay for the home to be built. There's a lot of risk involved in homebuilding, and risk isn't something lenders look to tackle. So what's more common is you'll need to get a short-term construction loan from a homebuilder or another financial institution to actually fund the home's construction. Then you'll refinance that short-term loan into the VA program using what's called a construction-to-permanent refinance. You may not want to spend a ton of time looking for VA lenders willing to pay for construction, and instead start searching for the right builder.
Lenders may want to make sure you haven't had a 30-day or more late payment on your mortgage (or even rent in some cases) in the last 12 months. So if you slipped up four months ago, you might need another eight consecutive months of on-time payments before being able to pursue a VA home loan. Veterans United currently allows up to one 30-day late payment in the previous 12 months on VA purchase loans.
Unfortunately, you won't be able to ask the lender for an extra $15,000 to make renovations or upgrade the kitchen. They're going to lend whichever is less between the purchase price and the appraised value of the property. So if you agree to purchase a home for $150,000 and the appraised value is $160,000, you're going to get $150,000 (Note: You don't magically have $10,000 in equity). Conversely, if it's a $150,000 purchase but the appraised value is $140,000, you'll need to renegotiate with the seller or make a down payment to cover that $10,000 gap. The only exception here is if you pursue an Energy Efficient Mortgage (EEM), which allows qualified borrowers to add up to $6,000 in energy-efficiency improvements.
Once you're under contract on a home change is not your friend. Lenders need to see stable, reliable income streams that are likely to continue. A job or career change during the loan process can derail your purchase. Likewise, lenders want to make sure your credit profile and assets remain steady while you're waiting for the underwriting process to wind down and the issuance of a clear-to-close. Putting a bunch of furniture on a credit card or buying things like a car or a boat before your loan closes will set off serious red flags and may kill your loan immediately.
You can absolutely use your VA home loan benefits to purchase a foreclosure or short sale. But properties that are in disrepair or that have sat vacant for a while may prose a problem. We mentioned earlier the VA's Minimum Property Requirements, which are broad health and safety issues that need to be met to satisfy the VA appraisal process. Some foreclosures are in better shape than others. Homes in need of repair or renovation will likely trip the MPRs, and at that point it's tough to get a bank or a seller to make repairs on a foreclosure, which must be completed before the loan can close. Again, these aren't fixes that you as the buyer can pay. You'll want to make sure any foreclosure you're considering is likely to make it through the VA appraisal process -- this is where a VA-savvy real estate agent can make a huge difference.
Condos are another acceptable property type for your VA benefits. The only potential wrinkle is that the condo development needs to be on the VA's list of approved condominiums. Thousands already are, but it's possible the one you've fallen in love with isn't yet. It's possible to get condo developments added to the VA's list, but that process can take time because the department needs to review condo documents and other information. So if you're interested in purchasing a condo keep this in the back of your mind, especially if you've got a tight timetable for purchasing.
Qualified VA borrowers can purchase up to a four-unit property provided they live in one of those four as their primary residence. But in some cases you may need several months of reserves in the bank when purchasing these types of properties. Reserves are basically extra cash on hand equivalent to the cost of your total monthly mortgage payment including taxes and insurance. So if the mortgage payment is $1,500 per month and a lender wants you to have at least three months of reserves, you would need $4,500 on hand as a safety net.
There are nine community property states where lenders can check your spouse's credit score even if he or she isn't going to be obligated on the loan. Some lenders won't actually require a non-purchasing spouse to meet their credit score requirement. But they likely will count that spouse's debts in the borrower's overall debt-to-income and residual income calculations. Non-purchasing spouses may be able to offset their debt by providing documentation about their income.
Self-employed veterans will almost always need to provide at least two years of tax returns to properly document their income to a VA lender. That's just the nature of self-employment, which isn't always stable and reliable. But you'll also likely need two years of tax returns if you work for a family-owned business or are otherwise employed by a family member. Lenders want to see a consistent, sustained pattern of income over time, especially given the potential conflict of interest.
You may be able to count as effective income any child support you receive, but it'll likely need to meet some lender requirements. Generally, lenders are going to want to see a sustained pattern and a likelihood that the support will continue for at least a few years after the loan closes. You'll likely need to have been receiving it for at least three months if not more. On the flip side, if you pay child support that outlay will be counted in your debt-to-income ratio and residual income calculations.