We have 14 money saving insights for Veterans purchasing a home with a government VA loan, to minimize your borrower investment, save on your interest rate, and structure your purchase contract correctly. A record number of military veterans, active-duty military, and their eligible spouses are obtaining VA loans to purchase a primary residence, especially millennials. The numbers have increased by 300,000 in the last three years. The VA loan has optimal advantages regarding down payment, more flexible credit and debt to income ratios, and a reusable entitlement.
1. Connect With A VA Experienced Real Estate Team
An experienced VA real estate team includes a seasoned real estate agent and mortgage originator who are knowledgeable about the numerous nuances of the VA loan from house to loan closing.
2. VA Certificate of Eligibility (COE)
Your first priority will be to order your Certificate of Eligibility (COE) at the eBenefits portal. A VA certificate of eligibility will state you are eligible for VA financing and also your specific entitlement amount if you aren't a first time user.
3. Understand Your Credit
A precise understanding of your credit doesn't stop at your three credit scores. The VA does not have an official credit score requirement, however all lenders do have minimums of 620-660 depending on the depth of your credit and derogatory items. If you have any concerns at all about your credit profile or score you can get one annual free credit report. It's also important to note that your credit score 680+ to 700+ to 730+ all have basis point hits to the lender premium within regards to your interest rate. Lower credit scores mean slightly inflated interest rate sometimes as much as a .25 - .375% difference.
There are lenders that will assist you create a non traditional credit report for those that have ZERO credit. Zero credit doesn't mean no traditional tradelines and three collections. A non traditional credit report will automatically equate to a 620 score as far as interest rate pricing and other guidelines.
4. Employment Stability
Veterans often times have gaps in employment especially between active deployment and seeking civilian employment. We had one military client who has been on a waiting list throughout North County San Diego for the police department for over a year and a half. Even though employment should be full time for a minimum of two years, exceptions can be made based on the entire borrower profile. Higher credit scores, and some savings or retirement can help offset a soft landing into full time employment.
5. Debt To Income Ratios
Traditional financing has two debt to income ratios a front-end and back-end DTI. The front-end is mortgage related only PITI principal, interest, taxes, insurance, and homeowner's insurance). The back-end ratio includes all consumer debt car notes, student loans, credit cards, any child support, or alimony, AND your housing. VA underwriting concentrates on only one ratio your back-end ratio.
6. VA Residual Income Guideline
One unique characteristic to VA underwriting that you won't find in any other loan qualification criteria is called Residual Income, or discretionary income. This due diligence goes hand in hand with debt to income ratios as it also calculates living expenses against qualification based on family size and geographical area. Even though most VA purchase money loans are zero down, historically the VA loan default rate is rather low in comparison to all others. A non-purchasing spouse could have documented income included to offset residual income such as child care, food, health care, clothing, and gas.
7. Future Occupancy
The VA loan program is intended for primary residences and owner occupancy within sixty days of close of escrow. Often times the spouse will fullfill the requirement for active duty members.
8. Preparing For Cash To Close
Even though most VA borrowers put no money down there is expected cash out of pocket. A seller is going to want at least one to two percent earnest money when you make the offer, a home inspection fee, well, septic, or termite inspection if applicable, and the lender may require you to pay for the appraisal and credit report upfront. It's important to get pre-approved in advance of househunting and ask your lender for a "closing cost worksheet" to help you visualize cash to close, or partial credit back of EMD. If structured correctly, there is a way to get some of your earnest money back at closing. See item nine Closing Costs.
9. Closing Costs
Your purchase contract can be structured in a way to ask the seller to pay up to 4% of the purchase price in seller concessions, which is the VA maximum. This can be challenging in a multiple offer situation while asking the seller for concessions. See our article on multiple offer situations and an Escalation Clause. In higher cost states 4% is more than enough to cover everything, which also includes a one year home insurance binder paid in full, escrow account for taxes and insurance, and sometimes two months of HOA dues if buying in a PUD.
There are costs that the VA does not allow the buyer to pay for. VA buyers may ask the sellers to pay for these costs, but the concessions may not exceed 4% of the loan.
Allowable Closings Costs for the VA Buyer
The purpose of the VA Funding Fee is similiar to the FHA upfront mortgage insurance premium. It is required on every loan and then reserved by the VA to help cover losses on any loans that go into default. The VA funding fee is a percentage of the loan amount and is calculated based on the type of military service, type of buyer (first-time or subsequent loan user), and downpayment amount. The funding fee for second time users, borrowers who do not make a down payment, National Guard, and Reserve Veterans, is slightly higher. Exceptions: If a veteran is receiving or is entitled to VA compensation for a service-connected disability, or the buyer is a surviving spouse of a veteran who died in service or from a service-connected disability, they are exempt from the funding fee. Here is the funding fee table.
The lender may charge an origination fee of 1% of the loan. This covers any costs involved with originating and processing the mortgage. This fee can cover non-allowable closing costs that the VA won't allow a borrower to pay. These can include doc prep fees, escrow fees, underwriting fees, broker admin fees, and courier fees.
The termite inspection report can be paid by the borrower in nine states: Alabama, Arkansas, Arizona, California, Florida, Louisiana, Mississippi, Oklahoma, and Texas. Other closing costs associated with obtaining a mortgage and closing that a veteran can pay for are VA Appraisal Fee, Credit Report, Recording Fees, Prorated Tax and Insurance, and Title Insurance.
10. Be Careful of Lender Paid Closing Cost Options
Structuring a loan with 100% lender paid closing costs means that the lender is inflating the interest rate to pay for the closing costs. If you are considering structuring your loan in this manner make sure you get both options on a closing cost worksheet and ask for an APR calculation. The APR is the only way to truly compare these two types of loans.
There are no minimum reserves (savings required after closing) for a VA loan. However if you are considering a multi-family 2-4 unit purchase then there will be reserves required by the investor.
12. Loan Limits
There are no limits on the amount the VA buyer can finance, but there are limits on the amount of liability the VA can assume, which affects the amount of money a lender will loan. In addition, the loan limits vary by county throughout the nation. Because there is no maximum loan limit, a fixed rate VA loan could be a better option for a luxury home purchase as long as you have the extra cash down. Jumbo mortgage options typically are adjustable rate mortgages and have higher loan qualification guidelines.
VA entitlement involves the VA pledge amount in the event of a borrower default. Under some circumstances a veteran could have more than one VA loan out at one time which is second tier entitlement. There are instances where a Veteran is relocated and they may want to lease out their current residence and purchase elsewhere. Here is a full explanation for second tier entitlement.
Tony Mariotti REALTOR® in Los Angeles writes, "VA calls condominium projects and Planned Unit Developments (PUDs) Common Interest Communities. A common interest community is basically a subdivision that shares land and common areas (like a parking lots and recreation facilities)." We've often found that VA pre-approved buyers who's qualification amount falls within townhome or condo real estate is uninformed that it doesn't mean ANY condo or townhome. The complex or building must be VA approved and a buyer and their real estate agent cannot depend on MLS remarks accepting this form of financing. To verify whether or not a condo project has VA approval you'll search on their Veterans Information Portal. You are searching for one of two options:
- Accepted Without Conditions – borrowers can take out a VA loan on any unit in the project
- HUD Accepted – this means HUD approves the project and it’s very likely that VA has approved them, but it’s a good idea to make a quick follow up call to regional VA office to verify
Need More Information as a VA buyer in San Diego?
In conclusion these fourteen due diligence items will help you successfully purchase using your Veterans Benefit, minimizing cash out of pocket, and avoiding costly mistakes. If you’re having thoughts of buying or selling in San Diego, please do not hesitate to contact Aumann Bender & Associates with any questions or to begin your VA househunting. We look forward to hearing from you and welcome the opportunity to help you find the home that best suits the needs of you and your family.
Joy Bender is the co-founder/owner of Aumann Bender & Associates, La Jolla real estate agents. She has a passion for digital marketing and helping clients discover San Diego's lifestyle. Joy Bender specializes in La Jolla Condos, San Diego beach homes, San Diego oceanfront real estate, and San Diego ocean view houses in La Jolla, Coronado, Del Mar, Solana Beach, Encinitas, Rancho Santa Fe, and beyond.