House Hunting Tips for Veterans
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Homebuyers who are active-duty military service members, veterans and eligible surviving spouses have access to the Veterans Affairs home loan program, which is backed by the federal government. VA loans allow these groups to borrow at competitive interest rates without a down payment or private mortgage insurance. The program is designed to make it easier for service members and veterans to purchase homes, but it comes with a set of rules and regulations.
This article will walk you through the challenges of house hunting if you are planning to use a VA loan and provide tips for finding an eligible home that works for you.
The challenges of house hunting with a VA loan
House hunting for those who plan to use a VA mortgage to finance their next home isn’t really that different from house hunting with a conventional loan. The program gives participants a lot of flexibility to find a home they love and a price range that fits their budget. However, there are a few potential challenges to be aware of.
Challenge 1: Minimum property requirements
All homes purchased through the VA home loan program must meet the minimum property requirements (MPRs), which are designed to ensure that they are “safe, structurally sound and sanitary.” These guidelines resemble the same standards set by the Federal Housing Administration for FHA loans or most private lenders. Homes are required to have basics like hot water, electricity and sewage systems to meet government safety standards.
A VA-certified appraiser must approve the house and property. Most of the rules are straightforward. “If the house has mold, that is a health issue, or if there is a broken window and someone can cut themselves, that is a safety issue,” said George C. Jalil, a VA-certified appraiser and chairman of the board of the Miami Association of Realtors.
The VA can be a stickler for the rules. “The VA does seem to be a little more picky on property conditions, a few more things that need to be done before closing than a traditional loan,” said Paul Brown, director of product management at USAA, which funded more than 38,000 VA loans in 2017. One specific example he gave was termite management. Even if no termites are present, the VA may require certain measures to lower the risk of future infestation, like removing wood piles or using specific deck materials.
The VA process allows for time to repair or modify issues so that a home meets the MPRs. If necessary, an appraiser will revisit the home for a final inspection before closing to certify that changes are complete and standards are now met.
Tip: Take advantage of special programs
Stringent VA appraisals can make it difficult for veterans who want to buy a fixer-upper or buy in competitive markets where sales prices may outpace values. But there are several workarounds:
- Take out a renovation loan at the same time as a purchase loan. The VA has a program which guarantees an additional loan to cover repairs and alterations on a new home purchase. The program is designed to help vendors buy and renovate homes that need work. The money from the additional loan is remitted directly to contractors or builders for their services.
- The VA has a specific program that helps finance energy efficiency improvements to a home as well as a program that provides grants to make modifications for a service-related disability. So, if you find a home but it needs some work and falls into these categories, don’t rule it out. The VA can help with funding.
- The VA has a special system — called the Tidewater Initiative — for dealing with appraisals that appear likely to come in lower than the sales price. The appraiser must notify the lender or real estate agent before submitting the final report, giving them 48 hours to provide additional information to support the final valuation.
Jalil believes Tidewater, in particular, provides an “edge” for VA house hunters when a seller is weighing multiple offers because it adds extra flexibility during the appraisal process. This, he said, is “the most impactful house hunting advice” he would give to anyone using a VA loan. “They say, ‘Oh the VA is tougher.’ It’s actually not. When a veteran wants some kind of an exception, they actually bend over backwards,” he said.
Challenge 2: Condos
VA borrowers can only buy condominiums from VA-approved developments. The VA has a list of specific criteria it considers in this process, which includes the number of units that are already sold, the completion of common areas and the terms of the homeowners association. A searchable list of approved condos is available here. If you want to buy a condo that’s not on the approved list, it’s worth asking if the condo board is willing to submit the paperwork to the VA to seek approval.
Tip: Work with a knowledgeable real estate agent
When it comes to VA loans, not all real estate agents are created equal. You are best off with an agent who has extensive experience working with service members and veterans. Brown recommends that after finding three or four agents through personal referrals or online searches, meet with each before making a final selection. An agent should work hard on your behalf, doing research and negotiating terms. You can also ask them how many VA loan purchases they have done before. “If you aren’t satisfied with your agent you can always change,” Brown said.
Challenge 3: Manufactured homes
You can use a VA loan to buy a manufactured home, but it must meet specific requirements. For example, a manufactured home that is classified as real property, attached to a permanent foundation and complies with local regulations is eligible. If you are interested in buying a mobile home, consult a lender or real estate agent with extensive experience via the VA program first. They can help walk you through the latest guidelines.
Tip: The VA can be flexible
Despite some of the myths around VA loans, the VA wants to help eligible service members and veterans become homeowners, so they can do more to accommodate your circumstances. Brown gave an example of a veteran who was rejected by a conventional lender because loan officers didn’t understand how his military experience as a tank commander fit with his new job as a process engineer. The VA and USAA saw the common skills used in both professions, ruled his employment history acceptable and got him a loan for a new house.
Challenge 4: Funding fees may rise
Most borrowers using a VA loan have to pay what is known as a VA funding fee. It’s a set percentage of the overall loan and varies depending on your military status, down payment and type of loan. A full table is available here. A new piece of legislation, already passed by the U.S. House of Representatives and awaiting Senate passage, would raise some of these fees in 2019 in order to fund disability benefits for Vietnam veterans exposed to Agent Orange.
Tip: Shop for and compare lenders
When factoring in a funding fee, it’s possible that a U.S. Department of Agriculture loan or FHA loan may make more sense. The USDA also offers 0% down payment while FHA loans allow for down payments as low as 3.5%. Borrowers who can afford to put down even more, at least 5%, may want to compare the costs of private mortgage insurance of a conventional loan versus the VA’s funding fee.
No matter which you choose, VA, FHA or conventional loan, a lender who has done many previous VA loans will be more familiar with the ins and outs of the process, Jalili said, and may help you see how non-VA loans stack up to VA ones.
Challenge 5: Lender limits
The VA doesn’t impose limits on borrowing for a home loan, but many lenders may require a down payment on the amount above the loan limits set by the Federal Housing Finance Agency. You may look up your county’s loan limits here. With these limits in place, you may be required to pay more upfront.
Tip: Know your budget
Just because you qualify to borrow up to a certain level, doesn’t mean you should spend that much. The VA has pretty liberal guidelines for debt-to-income ratios, said Brown, but if you exceed upper borrowing limits, lenders will usually require a down payment. Figure out how much debt actually makes sense for your financial planning. “Take a hard look at your budget and look at your cash flow and take into account surprises,” Brown said.
The bottom line
For the most part, borrowers using a VA mortgage experience the same house hunting process as everyone else — with perhaps a little more paperwork. For example, you’ll need a Certificate of Eligibility. Having this in hand before you start the process will speed things along. When it comes to the quirks, like termite inspections or condo restrictions, find a real estate agent and lender with VA experience to help guide you through.