Are you considering the American Dream? Here’s a house-hunter’s guide to the misunderstood VA loan.
by JJ Montanaro, USAA
The decision to buy isn’t my focus this month (we’re leaving that to Ellie Kay on page 60). But I’d have to take off (and stomp on!) my financial planner hat if I didn’t remind you that buying a home is an enormous decision. If you aren’t prepared to be an owner for the long haul and don’t have all your financial ducks (stash of cash for the home, emergency fund, great credit score, a working budget, etc.) in a row, you’re better off waiting.
If you are looking to buy, an important part of the process is securing the right mortgage. With that in mind, let’s review an oft-misunderstood benefit of military service: a Department of Veterans Affairs Guaranteed Home Loan or “VA loan.” You may have heard some of these misconceptions…
Myth #1 I’m borrowing from the VA. NO. VA-guaranteed loans are made by banks and other private lenders. The VA certifies that you’re eligible and guarantees the lender a portion of the loan amount in the event you default. That’s why you can get a loan without a down payment or private mortgage insurance (PMI).
Myth #2 I don’t need any cash to move in with a VA loan. NOT EXACTLY. No down payment is required, but there will still be normal closing costs (title search, hazard insurance, prepaid taxes, etc.) as well as a VA-mandated funding fee ranging from 0.5 to 2.8 percent of the loan (for those not eligible for VA disability compensation).
That fee is determined by your military status and how many times you’ve used the loan. The fees may be rolled into the loan, if the appraisal supports the additional loan amount. And don’t forget your moving costs: things like new curtains, appliances and other items that make a new house a home. Try to start a moving fund well in advance of the big day.
Myth #3 I don’t have to qualify for the loan. DEFINITELY NO. Your service makes you eligible for a VA loan, but it doesn’t guarantee you’ll get one. Your income and credit history determine whether or not you’ll get the loan and at what interest rate.
Myth #4 It takes much longer to close with a VA loan. NOPE. That may have been the case decades ago. But today with the VA’s automated system, your lender can get an electronic “certificate of eligibility” from the VA and close a VA loan in just a few weeks – not much different from a conventional loan.
Myth #5 I’ll get a higher interest rate with a VA loan. NO. The VA doesn’t set interest rates. The lender does, and the rates are competitive with any other type of loan. Your credit score and overall financial picture will determine the rate you’re offered. So don’t forget to shop around for the best rate, even with a VA loan.
Myth #6 If I make too much money, I can’t qualify for one.
NO. Unlike a lot of tax-related benefits (IRA deductibility, Earned Income Tax Credit, etc.) you can’t make too much to use a VA loan.
Myth #7 I won’t be able to buy a higher-priced home with a VA loan. NOT REALLY. The VA guarantees 25 percent of the loan amount up to loans of $417,000 in most parts of the country. In certain more expensive areas, this ceiling is increased.
Visit va.gov for more details. And remember: VA loan or not, the smartest move you can make is to be sure buying is appropriate given your own personal circumstances.
The last few years have driven home the fact that real estate is a long-term proposition and there are no guarantees.
