Buying a house should not be taken lightly. This is one of the most expensive purchase that you will make in a lifetime. This is why most buyers are forced to borrow a loan to help finance it. For members of the military, they have the extra benefit of getting a VA loan.
A VA loan is a home loan provided by the US Department of Veteran Affairs. It is exclusive to American veterans or surviving spouses of veterans. Before you take that first step to borrowing this loan, here are 20 important tips that you need to know.
Tip 1: Check your credit report.
With any loan, it is always wise to look at your credit report. This will play an important role – specifically in determining your interest rate. While a VA loan offers a low-interest rate, this will depend on your credit situation. You can get a free copy of this report through the Annual Credit Report website. Check for errors – sometimes, these can bring your score down. The lender usually takes a look at any home-related payments (e.g. past mortgage or rental payments). Usually, Veterans United only allow one 30-day late payment in the past 12 months before the VA loan application. If you live in a community property state, the credit report of your spouse will also be considered. If they do not use credit, that can affect your VA loan application.
Tip 2: Be careful of hard inquiries while shopping for a loan.
Comparing costs is always okay. However, you have to be careful not to trigger any “hard inquiry” on your credit report. This will cause your credit score to go down a couple of points. Credit bureaus usually treat multiple inquiries from the same type of lending company (e.g. mortgage lender) as one pull – as long as it is done within one month. Try to time your inquiries within the same month to avoid having a problem with “hard inquiries.”
Tip 3: Get a preapproval – but do not assume it will guarantee approval.
A preapproval will give you an idea about how much you can borrow and if you can qualify at all. However, it is not a guarantee that you will be approved the same conditions in your actual VA loan. Not only that, this preapproval will let sellers know that you are serious about buying and they will pay more attention to your offer than other inquiries.
Tip 4: Have your Certificate of Eligibility ready.
When you gather this certificate in advance, your loan application process will be faster. VA loans are only available to veterans and surviving spouses so this certificate will play an important role in your approval. It is best to get this document ready during the preapproval phase.
Tip 5: Condition your DTI Ratio.
The debt-to-income ratio is an important consideration for lenders. The VA prefers a 41% DTI – or less. Take note that the calculations of the lender will include the anticipated mortgage payments. To make your ratio lower, you either have to get a lower loan amount or increase your income.
Tip 6: Know your budget – and stick to it!
Most of the time, your preapproval is the ceiling by which you can borrow. But that does not mean you should follow it! You have to stick to your budget and try not to stretch your budget too tightly. If you only need 3-bedroom home that costs $200,000 but your preapproval states that you can buy a $250,000 home, do not look for a bigger house. Remember that a home purchase includes costs that go beyond the price of the house. Stick to what you need and know your budget limitations.
Tip 7: Be ready with a down payment.
Most VA homebuyers buy a house without a down payment. Although a VA loan makes this possible, it does not mean you should avail of this benefit. The lower the down payment, the higher the loan that you have to borrow. That would increase the monthly payments that you need to meet. It is always more beneficial to have a down payment ready. And not only that, you have to save up some extra cash because there are incidental expenses that should also be met – especially at closing.
Tip 8: Remember, you can borrow more than once…
This is not a one-time benefit. If you have enough equity in your house, you can apply for another VA loan to invest in another property. In fact, it is possible for you to have more than one VA loan at one time. After what you sacrificed for the country, this is one benefit you should not feel guilty of availing.
Tip 9: …But you cannot borrow extra money.
While a VA loan can be borrowed several times, that does not mean you can borrow extra money for renovations or similar expenses. The loan is usually for the house itself. This is why it is advised that you buy a house that is in good condition. Or, you should save up for the extra money needed to make these small upgrades and renovations. The only way you can get the extra money is when you qualify to receive an Energy Efficient Mortgage. This will allow you to get $6,000 for improvements that will make your home more energy efficient.
Tip 10: Finding a loan for new construction may be tough – but it’s possible.
If you cannot find your dream house but you found a perfect location to build your house on, you need a construction loan. While this is possible under the VA program, it is not always easy to find a lender for it. They are usually hesitant because of the high risk involved in building a house. What you can do is to get a short-term construction loan from another bank or the builder themselves. Then, you can refinance it into the VA program. This is known as the construction-to-permanent refinance.
Tip 11: VA loans consider your residual income.
When approving your home loan, the lender will take into consideration your residual income – or disposable income. The lender will make sure you have enough money left over after the mortgage payment. This decreases that chances of a financial emergency compromising your monthly payments. Usually, VA follows a benchmark that will depend on the state you live in and your family size.
Tip 12: Look for an agent that knows the ins and outs of VA loans
Buying a house is easier with a real estate agent – but not all of them understand VA loans thoroughly. This is why you need to look for an agent that understands the requirements that the VA usually have. This will make the home buying process easier on your part. Their experience can also be a source of tips to help make the process faster and cheaper. For instance, they would steer you away from properties that will not pass the VA home appraisal.
Tip 13: Think about the home appraisal.
This is an important part of the buying process. The VA loan will depend on the outcome of this home appraisal. VA appraisers look at various property requirements to ensure that the house is ready for occupancy. In case they notice damages or repairs, this should be attended to before the loan is finalized. Once the appraisal finalizes the value of the home, that is the only time the loan amount will be provided. This is why homes that are sold at a higher amount that their value should be negotiated with the seller. In case the home is priced higher than its value, you should consider setting up a separate home inspection. This will help you negotiate the price with the seller (e.g. if there are damages that need to be fixed, etc.)
Tip 14: Be prepared to prove income stability.
Lenders will take a good look at your employment history to determine any unemployment gaps. They want to see if you have held your job for the last two years. That could raise your chances of getting a loan. In case you are self-employed, you simply have to provide two years worth of tax returns to document your income to the VA lender. They basically want to establish that your source of income is secure and stable.
Tip 15: Hold of changes for now.
In relation to the last tip, any plans to switch to a new career or a job should be put on hold for now. Even major purchases should be reconsidered. This could affect your debt-to-income ratio and income stability. You only have to postpone these changes until after your home is already turned over to you.
Tip 16: Set up contract contingencies that protect you.
A contract is usually between the buyer and the seller. Work with the real estate agent to set up contingencies that will protect your interests. For instance, you should be allowed to walk away from the transaction in case the home inspection or appraisal found a lot of problems in the property.
Tip 17: Understand the occupancy requirements.
The VA occupancy requirement is quite simple – you need to live in the house within 60 days after closing. However, military personnel usually have a hard time meeting this because of deployment issues. Make sure you and your spouse talk about this thoroughly to avoid having problems in the future.
Tip 18: You can make the seller pay for all the closing costs…
The closing costs can be expensive. But fortunately, it is possible for you to make the seller pay for it. There is a cap though – 4% of the loan amount. You should discuss this with the seller because they may just agree to it.
Tip 19: …But you will still need that extra cash while closing.
Even if you are able to convince the seller to shoulder all the costing costs, do not think you are off the hook. There are still expenses that you need to pay for. Also, the loan may be offered with “no closing cost” but you can bet the lender will transfer the cost to your loan fees or interest rate.
Tip 20: Make sure a foreclosure or short sale is in good condition.
Although buying a foreclosed or short sale property is allowed, you need to make sure it is in good condition. The VA home appraisal is very strict. These properties may be cheaper but the process to get a good home that can pass the scrutiny of the VA home appraiser is more challenging.