Buying a home is a huge step in a person or couple’s life. This process can be extremely stressful and confusing yet exciting and hopeful. Learning all the terms can be overwhelming for first-time buyers, especially with the added complication of using a VA loan. This article aims to outline the basics of VA loan benefits and some tips on how to use it but it’s always best to speak to a Sacramento home loan broker as it pertains to your situation.
WHAT IS A VA LOAN?
The VA Loan program provides flexible loans with government backing a significant benefits that can make it easier for veterans to buy a home who would otherwise struggle to do so. There are many benefits to VA loans, such as:
- No down payment – Service members and their families may have a hard time building credit and accumulating sufficient sums of money for a large down payment. With a VA loan, it may be possible to avoid a down payment completely.
- No private mortgage insurance – A Sacramento home loan broker typically requires borrowers to have and pay for private mortgage insurance (PMI) unless they’re able to complete a 20% down payment. When making such a large purchase, 20% can be very difficult to put down. Private mortgage insurance protects the lender if a borrower defaults on his or her loan. VA loans don’t require private mortgage insurance as the loans are backed by the federal government. This means that the government takes on the risk on behalf of the borrower that the PMI usually covers.
- Lower interest rates – Lenders base loan interest rates on on the risk the bank takes on to finance the loan. Since the VA backs each loan, the banks can offer lower interest rates than they usually would.
- Basic Allowance for Housing – Qualified active military members can count their Basic Allowance for Housing as effective income, meaning it can be used to cover mortgage payments.
- No pre-payment penalty – Many financial institutions fine a borrower for paying off their loan early as punishment for avoiding additional interest. The VA loan does not institute a pre-payment penalty, allowing borrowers to pay back or refinance their mortgage as they wish.
VA LOAN TIPS
Below are a few tips regarding applying for and using a VA loan:
- Applying without a COE – It’s possible to start the VA loan process without having a VA Certificate of Eligibility (COE). Often, a Sacramento home loan broker will begin the loan process and will provide the COE later.
- Be sure your credit report is accurate – A borrower’s credit is a very important aspect when determining loan approval as well as the specific rates and terms, even for VA loans. It’s important to get a copy of your credit report and examine it closely for any errors, which may include late payments or accounts that don’t belong to you. About 25% of credit reports have errors that can affect home loan approval. It’s important to note that the credit score on a consumer report is different from the score lenders will use. Lenders use special formulas specific for mortgage loans, often churning out a number that differs from your report score.
- Lifetime benefit – Once you qualify for the VA home loan benefit, it’s yours for life. You can reuse it multiple times and even have multiple VA loans at the same time.
- Preapproval is helpful but not a guarantee – VA loan prequalification and preapproval helps a lender understand how much a borrower can afford and how much they are likely to be offered. Preapproval signals to sellers that you’re a viable lead and likely to complete the process.
- Stick to your budget – The preapproval amount should be considered your maximum limit, not just a casual suggestion. Just because you’ve been approved for an amount, that doesn’t mean you should necessarily buy a house for that amount – it is the maximum you can reasonably afford. Buying a house at your maximum may make your life uncomfortable. Remember there are many other expenses that come with buying a new home.
- Find a VA-savvy agent – Working with real estate company and a Sacramento home loan broker that is more familiar with VA loans is a very good idea, especially if you aren’t feeling too confident. Working with someone who understand how the program work can make the process a lot smoother and less expensive.
- California is a community property state – This means that a Sacramento home loan broker can check the credit of the spouse of the individual applying for a mortgage, even if that spouse won’t be responsible for any payments. Lenders may not require that spouse to meet the minimum credit requirement, but they are likely to consider that spouse’s debt when calculating debt-to-income and residual income. The non-purchasing spouse may help things by providing information about their income.
- VA appraisal process – For VA loans, the home needs to meet all property requirements or have work done to meet them before the loan can close. This work cannot be done by the borrower. This appraisal process makes buying a fixer-upper or unique property more challenging. Working with a real estate agent who understands this process can help you avoid problematic properties.
- Residual income – This financial aspect is uniquely important to VA loans and is one reason why this loan program has the lowest rates of foreclosure. Residual income is the amount the borrower has left over each month after the mortgage payment and other major expenses. The required residual income varies depending on family size and region.
- Home inspection – It is extremely important to get a home inspection so you actually understand the state of the home you are attempting to purchase. This step should absolutely never be skipped.
- Occupancy requirements – The VA program requires that the borrower move into the property within 60 days of closing. This can be fulfilled by a spouse, which is helpful for military personnel that are active duty.
Purchasing a new home is a very important decision that has a lasting effect on you and your family. This list is in no way comprehensive – buying a home and using the VA loan program are both complicated endeavors. Be sure to speak to a Sacramento home loan broker who understands the VA loan program and can help guide you through the process.
CALL A SACRAMENTO HOME LOAN BROKER FOR VA LOAN INFORMATION AND FINANCIAL ADVICE
Whether you’re buying your first home, refinancing or buying another home, having an experienced team of mortgage brokers is the best decision you can make. Give us a call at (916) 729-2000 to speak to a Sacramento home loan broker