What is The VA Loan?
One of the greatest benefits offered to military veterans is the VA loan. Unfortunately, it is also one of the most misunderstood. I wrote this detailed article in order to educate veterans on how this benefit works, what homes qualify for purchase, and why you should take advantage of it!
For example, I was talked out of using the VA loan by a lender. This supposed VA loan specialist cost me $10,000 to date, and that number is growing every month!
Full story later in the article!
Before we begin, I want to know—have you ever used the VA loan? Comment down below, yes if you have, and no if you haven’t…this will help me create better content for you!
About the VA loan – History
The VA loan was created in 1944 as part of the Servicemen’s Readjustment Act (better known as the GI Bill of Rights). The intent was to level the playing field for service members who had been away at war while their civilian counterparts were settling down and purchasing homes.
There are several ways to utilize the VA loan for military real estate investing!
Eligibility requirements for the VA loan are straightforward, but yet often misunderstood.
You may be eligible for a VA home loan if you meet one or more of the following conditions:
- You have served 90 consecutive days of active service during wartime,
- Or you have served 181 days of active service during peacetime,
- Have you racked up more than six years of service in the National Guard or Reserves, or 90 days on active duty during wartime?
- Or if you’re the un-remarried spouse of a service member who died either in the line of duty or as a result of a service-related disability.
- You are also eligible if you’re the spouse of a service-member that is in a missing-in-action or a prisoner-of-war status.
Now, obviously, there are stipulations such as needing to have received a “general” discharge or better.
If you received a bad conduct discharge or other-than-honorable discharge, it can be reviewed—but this process may take months…so don’t get in trouble!
Certificate of Eligibility
The first step in getting a VA home loan is to apply for a Certificate of Eligibility (COE). This confirms for your lender that you qualify for the VA home loan benefit.
For veterans, this will require a copy of your discharge or separation papers (DD214).
For active-duty service members, this will require a statement of service signed by your commander (or by direction), your name, Social Security Number, date of birth, pay entry base date, duration of any lost time, the name of your command, two stool samples, and a rare flower that grows in the Himalayan mountains…
…okay, maybe not the last few things, but you get the idea.
For current or former members of the National Guard or Reserves, you will need the above paperwork, plus a bunch of extra crap I don’t understand because I’ve never been in the Reserves!
Luckily, we active-duty military types are used to exorbitant amounts of paperwork.
*Hack* Ask your lender if they can get your certificate of eligibility for you. If they say “no,” they are either not a VA lender or not a good one!
If you wish to get your Certificate of Eligibility beforehand, you can do so online through the eBenefits portal.
Who can receive financing?
There are three ways that financing can be obtained:
- A veteran may obtain financing on his or her own.
- A veteran and his or her spouse can obtain financing jointly. This is a useful strategy if the non-veteran has a better credit history, which is commonly the case.
- Two or more veterans can obtain financing jointly!
What is really crazy about this last opportunity is that you can actually purchase more than four units if done correctly.
VA Pamphlet 26-7, Revised, states that “If a property is to be owned by two or more eligible veterans, it may consist of four family units and one business unit, plus one additional unit for each veteran participating in the ownership.”
Thus, two veterans may purchase or construct residential property consisting of up to six family units (the basic four units plus one unit for each of the two veterans), and one business unit!
What a crazy opportunity to house hack, a strategy we will talk more about in the following videos!
The VA loan does not have any requirement for a minimum credit score.
Yes, you heard me correctly—the VA loan program does not care what your credit score is!
Unfortunately, you can’t get money straight from the VA. As a result, most private lenders will have their own minimum credit score requirements.
The minimum required credit score is usually around 580-620.
As with any lending opportunities, the better your credit score is, the better your rates and terms generally will be.
Low credit doesn’t necessarily prevent you from getting a VA loan, but a higher score will mean better opportunities and terms.
The VA home loan is a primary residence mortgage. That means it is designed to provide service-members and veterans a place to live and to call their own.
Sorry guys, the VA loan was not intended to be used for investment properties…But that hasn’t stopped us from doing it!
I’m not advocating that you do anything illegal, but you need to understand the intent and use it to your advantage!
You must intend to occupy the property as your primary residence for a reasonable amount of time, generally assumed to be one year.
This means that after one year and one day you are cleared to move out of the property and rent it if you would like.
You may be asking, “But what if I get orders?”
Don’t worry, the VA home loan is a benefit, and it isn’t out to get you!
If you get permanent change of station (PCS) orders to move, you may do so without penalty.
If you bought the house after receiving orders to a new duty station, and then those orders got changed last minute…you’re safe!
You’re even covered if you utilize the VA renovation loan, and it takes a lot longer than planned so you had to move your family into another place.
Now, I’m not advocating for you to try and play the gray-area-game with this loan product.
The last thing anybody needs is for veterans to abuse the system and have this wonderful benefit go away or get stricter.
Qualifying for the VA home loan is simple.
Serve your country honorably for the minimum time required, maintain a moderate credit score, and intend to live in the property for at least a year after purchase.
How much house can you buy?
Everybody wants to know how much house they can buy without a down payment, and you will find out right after this
Do me a favor and tell me in the comments what you believe the VA loan limit is!
Awesome, thank you…You’re all wrong!
Or you could all be right.
The answer is, it depends on where you live.
VA Loan Limits
The VA loan limits vary based on where you live and what the market is like there.
In 2019, the VA loan limit increased to $484,350 from $453,100.
There are 199 exceptions, however, where the market is more expensive, and the limit has been increased.
These counties cap out at a $726,525 purchase price. Some of these locations are Hawaii, Anchorage, Los Angeles, San Francisco, and New York City.
You may be thinking; “Must be nice, wish my VA loan could buy a $700,000 house.”
Remember, in many of these markets the average home price is well above the limit.
Take Oahu for example. The median home price there is currently $782,500…$55,975 MORE than the VA limit.
Luckily, you’re allowed to purchase properties over the VA limit, but you must pay 25% of the difference as the down payment at closing.
Keep in mind, a $780,000 home in Hawaii isn’t (usually) very fancy.
*Side note* on January 1st, 2020 the VA loan limits ceased to exist on first time use of the loan. On subsequent uses the old limits will apply, and banks may still put their own cap on the VA loan for first time users. Here is a video I did about these changes if you would like to watch…video about the changes!
VA Loan Closing Costs
VA homebuyers can expect to pay various closing costs, such as appraisals, title insurance, credit reports, survey fees, or recording fees.
These costs can range from a couple of hundred dollars to over $3,500 dollars in more expensive markets.
The VA prohibits veterans from paying some common closing costs.
Some of these fees include escrow, document preparation, and underwriting. This helps lower, but not completely mitigate, closing costs.
Lenders are allowed to charge an origination fee, typically 1% of the loan amount.
The nice thing about the VA loan is that closing costs can still be paid entirely by the seller, just like normal real estate transactions.
Also, the VA allows the seller to pay the extra fees. This is known as a seller concession.
The seller can only contribute up to 4% of the home sale price or what the home appraised for (whichever is lower).
The lender can actually step in to pay for these costs through a lender credit, but this usually means a slightly higher interest rate on your loan…make sure you do a cost/benefit analysis on this!
The dreaded funding fees
This funding fee is one of the few downsides to purchasing with the VA loan.
Luckily, it is minuscule.
The funding fee is 2.15% of the purchase price for first-time homebuyers and 3.3% for any subsequent VA loans.
On a $200,000 property, this fee is only $5,020!
When added to the loan, this equates to roughly $25.10/month added to your payment.
I’m okay paying an extra $12.55/month for every $100,000 I spend on a house if it means I avoid having to pay a 20% down payment!
Also, the dreaded funding fee is waived for any service member with a 10% disability rating!
Ironically, this means an active-duty service member who is missing a limb will pay a funding fee because they haven’t received a disability rating yet. I found a flaw in the system!
Also, the 20200101 update for the VA loan states that active duty service members with a Purple Heart will pay 0% funding fee too!
VA Loan Calculator
Take advantage of free VA loan calculators in order to see what your mortgage payment will look like. Most of these will show how much your funding fee will be, too.
There are many VA loan calculators out there, but Veterans United has a simple one!
Private Mortgage Insurance
Private mortgage insurance (PMI) is required on loans with less than 20% equity in the home. Therefore, anyone who pays 3.5% down using an FHA loan or any amount totaling less than 20% equity in the property is required to pay PMI.
PMI typically costs between 0.5% to 1% of the entire loan amount, annually. This means that on a $100,000 mortgage you could be stuck paying $1000/year ($83.33/month)!
There is no PMI on a VA loan!
That is correct, there is no PMI on a VA loan.
Now you know why the VA loan often has a lower monthly payment, even though you didn’t put a penny down on the property!
VA Purchase Process and Requirements
So far, we have discussed the history of the VA loan, determined your eligibility, and learned about loan limits.
Today we are going to walk you through the VA purchase and some of the requirements your housing needs to meet.
A common belief is that the VA loan isn’t worth using for investors because the inspection requires a home to be perfect!
What can a VA loan be used for?
- Buy a home, including townhouse, or condominium unit in VA-approved project
- Build a home
- Buy a manufactured home or modular home
- Buy a multi-unit property, up to four units
- Simultaneously purchase and improve a home with energy-efficient upgrades
- Refinance an existing home loan up to 100 percent of the home’s value
- The VA renovation loan allows you to wrap renovation costs into the home purchase mortgage
VA Requirements for Homes
The Department of Veteran Affairs has a list of Minimum Property Requirements (MPRs) that a home must meet in order to qualify for a VA loan.
These requirements are in place to ensure veterans and military families own safe, sanitary residences.
Inspectors are looking for major issues to ensure the house meets safety, sanitation, and structural integrity requirements.
This includes heat and/or air-conditioning (where necessary), electricity, kitchen function, plumbing, etc.
Some other requirements are:
-The home must provide enough space to live, cook, and sleep.
-Properties need clean drinking water, a water heater, and working sewage systems.
-The roof must be in good condition and meet the “reasonable future utility” requirement, which is generally a minimum amount of time it should have left before needing to be replaced.
-Attics and crawl spaces require adequate ventilation to prevent mold.
-Properties must be accessible from the street via an all-weather driveway.
-You can’t buy a termite-mound, or carpenter beehive, to live in (sorry).
These guidelines allow you to understand what the home inspector is looking for.
Ultimately, the home needs to be inhabitable and safe for your family to own. These rules are in place to protect service members and military families!
Condominiums and Condominium Property Regimes (CPRs), must be VA approved in order to qualify.
There are several exceptions to the above requirements, but understand that you may need to articulate these to your inspector/appraiser to ensure they are on board.
-You can purchase a property with unpermitted improvements, but that area does not count towards the value of the property, and you must sign a hold-harmless letter.
-The VA renovation loan, covered below, allows you to purchase a “fixer-upper” property.
-Leasehold estates, common in Hawaii, can be purchased as well. In order to qualify, the lease term must exceed the length of the mortgage by 14 years.
There are some additional “loopholes” (not actually loopholes, just misunderstood options) with financing, but we will cover those in a later video!
VA Loan for Renovation
This loan is like the FHA 203k loan in many ways but with the option for 100% financing!
Maximum 100% LTV/CLTV subject to VA County Loan Limits plus the VA funding fee. Loan amounts up to $1,500,000 are allowed as long as the VA guaranty or a combination of the VA guaranty plus borrower’s down payment and/or equity equal to at least 25% of the lesser of the sales price or the subject property’s reasonable value as documented in the NOV. The maximum guaranty on a VA loan is the lesser of the veteran’s available entitlement or the maximum potential guaranty amount.
*Layman’s terms* – You can loan up to $1.5 Million, but your remaining VA loan eligibility amount plus equity in the building must be at least 25% of the purchase price!
VA Renovation Loan Requirements:
-Minimum repair amount is $5,000; no maximum. Structural repairs are permitted.
- Major rehabilitation/remodeling, such as the relocation of a load‐bearing wall;
- New construction (including room additions);
- Repair of structural damage;
- Repairs requiring detailed drawings or architectural exhibits;
- House is uninhabitable at the close of escrow
Repairs must start within 30 days and be completed within six (6) months.
The list of applicable repairs is quite extensive. There is no reason to avoid looking into this loan. As with all loans, I recommend shopping around in order to get the best rates.
A lot of people don’t know there is a VA energy-efficiency mortgage (EEM) home loan option.
This program allows the homebuyer to add up to $6,000 to the loan for energy-efficient upgrades. This can be done either at purchase or refinance.
The determining factor for approval is if the amount of money saved monthly by these upgrades is greater than the amount of money it will add to your mortgage payment.
For example, if you pay $6,000 for these energy efficient upgrades, that is roughly $30/month added to your mortgage payment.
If the upgrades are estimated to save you $60/month on utilities, you meet the requirements for this program!
Understand this means you are taking on extra debt—so be careful—but in my opinion, it is safe since you’re saving more money than it costs you every month!
What can be financed?
The answer to this question is simple: the VA loan is designed to help service members (or veterans) and their families purchase safe, sanitary, and structurally-sound properties.
However, there are a lot of intricacies that will depend on your lender. But the Department of Veteran Affairs is not overly strict on lending criteria (which is great for us)!
For example, in Hawaii, you can even purchase in Volcano zones 1 & 2!
Tying it all together
The VA loan is an amazing benefit and must be added to your repertoire immediately. I hope you’ve enjoyed this article, and the videos as well.
Now that you understand how this benefit works, what homes qualify for purchase, and why you should take advantage of it…take action!
Benefits of the VA loan
Congratulations, you’ve made it through the VA loan qualifications, home requirements, and financing options.
Now, let’s talk about WHY you should use the VA loan!
There are a ton of benefits to the VA loan, but these are some of my favorites!
Requires no money to get started
The number one excuse for not getting started in real estate is “I don’t have enough money.”
This is actually one of the reasons I love real estate!
This excuse raises the barrier to entry for real estate investing and keeps a lot of the would-be competition away.
That being said, the VA loan eradicates this excuse soundly!
The VA loan allows for 100% financing. That means you don’t need to pay a single penny to buy a home!
While this is great for buying a primary residence, it is also great for investors.
Imagine earning a return on your investment of $0.00 Any return is an INFINITE return because you didn’t have to invest any capital!
VA house hacking!
The VA loan allows you to purchase up to four units simultaneously.
Technically, as stated above, you can buy more units if you partner with another veteran, but that is a story for another time!
This means you can buy a four-plex, move into one unit, and rent the other three to cover your mortgage payment. Theoretically, this means your tenants could pay 100% of your mortgage.
Does that mean I can buy a house without a penny out of pocket…and live for free?!??
That is the power of the VA loan!
100% refinance option
Refinancing real estate is a popular way to retrieve some extra cash for investing.
Banks will lend up to 70% or 80% of the value of the property, traditionally.
Banks can lend up to 100% of the value of your home with the VA refinance!
That is a really cool benefit if you need a little capital to invest elsewhere.
Imagine conducting a live-in BRRRR strategy and being able to pull 100% of your equity out to reinvest!
One of the biggest misconceptions with the VA loan is that you can only use it once.
This is absolutely not true! You can reuse the VA loan until you have reached the maximum dollar amount for your area.
After that, you will need to sell one of the houses, or refinance into a conventional loan in order to reuse the VA loan.
You also must meet the criteria of intending to live in the property for a year. If you don’t meet these criteria, you need to have been relocated more than 50 miles away by your job in order to use the VA loan immediately.
Safeguards to protect Service members and Veterans
Thorough inspection periods
It is no secret that the VA loan inspection and appraisal process is thorough.
Sometimes it seems a little too thorough.
The good thing is that it is unlikely you’ll have any surprise maintenance arise after purchase.
This should give you an extra level of comfort, and will ensure your family is taken care of!
The Department of Veterans Affairs will negotiate for you to avoid foreclosure
The Department of Veterans Affairs guarantees a portion of your loan.
This gives them some incentive to want to help you avoid foreclosure (they lose money).
“The Department of Veterans Affairs (VA) aims to help Veterans retain their homes or avoid foreclosure. If you are struggling to make your mortgage payments, speak with a VA loan servicer as soon as possible. Contact your nearest regional loan center to explore your options. (Source)“
This should make you feel even more comfortable…if you begin falling behind on payments, there is still hope for you!
Any lender, inspector, appraiser, contractor, energy efficient professional, etc. are required to be vetted by the VA.
This vetting process is designed to weed out the shmucks!
Now, as with any vetting process, I’m sure some people get through the cracks.
None the less, this means you have a much higher quality group of people working with you throughout your home purchase!
The VA loan can be assumed by another veteran.
This is a decent exit strategy if you find yourself unable to sell without bringing cash to closing.
You can find someone to assume the loan (take over your payments) and it is a win-win.
They get a property, and you get to walk without having to bring money to closing.
VA renovation loan
I absolutely love the VA renovation loan!
This is the single, greatest renovation loan in existence. Even the famed, 203k loan can’t touch it.
These points were mentioned above, but are worth recapping.
Lower credit requirements
The VA has no minimum requirement for credit scores.
Most banks set their own limit, but it is generally still better than average loans allow!
This one pains me to say. I am STILL paying $81/month in PMI on the duplex I purchased in 2015. That is a lot of lost cash flow just because I used the FHA loan, instead of the VA loan.
Low closing costs
The VA loan has very competitive closing costs associated with it, and they can even be wrapped into the loan!
The funding fee can be waived
The “dreaded” funding fee is waived for disabled veterans (10% disability or greater).
It can also be wrapped into the loan, and really isn’t bad considering you aren’t required to provide a down payment!
The most unfortunate downside to the VA loan is how many people don’t understand it.
You would be amazed how many professionals aren’t up to speed on the VA loan.
My horror story
In 2015 I had read a couple of real estate books and decided to take the plunge by house-hacking a duplex.
I was very excited about this move and eager to take action!
My realtor informed me that I needed to get pre-approved for a loan to be more competitive when I made offers (she was right).
Unfortunately, the lender she recommended wasn’t very familiar with the VA loan.
I scheduled an appointment with a local lender that I heard about on the radio. His advertisement said they were great at helping veterans use the VA loan!
What could go wrong?
Well, long story short, he talked me out of using the VA loan.
He said I shouldn’t “waste” my VA loan on this little duplex because reusing it was complicated.
The way he explained it I thought I could only use the loan once.
As a result of this, I opted for the FHA loan. I paid just under $4,000 in closing costs, down payment, and fees.
$4,000 isn’t too bad, but it could have been $0.00!
I have also paid $81/month in PMI since closing. That is $972 a year that could be extra cash flow!
Talk about screwing the pooch!
Now, the property still cash flows, so obviously this isn’t a true horror story…but it has been a colossal waste of money.
I would have saved $8,000 by the time of writing this if I had used the VA loan. That is not including the lower mortgage payment I would have had.
What a bummer!
Probably a $10,000 mistake, and that is in an affordable market. Imagine how much more costly this would be in an expensive city.
Use the VA loan
By now I hope you realize how wonderful the VA loan can be.
If you have any other questions please leave them in the comments and I will respond ASAP!
The VA loan is one of the greatest benefits available to veterans, and you should take full advantage of it.
As always though, I recommend that you buy as an investment, not a primary residence!
Another good article: Military Millionaire Do’s/Dont’s