Mike and Amy dive into the VA Home Loan Guarantee, a significant benefit for veterans and active military members. They discuss the eligibility criteria, application process, advantages, and costs associated with VA loans, including the funding fee. They also explore the challenges faced by service members transitioning to civilian life and the importance of demonstrating stable income. Additionally, they cover refinancing options and the unique feature of VA loans being assumable, which can enhance the attractiveness of a property in a competitive market.

Takeaways

• The VA Home Loan Benefit helps veterans and active duty service members become homeowners.
• Eligibility for VA loans is based on service history and duty status.
• VA loans offer no down payment, better interest rates, and no PMI.
• The funding fee is a one-time payment that helps lower program costs.
• Certain individuals may qualify for a waiver of the VA funding fee.
• Demonstrating stable income is crucial when transitioning to home ownership.
• There are two types of refinancing options available for VA loans.
• VA loans are assumable, making them attractive to potential buyers.
• Understanding the ins and outs of VA loans can ease the home buying process.
• It’s important to consider the timing of refinancing to avoid unnecessary fees.

Chapters

00:00 Understanding the VA Home Loan Guarantee

06:27 Eligibility and Application Process

12:21 Advantages and Costs of VA Loans

18:17 Refinancing VA Loans and Assumability

Links

Schedule a consultation with Amy

Schedule a consultation with Mike

Transcript

Mike Hunsberger (00:00)

Today we’re going to be talking about the VA Home Loan Guarantee. It’s a great benefit that I’ve definitely used several times.

Amy (00:07)

Yeah, it is a great benefit. I’ve used it myself. But there’s a few things that listeners should be aware of, especially as they approach military retirement.

Mike Hunsberger (00:48)

All right, as we both said, VA loan guarantee is a great benefit. It’s a fantastic resource for both military members while they’re serving and veterans after they’ve completed their service. So we’re going to talk about how do you apply for the benefits, what they entail, and some common misconceptions. So Amy, can you just basically describe what the VA home loan guarantee benefit is?

Amy (01:17)

Yeah, great question. So the VA Home Loan Benefit is a program offered by the Department of Veterans Affairs to help veterans, active duty service members, and some eligible surviving spouses become homeowners. So it provides a range of benefits, including probably what is the most commonly known, no down payment, a little bit better interest rates usually, and no private mortgage insurance, also called PMI, which makes things a lot cheaper.

Mike Hunsberger (01:49)

sounds like a great deal. How do you get eligibility for it?

Amy (01:54)

Yeah, so eligibility is based on your service history and your duty status. So veterans, active duty service members, National Guard, and reservists, all may be eligible. And then again, certain surviving spouses of veterans may also qualify. So Mike, if somebody qualifies, how do they integrate this into their home buying process?

Mike Hunsberger (02:18)

Yeah, so the first step is to apply with the VA. You need something called the certificate of eligibility. there’s numerous ways you can do that. You can go on the VA website, pretty easy process. They walk you through it. You can also apply via mail. Or lots of times, your lender can also help you do that as part of the process. So once you get…

that application, you get your certificate of eligibility from the VA, you go now and work with a VA lender. And they’re going to know the whole process and have specific expertise in that. But some of the things that this is now more in the regular part of home buying, they’re going to want to see your income statement.

they’re going to want to understand your proof of service and your credit history to come up with, this is how much we’re going to be able to lend you as part of having this VA guarantee. And we’ll talk more about the qualifications in a little bit. But can you talk a little bit about how much you can borrow?

Amy (03:34)

Yeah, so there used to be a specific limit to how much you could borrow using a VA loan, but it’s different now. So if you don’t have an outstanding VA loan, meaning you’ve never had a loan or you had one and it’s paid off, VA will basically reimburse the lender for 25 % of the loan amount if you default.

So basically 25 % of whatever amount of loan you take out is sort of guaranteed by the VA, which is why the rates can be a little cheaper and there’s not PMI and things like that. Now, if you do have an outstanding loan that hasn’t been paid off, you can still possibly get a VA loan. It’s tied to the conforming loan limit in the county where you’re buying. For those situations, it’s really better to talk to a VA lender. They’re gonna have a lot more

expertise in this area, going to be able to walk you through your particular situation and let you know how much you can use for your VA loan.

Mike Hunsberger (04:37)

Yeah, that definitely sounds smart. Because, yeah, the math and stuff can get kind of tricky on how you figure that out. yeah. And again, while there isn’t really that cap on how much you can borrow or it’s the straight 25 % of the loan, you still got to qualify for that loan. And if you’re making $100,000, lenders probably aren’t going to loan you $2 million.

for that dream house that you have. So again, I think we’ve hit on some of them, but what are the real advantages that come with the VA loan?

Amy (05:18)

Yeah, I I think the probably the biggest advantage and I know what makes home purchasing accessible for a lot of service members or veterans is the fact that there’s no down payment. So that’s a big hurdle that people without access to a VA loan have to get over. So it ends up being a big barrier for home buyers. Also, like we mentioned before, VA loans usually come with a little bit better interest rate partly because

Some of that loan is guaranteed. So the lender doesn’t have quite as much risk on the table. then lastly, so PMI is something that, you know, civilians would have to purchase if they aren’t able to come up with that 20 % down payment. Since the VA is guaranteeing 25 % of the loan, then the lender doesn’t require PMI, which it saves a ton of money. So between, you know, interest rates being a tiny bit lower or a little bit lower,

and not needing PMI, it is a huge savings for military families. Mike, now we’ve talked about savings. Now there is a cost to it, right? So can you talk about the VA funding fee?

Mike Hunsberger (06:27)

Sure. Yeah, get all those benefits. there is a fee each time you apply. So the funding fee, it’s basically a one time payment that helps them lower the cost of having the program and all of that. So these fees can be included, can be rolled right into the mortgage or you can pay them off at closing. So if it’s the first time you’re using it,

And again, these are going to be based on how much of a down payment you’re going to make. As Amy said, you don’t have to put anything down. But for the first use, you put down less than 5 % of the price of the property, you’re going to pay 2.15%. If you put down 5 % or more, up to between 5 and 10%, it’s 1.5%. And then if you put down

More than 10%, it’s 1.25%. So again, a little bit lower. So great for the first time. After the first use, the rates change at least for if you’re putting down less than 5%, and it jumps to 3.3%. So I know I definitely recommend to clients, if we’re talking about this, that

you know, try to have that at least that 5 % if it’s a second use because, you know, it drops from 3.3 back down to that 1.5 % if you put 5 % or more down. So again, you want to factor this in. It’s still a good deal. But, you know, just understanding that. And then, Amy, there are some times where this can get waived, you know, where you don’t even pay the VA funding fee. Can you

Talk a little bit about who might qualify for that.

Amy (08:26)

Absolutely. Yeah. So you don’t have to pay the VA funding fee if you’re receiving VA compensation for a service-connected disability. If you’re eligible to receive VA compensation for that, for a service-connected disability, but you’re receiving retirement or active duty pay instead. So for those who are under 50 % and are getting their retirement pay, for example, you’re eligible to receive the compensation, but you might not be getting it.

If you’re receiving dependency and indemnity compensation as a surviving spouse, then the VA funding fee can also be waived. This is big for those who are about to retire. If your service member who has a proposed or memorandum rating before your loan closing date, so before your loan closing date that says you’re eligible to get compensation because of a pre-discharge,

claim, you also don’t have to pay the VA funding fee. So that’s big for retirement planning purposes. And then lastly, if you’re a service member on active duty, who before or on the loan closing date, you provide evidence that you have a Purple Heart, you also won’t have to pay the VA funding fee.

Mike Hunsberger (09:39)

Yeah, so great, great overview. And, you know, the approaching retirement piece is, you know, understanding that most of the time you don’t get your rating until after you’re fully retired. You know, that happened with me. You know, had to pay the funding fee, you know, because I was closing while on terminal leave versus, you know, after my official retirement date.

versus if I had waited a couple more months to buy the house, would have then been able to waive the retirement fee. that happens even if you put in your paperwork and use my dates, for example, I retired the 31st of October. So if I closed on the house November 5th, had the paperwork in and VA came back with a rating November 15th.

but I closed on the house November 5th, you can go back and get a refund from VA for that. But again, you’ve got to, your day for starting VA pay has to go back, disability pay has to go back to pre-closing on the house. So does that make sense today? Explain that well enough.

Amy (11:02)

Yeah, I think so. I think that covers it. So basically, you know, in conclusion, as long as you were eligible for compensation, so in your case, you were eligible, you just didn’t get the notification until after. So you had to go back and request or you could have gone back to request a refund.

Mike Hunsberger (11:22)

Well, and I couldn’t because the date that my VA, you know, the VA pay started on one November. The year I retired, I closed on the house in August. So, yeah, I had my paperwork in, but I had to pay the funding fee, didn’t get reimbursed. You know, if if the house closing had been after that, after one November, then I could go back and ask for a refund if I if it

Amy (11:36)

right.

Mike Hunsberger (11:51)

didn’t line up with when that came through. just understand that. And one of the things with SkillBridge now, people are moving while they’re still doing terminal leave and that type of thing. Unless you’ve got like a medical retirement type thing where you do get that letter ahead of time that says, we’re going to rate you as this, you’re probably not going to get your VA rating pay until you actually

you know, go fully retired. So that can be one thing that, you know, you’re probably going to have to pay the fee if you’re, you know, moving on terminal leave type thing.

Amy (12:33)

Yeah,

gotcha. Okay, know, some other, you another challenge really that you have as you consider transition and home purchase. One of the biggest challenges is demonstrating stable and ongoing income. So usually a lender is going to want to know that, you know, if you’re retiring, you already have a job offer. You know how much you’re going to make. And it’s a, this is, we’ve talked about this before, transition is a big.

period of uncertainty. So it’s really important to make sure that you have documentation of what your retirement benefit is going to be, as well as any other sources of income that you may have that are going to continue.

Mike Hunsberger (13:18)

Yeah, I find that’s, know, trips people up. Sometimes they’re surprised that this is happening as they’re getting ready to retire. Had friends that, you know, trying to buy a house in the D.C. area, but they’re going to do skill bridge. So they’re going to have, you know, they want to do it in that time frame. And, you know, houses in D.C. aren’t cheap. So, you know, to have a just

If all the income you can show is your retirement income, it’s going to be a challenge to get approved without, like you said, that letter from a new employer saying, yes, going to cover, you know, this is how much they’re going to get paid once they start with us. again, with SkillBridge, that can sometimes be a longer, you know, process before you’re actually going to get that letter.

Amy (14:14)

Yeah, it’s a big trade off, trying to close on your house while you still have your military income versus trying to get the VA funding fee rating. So definitely a point of consideration if purchasing a home is part of your retirement plans. Mike, think one of the things that we should cover, because I know it

could possibly start coming up more and more often is VA home loan refinancing. So I’m betting you probably get the notices in the mail just like the rest of us.

Mike Hunsberger (14:53)

Definitely, probably at least one a week in the mail and then probably another, you know, something from my lender via email saying, hey, you know, you could be eligible to take money out or, you know, other things. So what’s going on there?

Amy (15:11)

Yeah. So there’s two types of refinancing available for a VA loan. So, you know, if you have a low interest rate, probably, just like I do, we were lucky enough to buy when home rates were really low. So they’re offering the cash out refinance option. you know, they’re offering you the ability to take out a new loan for more money.

And then they give you cash back to be able to use for home improvements or debt consolidation, things like that. So essentially, your home value may have increased, but at a minimum, you’ve been making payments. So they’re going to use the equity in your home to cash things out. that make sense?

Mike Hunsberger (15:56)

does. does. Yeah. The other type of refinance that this is a newer one is the interest rate reduction loan, IRRL. And this is known as streamlined refinance. Basically, you’re going to stay with the same lender. But if you borrowed it recently at the 7 % and hopefully in a couple of years, we drop down, we’re back in 4 or 5%.

you can go to your lender and just they call it the again, streamlined refinance. You’re just going to, you know, some fees, but it’s going to drop your overall interest payments, you know, from when you borrow down to what the current rates are.

Amy (16:42)

Yeah, and I mean, it’s important to understand. there are fees and there is an additional VA funding fee. So, you know, like we talked about is 2.15 % for the first time you use VA cash out, 3.3 % for subsequent uses. And then the IRRL, the streamlined version, there’s another half a percent in addition to any closing cost for that one.

Mike Hunsberger (17:10)

Yeah, like I said, if you bought a home recently, used a VA loan, the interest rates were high, 7%, 8%. So again, hopefully more people are going to be able to take advantage of at least the streamlined refinancing in the future. Hopefully, I know rates have been slowly taken down over the last couple of weeks even. And it may make sense to.

to look into that at some point in the future if rates continue to drop and you had to lock in at a higher rate.

Amy (17:48)

Yeah, one thing I’ll add on the refinancing part of it is just making sure that you completely understand that there is a cost associated with it. So choosing the timing of that refinance is important. So lenders are looking very hard right now to get people to refinance. They’re looking for business and it might not be the ideal time for you to refinance because interest rates could go lower. We don’t know. So if you refinance now,

you’re going to pay a fee. And then if rates go lower and you want to refinance again, you’re going to pay another fee. So just keeping in mind that there’s like the sweet spot of waiting for the right time, but maybe not waiting beyond the right time. And it’s a lot of guesswork since none of us can know the future. Anything else on the refinance Mike that we didn’t hit?

Mike Hunsberger (18:40)

No, think that pretty much covers it. Anything else overall we need to touch on with VA loans?

Amy (18:48)

Yeah,

yeah. So I think one important point, it doesn’t come up very often, but I do think that it’s an important element of VA loans and that’s that they’re assumable. And so what that means is if you’re selling your house, you could let a borrower just take over your home at that current interest rate. And for some people who bought their houses when interest rates were really low, that could make your house a lot more attractive to purchase. There’s some challenges around this and, you know,

You really need to understand the pros and cons of the situation, but for the right situation, it could be a good deal for you and for the borrower.

Mike Hunsberger (19:26)

Yeah, that’s a great point. It’s not, you know, it’s not especially common in other types of commercial loans that you might get. But, yeah, if you can find the right borrower that, you know, maybe has a large down payment and, you know, can come in and, you know, that would be a huge deal of mine. I mean, I’m locked in at a 2.25 percent, you know, mortgage again.

Challenges as you get further and further along and eat more down into principle the buyers got to bring another bigger chunk of money to pay it all off but again if they could get some type of second mortgage or something it still could make sense so You know as you’re you know thinking about selling your house with a VA loan that’s locked in Talk to your talk to your realtor

see how you can advertise that this would be a possibility. The one piece that we’ll say is, if you’re thinking of using your benefit again because you’re going to buy somewhere else, make sure you understand how much entitlement that you could still get in that new place. So again, homework to do, but it is a little known.

or probably little used piece of the VA loan.

Amy (20:55)

Yeah, that’s great. Great considerations. Anything else that we need to cover, Mike?

Mike Hunsberger (21:01)

I think we pretty much hit the main things of, again, a great benefit that definitely encourage you to understand all the ins and outs because it can make home buying quite a bit easier than if you didn’t have this benefit.