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Victor LaGroon bought a $700,000+ home for only $4,000 out of pocket.
A U.S. Army veteran and former director of the Chicago Office of Veterans Affairs, LaGroon says he was able to keep his upfront costs so low thanks in large part to the federal benefits available to him.
LaGroon’s story isn’t unique. The typical homebuyer can end up paying tens of thousands of dollars out of pocket for a down payment and closing costs. But as a veteran, you may qualify for a mortgage backed by the U.S. Department of Veterans Affairs, otherwise known as a VA loan, which allows you to finance 100% of your home’s purchase price.
And there are many other veteran benefits that can reduce the cost of purchasing and owning a home, including down-payment assistance, property-tax relief, reduced interest rates, and discounted homeowners insurance. These programs are managed by state and local governments, as well as non-government organizations, so understanding all of the benefits that are available to you isn’t always easy.
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Home Savings for Military Veterans
What Is a VA Loan?
A VA home loan is a mortgage issued by a traditional private lender, but which is partially guaranteed by the U.S. Department of Veterans Affairs (VA). You can use VA mortgages for home purchases, new-construction homes, or refinancing. And as of Jan. 1, 2020, there are no maximum loan limits for most VA mortgages. So your only limitation is how much the lender will loan you based on your individual financial profile.
The process of underwriting a VA mortgage is the same as any other home loan: you’ll need to provide proof of income and meet the lender’s credit score and debt-to-income ratio guidelines. But, because these loans are backed by the government, they’re less risky for lenders. So the qualification standards aren’t as strict as with a conventional mortgage — and VA loan rates can be lower.
What Are the Perks of a VA Loan?
One major advantage of a VA loan is you can greatly reduce your upfront costs by purchasing a home with no down payment. And unlike other types of home loans, VA loans never require private mortgage insurance (PMI), even if you have less than 20% equity in the home.
A VA mortgage does have a unique upfront funding fee, in most cases. This fee is a percentage based on whether you’re a first-time homeowner and can be thousands of dollars. You can either pay it upfront or roll the funding fee into the loan. That means you can actually finance over 100% of a home’s sale price with a VA loan.
If you have an existing VA mortgage, it’s relatively easy to refinance to a better rate or terms with an Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA streamline refinance. A VA streamline refinance typically requires less paperwork than a traditional refinance, and often you won’t need to get your home reappraised.
What to Pay Attention to with a VA Loan
A VA loan isn’t always the cheapest option. Because VA-backed mortgages can come with a special upfront funding fee, it’s always a good idea to shop around for the best mortgage rates.
“Veterans get taken advantage of a lot when it comes to using their VA [loan] benefits,” says David Piatek, who is a member of the West Virginia National Guard and vice president at The Federal Savings Bank in Chicago. “On average, closing costs across the country are going to be 2% to 3% of the purchase price.” But Piatek says veterans may get stuck paying 4% to 5% in closing costs if they don’t find the best offer.
Always shop around for the best lender when choosing a VA loan. Some will charge extra upfront origination fees, which can greatly increase the cost of your mortgage.
The required funding fee can total between 1.4% and 3.6% of the home purchase price. In addition, the VA allows origination fees of up to 1%, and some lenders may also charge 1% or more in discount points on top of that, Piatek says. Both of these fees are optional and won’t be charged by every lender.
Another consideration: in today’s sizzling real estate market, where sellers are regularly receiving multiple offers, an offer with a VA mortgage may be less appealing to a seller.
This is an issue Piatek deals with regularly. “A lot of people think it’s an extremely long process to close a VA loan home purchase or think that the property won’t meet the VA appraisal standards,” Piatek says. But how smoothly the closing process goes depends on the lender and real estate agent you’re working with.
When Does a VA Loan Make Sense?
Whether a VA mortgage is truly worth it will depend on the lender you choose and the property you’re buying.
Real estate professionals familiar with VA loans will mitigate some of the potential downside. “I can’t tell you how many Realtors I talked to before purchasing my home,” says LaGroon. “I actually had one person tell me they weren’t interested because they didn’t want to do a VA loan.” He eventually ended up working with a real estate agent who is a veteran and understood the VA loan process.
VA home loans can be appealing for younger veterans or first-time home buyers because they don’t require a down payment. For those who don’t have significant cash reserves, or cash from a home sale to apply to a new purchase, not having to come up with a down payment can be the difference between owning a home or renting.
If you have an existing VA mortgage, a VA streamline refinance can potentially reduce your interest rate or loan term. However, you need to pay attention to the refinancing fees to ensure it makes sense.
Federal Housing Benefits for Veterans
VA home loans are the main federal benefit veterans can take advantage of to potentially save on housing costs.
VA loans can only be used to buy a primary residence, but that can be a multi-family property of up to four units for veterans who are interested in buying property then can both live in and earn income from as a landlord. There are also grants available to veterans with a service-connected disability to pay for renovations to make the home accessible. And special loans issued directly by the VA are available to Native American veterans.
All VA-backed mortgages have a one-time funding fee, which varies depending on the type of loan. You can qualify for a funding fee waiver under certain circumstances, such as if you received a Purple Heart, or if you receive service-connected disability pay.
VA Purchase Loans
A VA-backed mortgage has several advantages over a conventional home loan. Because these loans are issued by traditional lenders, you still need to shop around for the best loan terms and rates. And one thing to keep in mind: Just because your loan has a low mortgage rate, that doesn’t necessarily mean you’re getting a good deal if you’re paying excessive fees.
The biggest advantage of a VA mortgage is being able to purchase a home without a down payment. But if you don’t make a down payment, you’ll have a bigger loan amount, which means higher monthly payments. Ultimately, it’s a personal choice on whether it’s worth it to forgo the down payment or to make one to avoid large monthly payments.
Funding fee: For VA purchase and construction loans, the funding fee is anywhere from 1.4% to 3.6% of the purchase price. After you take out your first VA home loan, the funding fee will be higher for any future VA-backed mortgages you take out. You can reduce the funding fee with a down payment of 5% of the purchase price or more.
VA Refinance Loans
There are two main types of VA refinance mortgages: Interest Rate Reduction Loans (IRRL) and cash-out refinance loans. With a VA refinance you can borrow up to 100% of your home’s value and you’ll pay a one-time funding fee (if you don’t qualify for a waiver) in addition to other closing costs. Usually, VA lenders require you to have had your existing mortgage for a minimum of seven to 12 months before allowing you to take out a VA refinance loan.
Before you commit to refinancing your mortgage there are a few things to consider. While refinancing into a longer-term mortgage will reduce your monthly payments, it may not be the best move. Not only will you add years onto your repayment term, but you’re likely to end up paying more interest over the life of the loan. Even if you’re securing a shorter term or a lower interest rate, the closing costs and the VA funding fee will eat away at your savings. So it’s important to look at the big picture, not just the interest rate or monthly savings.
Interest Rate Reduction Loan
An IRRL is also known as a VA streamline refinance because the approval process is more simple than a traditional mortgage refinance. Depending on the lender, you may be able to refinance without a new appraisal, credit check, or verification of your employment or income. To qualify for an IRRL you must be refinancing an existing VA loan.
Funding fee: The funding fee for an IRRL is the lowest of any VA loan and is a flat 0.5% of the loan amount.
VA-backed cash-out refinance loans
If your current mortgage isn’t a VA loan, a VA cash-out refinance is the only way to refinance to a VA-backed mortgage. A cash-out refinance allows you to turn your home’s equity into cash by taking out a new mortgage for more than what you owe on your existing mortgage.
You can use the cash you take out to pay for the closing costs and, depending on the lender, you may be able to refinance 100% of your home’s value. (For a traditional refinance, you’re typically limited to cashing out up to 80% of your home’s equity.) If VA loan rates are significantly better than other refinancing options, this could be a good move if you’re also able to get rid of the mortgage insurance requirement on your existing loan.
Funding fee: VA cash-out refinance mortgages can get expensive. The funding fee is 2.3% the first time you use this benefit and jumps up to 3.6% for each subsequent VA cash-out refinance.
Disability Housing Grants
The VA offers several different grants for veteran homeowners who need to make renovations to accommodate a qualifying service-connected disability. These include the Special Home Adaptation grant (SHA), the Specially Adapted Housing grant (SAH), and the Home Improvements and Structural Alterations (HISA) grant.
Each grant has slightly different qualifying criteria and maximum benefit amounts, but they all provide free money to make changes to a home. Both the SHA and SAH also allow the money to be used to purchase or build a permanent home.
Native American Direct Loans
Native American veterans, or veterans who are married to a Native American, may qualify for the Native American Direct Loan (NADL) program. This loan is very similar to a traditional VA loan but allows you to purchase, build, or renovate a home on tribal land. You can also refinance an existing NADL loan with this benefit.
With these loans you can purchase a home with no down payment, and they have no PMI requirement. You’ll still have to qualify for the mortgage, just like with any other loan.
Funding fee: The funding fee for a NADL 1.25% for a purchase loan and 0.5% for a refinance loan.
Am I Eligible for a VA Loan or Other Benefits?
The first step to getting a VA mortgage is to apply for a certificate of eligibility or COE. To qualify for a COE you’ll need to show that you didn’t receive a dishonorable discharge and that you meet the minimum service requirement. The service requirement varies depending on when you were in the military, but typically you’ll qualify with 90 days of active-duty service. You may also qualify for a VA loan as the surviving spouse of a veteran.
You can see all of the VA loan service requirements and apply for a COE on the Veterans Affairs website.
Qualification guidelines vary across veteran benefits, especially at the state level. Some benefits require a specific service-connected disability rating. “With disability benefits you need to provide evidence that it happened in the service,” says Anthony Vaughn, acting assistant director of the Illinois Department of Veterans Affairs and Marine Corps veteran. Your local state or federal VA office can provide assistance in gathering evidence of a service-related disability, if it’s not already in your records.
If you’re unsure what benefits you qualify for, you should contact your state’s veterans office, or reach out to your regional VA loan center.
What Forbearance Options Are Available for Veteran Homeowners?
If you’ve experienced a financial hardship due to the COVID-19 pandemic, you may have forbearance options for your VA loan. Because they’re backed by the federal government, VA loans are covered under the Coronavirus Relief, and Economic Security Act, also known as the CARES Act.
The most important thing to know is you have to contact your loan servicer if you can’t make your monthly payments.
Under the CARES Act, borrowers can request a 180-day mortgage forbearance without having to provide proof of economic hardship. After that, you may ask for a forbearance extension of an additional 180 days. The deadline for making a forbearance request under the CARES Act is currently December 31, 2020. If you qualify for a COVID-19 forbearance it won’t negatively affect your credit, but you will have to eventually pay back the missed payments and your mortgage will still accrue interest while payments are paused.
How you plan to repay your missed mortgage payments is something you’ll have to discuss with your lender. You may be able to set up a repayment plan for what you owe, or potentially modify your loan’s repayment term, and include the missed payments in the new loan.
State-Level Veteran Housing Benefits
Depending on what state you live in, or are purchasing a home in, you may be able to take advantage of veterans’ benefits provided through your state’s veterans department.
The specific benefits and the qualification standards vary widely, but you can get more information on what’s available in your area by contacting a state veterans office. “In Illinois, we have veterans service officers you can contact to get information on the types of veterans benefits available in Illinois, in addition to getting help in filling out applications,” Vaughn says.
But it’s not the same in every state. Some states may rely on other service organizations, like the Veterans of Foreign Wars (VFW) or the American Legion, to provide that service, or on county-level veterans service officers, he says.
The state-level benefits available to veterans run the gamut from reduced property taxes to down payment assistance programs. A few states offer reduced mortgage rates to veterans. For example, Maine offers a 0.25% mortgage rate reduction to veterans and qualified military personnel. Other states have separate state-backed mortgages for veterans. California has the CalVet Home Loans program, which offers mortgages and affordable homeowners insurance to veterans. “This drastically reduces the cost of insurance for veterans because in California you need additional insurance for fires, floods, and earthquakes,” says the Los Angeles-based LaGroon.
Other Ways for Veterans to Save on Housing
One of the best ways to save on a home purchase is by taking advantage of closing cost, or down payment assistance programs. These programs are typically managed on a state, county or municipal level, and are available to any eligible homebuyer. They offer thousands of dollars in grants, forgivable loans, or low-interest loans to cover closing costs and down payments.
Veterans typically have access to a greater number of these programs and will have an easier time qualifying. This is because some programs are only available to public service workers, which usually include military veterans in addition to other careers like, firefighters, teachers, and law enforcement officers.
Many homebuyer programs are designed to help first-time homebuyers. Typically, a first-time buyer is defined as anyone who hasn’t owned a home in the previous three years. However, most programs exempt those with qualifying military service from this rule. So for veterans it is much easier to qualify as a first-time buyer.
There are lots of benefits available to veteran homeowners and for those looking to purchase a home. These programs run the gamut from federally guaranteed homes loans to state-government programs that reduce the property tax burden for eligible veterans.
Because there are so many different benefits available, it’s difficult to know what you’re entitled to. So it’s important to connect with your local federal or state veterans affairs office. They can let you know what programs are available in your area and help you to take advantage of them.