VA loans: how do they work, and what can these loans be used for?
VA loans are loans that are available to veterans and their families, service members, and eligible national guard and reserve members. We’re basically talking about our military community. Eligible parties can use the funds to obtain, retain, refinance, or adapt a home. An example of the latter was given on the webinar. For example, if a service member comes back from combat zone with some type of disability, maybe they need to put a ramp on the front of a home so they can get a wheelchair in. That would be covered. VA loans allow much more favorable financing terms than conventional mortgages. For example, there’s no down payment nor is there any mortgage insurance, which are big obstacles for a lot of people trying to save up money for the down payment and then adding on the expense of mortgage insurance. You don’t have that with the VA loans. It was mentioned that VA loans are administered through 8 different VA regional loan centers around the country. The key document that applicants need is what they call a COE, or certificate of eligibility. That’s what they’re going to need to prove that they are eligible to qualify for a VA loan. Lenders provide the actual loans to borrowers, but the VA backs or guarantees a portion of the loan- typically 25%. There’s some skin in the game, not from the borrower per se, but from the VA guarantee. The VA allows lenders to charge up to 1% in fees to originate the loan. Any time you apply for a mortgage you’re going to have to pay an origination fee, so that’s pretty competitive compared to maybe what you would pay in a conventional mortgage.
What are the benefits of the VA guaranteed home loan program?
As I noted before, there isn’t any down payment required, so this overcomes the barrier of time. These days most people- when they’re going to get a mortgage- need a five figure sum just as a down payment, so think about how long it can take some people to save up $10-15,000. It can take years, so people overcome that barrier because there’s no down payment required. Also, as I mentioned, there’s no mortgage insurance. Conventional loans typically charge what they call PMI (private mortgage insurance) if borrowers have less than 20% down. You don’t have to worry about that with a VA loan, another obstacle overcome. Interest rates are negotiable. The VA does give lenders flexibility in the underwriting process for the loans. The VA can provide assistance after closing. The benefit never expires. It was also mentioned that you can have more than one active VA loan. Now obviously, there’s a cap on how much people can borrow, but it’s not uncommon in military families to perhaps own a home and then have to PCS somewhere else and maybe have trouble selling that home. Maybe you want to come back to it at some point in time, so you rent it out. You could hold on to that one house and still be able to borrow for another one again subject to the maximum that you’re allowed to borrow.
What are the biggest mistakes that home buyers make?
These are mistakes that you’ll see with any type of home, whether it’s VA or conventional. There’s five of them that were mentioned. One is that people don’t clean up their credit before applying for a loan. They go in applying for a loan, and they have a high consumer debt ratio or still have negative remarks on their credit report (e.g. late payments). Number two- they fail to educate themselves about the home buying process (e.g. knowing the steps to follow, what closing costs are, how much money you’ll need at the closing). Number three- they don’t shop around and compare offers from multiple lenders. It’s always a good idea to follow the rule of three and compare at least three product or service providers, including mortgage lenders. Number four- they don’t consider the true cost of home ownership. It’s not just what you’re going to pay to buy the house, but you’re going to have the ongoing expense of property taxes and homeowner’s insurance. Plus, you’re going to have maintenance and repairs that you’re going to be spending on once you become a homeowner. People sometimes don’t factor that in. Also, people fail to negotiate with their sellers for required repairs. Let’s say you have a home inspection, and you find that there’s some issues with some part of the home. This would be a great time to ask for a price concession to account for the fact that you’re going to have to fix that or to get it fixed before you close on the home. People sometimes don’t negotiate, so that’s another mistake that was mentioned.
The second webinar speaker was from the CFPB. What were some highlights of his portion of the presentation?
He mentioned that the CFPB provides consumers with timely and understandable information to make responsible decisions, and they have an Office of Servicemember Affairs. The purpose of this office is really to support service members throughout the entire military life cycle. They had a graphic that showed what that military life cycle is, and it basically runs the gamut from when somebody signs up to enlist in the military- that would be step one- all the way to when they’re receiving military retirement pay, which could be three or four decades later. Also, they mentioned that the CFPB has a number of home buying and mortgage tools and resources, including a home loan toolkit that’s available online.
What information did the CFPB speaker share about consumer complaints?
He talked about several red flags of fraud, and people should really run when they see somebody that’s kind of enticing them with these offers. One was anybody that would be offering to skip mortgage payments because again there’s some kind of catch. The interest clock is not going to stop, and you just don’t know what’s happening there. Probably you’d be paying a fee and nothing would happen. Also, offers to be able to withdraw funds from your escrow account. Typically, that’s not done. The third red flag was anybody offering low, below market interest rates. Again, you kind of have to wonder what the story is there. He also noted that issues with mortgages are their third most frequent complaint topic. I believe credit cards were number one. He also mentioned that Florida, Texas, and California had the highest frequency of complaints. Now obviously, they’re big states. Also, he mentioned that many veterans live in those three states as well. Finally, the last thing that he reviewed on the webinar was their complaint filing process. He mentioned that the most efficient way to contact the CFPB was to use their online portal and put the information in about your complaint that way. They do have a phone number, and complaints can also be submitted by phone. He noted that the CFPB can’t solve every consumer problem, but they often can connect people with resources in their local communities that can help them address the complaint issue that they have.
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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Military Family Readiness Policy, U.S. Department of Defense under Award Number 2019-48770-30366.