VA Loan Tips for First-Time Home Buyers

If you plan to buy a house and want a really good deal, join the military.

OK, that probably shouldn’t be the primary reason you enlist, but active-duty personnel and veterans have a big advantage over civilian home buyers.

They can qualify for a loan that’s guaranteed by the U.S. Department of Veterans Affairs and has plenty of other benefits that make it attractive.

“It offers no down payment requirements and typically has lower interest rates,” said Doug Nunnery, a realtor in St. John’s, Fla. “VA loans also do not require private mortgage insurance (PMI), which can save borrowers significant amounts of money over time.”

It’s easier to buy a house with a VA loan, but the process is still complicated and time-consuming. That’s especially true if you are a first-time home buyer and unfamiliar with terms like “PMI,” “mortgage points” and “escrow.”

Here’s a guide that will help you understand the VA loan process and get you on your way to a new home.

1. Understand Your Eligibility

Before you begin the VA loan process, you should make sure you are eligible. The first requirement is that you served in the military after Sept. 15, 1940. If you served before that, chances are you are currently living in a senior care facility.

If you served after 1940, you must meet at least one of these requirements:

• You have completed at least 90 days of active-duty service during combat.
• You have at least six years in the Reserves or National Guard.
• You have served at least 181 days of active duty during peacetime.
• You have 90 days of cumulative service under Title 10 or Title 32. For Title 32, at least 30 days must have been consecutive.
• You are the spouse of a military member who died in the line of duty or as a result of a service-related disability.

2. Check Your Credit Score

Because VA loans are backed by the government, your credit score is not as important as it is for a conventional loan. That doesn’t mean credit scores play no role, however.

The VA doesn’t make the loan. It leaves that up to lending institutions (banks, credit unions, online lenders), who set their own credit score requirements. The minimum is generally around 580, which is just one point above a “poor” credit rating.

You can get a loan with “fair” credit, but it comes with a price. The lower your score, the higher the interest rate on your loan will be. The difference between a 7% and 8.5% rate can translate into hundreds of dollars a month in interest charges.

Here are a few ways to improve your credit score:

• Make payments (especially credit cards) on time.
• Pay down balances.
• Don’t open any new credit accounts.
• Dispute potentially inaccurate information on your credit report.
• Don’t close out your oldest credit card account.

3. Get Your Finances in Order

As with any mortgage, lenders want to see consistent employment income and financial stability. So, if you’re thinking about quitting your job before applying for a VA loan, don’t.

You can get your financial house in order by developing a budget, paying down debts, asking for a raise, having an emergency fund and being more frugal with your spending habits.

That doesn’t mean becoming a cheapskate, but you might consider giving up Starbucks for home-brewed coffee. At least until your loan closes.

4. Obtain Your Certificate of Eligibility

A VA loan won’t go anywhere without a Certificate of Eligibility. It’s a document that proves you meet the service requirements to apply for a loan.

Assuming you do, getting a COE is not a big hurdle. You can apply online at the eBenefits online portal. You can print out a COE request form, fill it out and mail it in (the address is on the form). Or you can ask your lender to obtain a COE.

Bear in mind that it can take 30 days or longer for the VA to complete the paperwork and produce a COE, even if you apply online. The sooner you start the process, the less chance an unforeseen problem might pop up and sidetrack your loan.

5. Choose the Right Lender

The primary question in home buying is, “Is it a buyer’s market or seller’s market?” When it comes to finding a lender, it’s always a buyer’s market.

There are plenty of them out there. And the better your credit score, the choosier you can be. First, look for a lender experienced in VA loans, then shop around for the best interest rate among those.

Remember that the interest rate you see advertised is just an estimate. It may change after the lender pulls your credit information.

Get loan estimates from at least three lenders. That document will spell out your interest rate, monthly payments, and other fees.

Buying a home is a complex undertaking, so don’t hesitate to ask questions about closing costs, the lender’s VA experience, escrow funds, tax implications or anything else you are not sure of.

6. Get Pre-Approved

If you want to know how much money you can spend – and you do – get pre-approved. You’ll need to provide your lender with financial documents, like W-2s, recent pay stubs and bank statements. You don’t need a COE to start the process.

Pre-Approval is not the same as pre-qualification, where lenders just estimate how much you can afford without needing financial documentation. Pre-approval confirms your creditworthiness to sellers. That can make your offer more attractive, especially in a seller’s market.

A pre-approval letter is usually good for 90 days.

7. Work with a Real Estate Agent Experienced with VA Loans

When it comes to picking a real estate agent, it’s always a buyer’s market. There are enough of them to overrun Fort Bragg, and they all want your business.

Ask friends and colleagues for referrals to find prospective agents. Check out the agents’ online profiles and make sure they’re used to handling VA loans.

You don’t have to use an agent, but home mortgages come with a mountain of paperwork, timelines, and other requirements. Besides handling those, an agent knows the market and the ins-and-outs of negotiating to get you the best deal on a new home.

“An agent can navigate the VA loan maze like a pro, making sure you don’t miss out on any perks,” Nunnery said. “And they can sniff out the perfect VA-approved loan faster than a dog finds his favorite bone.”

8. Understand VA Loan Limits and Your Budget

VA loan limits are the highest amount the Department of Veterans Affairs will guarantee without the buyer having to make a down payment. They don’t cap how much you can borrow, but they set a maximum you can finance for no money down. No down payment is one of the best benefits of a VA loan.

The limits don’t apply if it’s your first VA loan, if you’ve paid off a VA loan and are buying a new primary residence, or if you’ve had a VA loan but had a foreclosure or short sale and repaid the VA in full.

If you don’t meet any of those criteria, VA loans are usually available for up to $766,550 in most areas. They can exceed $1 million in high-cost areas. To find out the VA loan limit in your county, check the FHFA Loan Limits website.

That doesn’t mean you’ll automatically qualify for a $766,550 mortgage. Your loan amount will depend on what you can fit into your budget.

9. Look for VA-Approved Properties

Potential residences must meet VA standards to ensure that it is structurally sound and systems like air conditioning, hot water and plumbing are functional.

Even if everything meets the standard, a property won’t be approved if it’s not going to be a primary residence. Vacation homes or investment properties won’t qualify.

Any problem issues will need to be repaired before the VA loan is approved. For a list of VA-approved properties, refer to the VA website.

10. Prepare for the VA Appraisal Process

An appraisal is the estimate of the property’s market value. It is determined by a VA-approved appraiser, who checks to see if the home meets standards known as Minimum Property Requirements (MPRs).

The process ensures the house is a sound investment that doesn’t need significant repairs. You don’t want to move in and a week later, you need a new $14,000 air conditioning unit.

The VA appraisal is required if you want a VA loan, but it should not be confused with a traditional home inspection. That takes a more extensive look into every aspect of the home and flags potential problems.

If the home doesn’t meet one of the MPRs, you can ask the seller to repair the item in question. If the appraisal is lower than what you have offered, you can pay the difference in cash or ask the seller to lower the price.

11. Know Your Closing Costs and How to Manage Them

Do you know a discount point from an origination fee?

They are among the maze of closing costs, which can be a ball of confusion that rolls up thousands of dollars in mysterious fees. A VA loan prohibits some of the costs that come with conventional loans, like attorney’s fees, realtor commissions and prepayment penalties.

However, there are still plenty of closing costs to deal with, some of which can be negotiated or covered by the seller.

Some closing costs can also be rolled into the mortgage, which will increase the total loan amount. Dealing with closing costs is another place where a real estate agent can come in handy.

“An experienced agent can negotiate favorable terms,” Nunnery said. “Their expertise can lead to a smoother transaction and better financial outcome for the buyer.”

12. Use Your VA Loan Benefits Wisely

One enduring benefit of VA loan programs is the ability to refinance an existing loan to get a lower interest rate, get more favorable loan terms or convert your home equity into cash.

The Interest Rate Reduction Refinance Loan (IRRRL) program guarantees that you’ll get a lower payment. A VA cash-out refinance lets a mortgage-holder take out some or all of the accrued equity in their house.

That money can be used for any purpose, like making home improvements or paying for expensive medical procedures. The important thing is to use it responsibly.

If you need cash to pay off credit card debt, try to stay on a budget that keeps you from spending more than you can afford. If you fall into old spending habits, you’ll end up back in the same hole you just dug out of.

13. Plan for a Smooth Closing Process

There’s a common misconception that VA loans take longer to close than conventional loans. The fact is, it usually takes about 50 days from start to finish, which is only a few days longer than most other home loans.

To prepare for the big final day, stay in touch with your lender and realtor. They will provide you with a closing disclosure that outlines the loan terms, closing costs and how much money you’ll need to bring to closing. There will be a final walk-through to make sure the agreed-upon repairs have been completed.

Your real estate agent will assist you with the paperwork and coordinating meetings with the lender and seller. On closing day, you’ll need to bring a government-issued photo ID, proof of insurance and a certified check or cashier’s check to pay closing costs and the down payment.

14. Be Prepared for Unexpected Expenses

It’s natural to breathe a sigh of relief after closing, but the financial obligations are just starting. Besides the monthly mortgage payments, many smaller expenses come with owning a house.

Insurance, homeowners’ association fees, utility bills, repairs, lawn, and pool maintenance are just a few. Those are some of the bills first-time homeowners will have to get used to.

Expect the unexpected, like a leaky roof or a kitchen appliance that goes on the fritz. To prepare for the unexpected, try to set up an emergency fund. Ideally, it will cover at least three months of living expenses. Hopefully, it will at least take the sting out of having to buy a new refrigerator.

Ensuring a Successful Home Buying Journey

As former Secretary of Defense Donald Rumsfeld said in 2002, “There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we don’t know. But there are also unknown unknowns, the ones we don’t know we don’t know.”

He was referring to the Iraq War, but the phrase is appropriate for first-time home buyers. You know some things about the process, but a lot of things start out as mysteries.

The best way to unravel them is to have a VA loan specialist in your camp, and to start the pre-approval process as soon as possible.

An experienced loan specialist can also guide you through other VA housing options, like disability grants, move-in allowances, and other resources.

Whichever route you go, getting a better deal on a new home is a well-deserved benefit.

“For those who have served or are serving in the military,” Nunnery said, “these benefits make homeownership more accessible and affordable.”