VA Loans 101: Unlock the Secret to Homeownership

One of the greatest benefits offered to military veterans is the VA loan. Unfortunately, it is also one of the most misunderstood. The VA loan was created in 1944 as part of the Serviceman'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. Eligibility requirements for the VA loan are straightforward but yet often misunderstood. You may be eligible for the VA 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 if you're the unremarried spouse of a service member who died either in the line of duty or as a result of a service-related disability. You're also eligible if you're the spouse of a service member that is missing in action or in 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 honorable discharge, it can be reviewed, but this process may take months, so just don't get in trouble in the first place. The first step in getting a VA home loan is to apply for a Certificate of Eligibility. This confirms for your lender that you qualify for VA home loan benefit. For veterans, this will require a copy of your discharge or separation papers, the DD-214, the coveted DD-214. 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. You're going to need a ton of information just like every kind of paperwork you do in the military. For current or former members of the National Guard or Reserves, you will need about the same paperwork above plus a bunch of extra crap that I don't understand because I've never even been in the Reserves. Luckily, we active duty military types are used to exorbitant amounts of paperwork. Hack alert! 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 they are not a very good one. If you wish to get your Certificate of Eligibility beforehand, you can do so online through the eBenefits portal, which is linked below, but your lender should be able to help you out. 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 because we like to spend money on stupid things when we're young. Or 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. The VA pamphlet 26-7 revised states that, quote, 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, unquote. 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, which is a strategy we'll talk more about in following videos. Another cool fact about the VA is that 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, and as a result, most private lenders will have their own minimum credit requirements. The minimum required credit score is usually around 580 to 620, but as with any lending opportunities, the better your credit score is, the better your rates and terms will be. So upgrading your credit is something that will help you forever. Low credit doesn't necessarily prevent you from getting a VA loan, but a higher credit score will mean better terms and better opportunities. 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 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. You just have to do it the right way. I'm not advocating that you do anything illegal, but you need to understand the intent, and then you can use it to your advantage. You must intend to occupy the property as your primary residence for a reasonable amount of time, which is generally assumed to be one year. This means that after one year and one day, you are clear to move out of the property and rent it if you would like. You may find yourself asking, but what if I get orders? Don't worry. The VA home loan is a benefit. It isn't out to get you. If you get permanent change of station orders or PCS orders to move, you may do so without penalty. If you bought the house after receiving orders to a new duty station, and you were on the way, and then your orders got changed last minute, you're still safe. You have to intend to own the property for a year. Stuff happens, and they're not going to screw you over. You're even covered if you use the VA renovation loan, and it takes a lot longer than planned, so you had to move your family into another place. They understand you're not trying to live out of a hotel for a year. 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. Bottom line is this, guys. Qualifying for the VA home loan is simple. Just serve your country honorably for the minimum time required. Maintain a moderate credit score, and intend to live in the property for at least one year after purchase. Again, that's intend to. The financing limitations of the VA loan. Everybody wants to know how much house they can buy without a down payment. The answer is it depends on where you live. The VA loan limits vary based on where you live and what the market is like there. In 2019, the VA loan increased from $453,100 to $484,350. There are 199 exceptions, however, where the market is even more expensive and the limit has been increased. These counties cap out at $726,525 for the purchase price. Some of these locations are Hawaii, Anchorage, Los Angeles, San Francisco, New York, places you would kind of expect. 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. That's $55,000 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 a down payment at closing. Now, keep in mind a $780,000 home in Hawaii isn't usually very fancy. I want to talk about VA loan closing costs real quick. 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 hundred bucks to over $3,500 in more expensive markets. Now, 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 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 house was 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. So, make sure you do a cost benefit analysis on this to determine if it's worthwhile. The dreaded funding fee. The funding fee is one of the few downsides to purchasing with a VA loan. Luckily, it's minuscule. The funding fee is 2.51% 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 about $5,000. Now, that sounds like a lot, but when added to the loan, it only equates to $25.10 a month added to your payment. I'm okay paying an extra $12.55 a month for every $100,000 I spend, if it means that I avoid paying a 20% down payment. Also, the dreaded funding fee is waived for any service member with a 10% disability rating. Ironically, this means that an active duty service member who is missing a limb, a hand, a leg, an ear, whatever, will pay a funding fee because they haven't received a disability rating yet because they're still in the military. I found a flaw in the system. All right, private mortgage insurance, otherwise known as PMI. It's required on loans with less than 20% equity in the home. Therefore, anyone who pays 3.5% using an FHA loan or any amount less than 20% down on the property is required to pay PMI. Now, PMI typically costs between 0.5% and 1% of the entire loan amount annually. This means that on a $100,000 mortgage, you could be stuck paying $1,000 a year or $83.33 a month. There is, however, no PMI on a VA loan. That's 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. This is especially painful for me to talk about because I should have used the VA loan. I got talked into an FHA loan, and I'm paying $81 a month extra on my mortgage payment, which is cash flow that I could be pocketing and I'm not. The VA loan is awesome. What can a VA loan be used for? You can buy a home, including a townhouse or condo unit, in a VA-approved project. You can build a home from scratch. You can buy a manufactured home or modular home. You can buy a multi-unit property up to four units, with the exception that we talked about in the last video. You can simultaneously purchase and improve a home with energy-efficient upgrades. You can refinance an existing home loan up to 100% of the home loan's value. The VA renovation loan will even allow you to wrap renovation costs into the home purchase mortgage. I'll link to that video down below. Now, let's talk about the VA requirements for homes. The Department of Veterans Affairs has a list of minimum property requirements that a home must meet in order to qualify for a VA loan. These requirements are in place to ensure that 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 or air conditioning, where necessary, electricity, kitchen function, plumbing, etc. Some other requirements are that 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 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 a 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 families. Condominiums and condo property regime CPRs must be VA approved in order to qualify. Now, are there loopholes with the VA loan? There are several exceptions to the above requirements, but understand that you may need to articulate these to your inspector or appraiser and ensure that they are on board. You can purchase a property with unpermitted improvements, but the area does not count towards the value of the property and you must sign a hold harmless letter that you understand this. The VA renovation loan allows you to purchase a fixer upper property. Leasehold estates, which are common in places like Hawaii, can be purchased, but the term of the lease must exceed the length of the mortgage by 14 years. There's some additional loopholes, not actually loopholes, just, you know, misunderstood options with financing, but we'll cover those in a later video. Now, to discuss the VA renovation loan, this loan is just like the FHA 203k loan in many ways, but with the option for 100% financing. There's a maximum of a 100% loan to value subject to VA County loan limits plus the VA funding fee. Loan amounts up to 1.5 million are allowed as long as the VA guarantee or the combination of the guarantee plus the borrower's down payment is equal to at least 25% of the either sales price or the subject's reasonable value, whichever one is lower. All right, in layman's terms, you can loan up to $1.5 million, but your remaining VA eligibility amount plus the equity in the building must be at least 25% of the purchase price. Now here's some requirements for the VA renovation loan. The minimum repair amount is $5,000. There's no maximum to repair amount. Structural repairs are permitted. Major rehabilitation, remodeling, such as the relocation of load-bearing wall, new construction, or including additional rooms is approved. The repair of structural damage is approved. You can even conduct repairs that require detailed drawings or architectural exhibits. If the house is uninhabitable at close of escrow, repairs must start within 30 days and be completed within six months. The list of applicable repairs is quite extensive. There's no reason to avoid looking into this loan. As with all loans, I recommend shopping around in order to get the best rates because different lenders have different requirements. Now for energy efficient upgrades, a lot of people don't know that there's a VA Energy Efficiency Mortgage, EEM, home loan option. This program allows the home buyer to add up to $6,000 to the loan for energy efficient upgrades. You can either do this at purchase or at 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'll add to your mortgage payment. For example, if you pay $6,000 for the energy efficient upgrades, that's roughly $30 a month added to your mortgage payment. If the upgrades are estimated to save you $60 a month on utilities, you meet the requirements for this program. $60 a month saved, $30 a month paid on mortgage, you're coming out on top. You're saving 30 bucks a month. You need to understand that 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. Now 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's a lot of intricacies that will depend on your lender. 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 and 2. Now, I don't know why you'd want to live in Volcano Zone 1 and 2, and I don't even want to know what Volcano Zone 3 is, but there's a lot of options out there. There are so many benefits to the VA loan, but these are some of my favorites. Number one, of course, is that it requires no money out of pocket. The number one excuse that I hear from real estate investors is that I don't have enough money to get started. So the VA loan completely eradicates that excuse because you can get away with 100% financing, which means zero money out of pocket. Now, this is great for investors, but it's also very good for just your normal primary residence home buyer because, depending on your market, 20% down could be a lot of money. And the FHA loan, which is only 3.5% down, has some other drawbacks that we'll cover in a minute. I want you to think about this for a minute if you use this for an investment property. Try to imagine the return on investment from $0 down. You can't. It's infinite. Literally no way to calculate the return on even $1 back if you put zero into the property. The next is VA house hacking, which is basically taking the first point and then making it even more effective. The VA loan allows you to purchase up to four units. There's actually a way to purchase more than that. We covered it in an earlier video. I'm going to bring you a much more detailed analysis of that later, but generally speaking, up to four units. So imagine you buy a fourplex or even a duplex, and you rent out all the vacant units, and you live in one, and it pays for your mortgage. Theoretically, this means that your tenants could pay 100% of your living expenses, as in your mortgage, utilities, whatever. Wait, does that mean I could buy a house with no money out of pocket and then live in it for free while I'm building equity and I own the house? Yeah. That's too good to be true. There's no way that's true. Yeah, you're right. It is too good to be true, and it does sound too good to be true, but it is a realistic possibility, and that's why this loan is so powerful. You've got to do your research, and you should definitely look into using it. Another great benefit behind the VA loan is the 100% refinance option. Most banks will let you pull cash out and refinance up to 70% or 80% of the value of the home, meaning if you own a $100,000 home, you could pull up to $70,000 or $80,000 out of that property. So if you owe 50 and you pull 80, you could pull $30,000 in cash. Hope I didn't lose you there. The VA will let you refinance up to 100%. So if you own a $100,000 home, you owe $50,000 on it, you could pull $50,000 cash, like write a check to your bank account, and still own the home. That's a pretty unique opportunity. Imagine conducting a live-in burr, which is the buy, rehab, rent, refinance, repeat strategy, a live-in burr where you put zero money into the renovation, and then you're able to pull 100% out, and it may still cash flow or pay for living expenses. I mean, that's impressive. You could get paid to own a home that you live in for free. Pretty cool strategy. But as always, make sure you run your numbers. One of the biggest misconceptions with the VA loan is that it can only be used once, and that's just false. Now, there are some stipulations, but you can reuse the VA loan. In fact, that's kind of what screwed me, and the story we'll tell in a minute. The VA loan allows you to buy a property and then live in it. You have to intend to live in it for a year, but let's say your job relocates you more than 50 miles away. Well, now you can move out and live in another home, and you can use the VA loan again, and you can keep doing this until you've maxed out the maximum allowable amount of VA loan, depending on your area. So, you know, $400,000, $700,000, depends on your area, and then, you know, you pay 25% down over that, which is just really cool, but you can keep using it. And then, if you've maxed that out and you can't reuse it, you can refinance into a conventional loan with one of the houses you already own or sell one of the houses you already own, and it just kind of recycles, and you can now reuse the VA loan again. But the real benefits behind the VA loan are the safeguards in place to ensure you're taken care of and your family is taken care of. The VA loan offers a level of comfort that a lot of loans don't, even though it might be 100% financed. One of the complaints a lot of people have is the strenuous inspection and appraisal periods for the VA loan, but the reality is once you get past that and purchase the home, that's a really good thing, because it means you know every minute detail of everything that's wrong with the property. The odds are very, very slim that something will come back to bite you in the rear later on, because you had a very thorough inspection period, and the appraisers are very good, and so you know that there's a margin for error there that may not be the case if you use kind of cheapo non-vetted people to buy a conventional loan. The Department of Veteran Affairs will actually go to bat to negotiate for you a little bit on foreclosures. Now, I am not advocating to fall behind on your mortgage payment, but if the worst of the worst happens, because the VA guarantees 25% of that loan, that's how you're able to get 0% financing, they don't want to just lose their money. So they are going to be willing to help you negotiate, and if things go super south, they have ways to still help you get out without a huge foreclosure on your record short sale, stuff like that, and the Department of VA will actually help you with that, whereas most lending institutes are not so kind per se. Another safeguard is the vetted professional. So your lender, inspector, appraiser, contractor, the energy efficient people, and all these people that work with your home, they've all been vetted by the Department of Veteran Affairs. So they have some requirements for vetting to ensure that you have qualified people working with you. Now, obviously, there are going to be people who are better than others, and there are going to be some people who fall through the cracks, but the vast majority of people that would not be someone you want to work with for lending or contracting are going to be weeded out by this vetting process, either through the vetting process, or just because there is a vetting process, and they're like, I don't waste my time applying for that. So you have a much better talent pool to pull from, which means you're going to get better services and a better product, depending on what you're using. Another great safeguard is that the VA loan is actually assumable, which means that another veteran could come and just take over your payments. This is not necessarily the most ideal exit strategy, but let's say you buy a $500,000 house, and because of commission for real estate agents and maybe some repairs, maybe the market didn't go up as much as you thought, or you didn't live in it as long as you thought because you got orders. If you sell the house, you need to bring $10,000 to closing in order to break even, meaning that you would be kind of underwater, and when you pay commission, you're going to be out $10,000 out of pocket. Not ideal, but it's a reality. I have a buddy out here going through that right now. What if you had another friend who had just gotten there and liked your house, and they just assumed your mortgage, meaning that they just start making payments for you, they just take over your mortgage. They don't need the down payment. They're a VA lender. All that other stuff is still a normal thing. You don't own the house anymore, but instead of losing $10,000 on a commission, you just walk away, and they just take over your payments. It's kind of a win-win because if the appreciation happens or they make more debt pay down over the next three years, they're going to be taken care of. Obviously, they want to do their numbers, but you're taken care of because now you're not bringing $10,000 to closing, so you can put money into a new property. It's a very nice exit strategy when things have not gotten the way that you would like them to have gotten. The VA renovation loan is amazing. The VA renovation loan is huge. You can buy a house, even if it's teardown quality, and renovate it completely and move into an effectively rehabbed and almost brand new home and still be zero down, and you can build equity by doing that. The opportunities are endless here. Again, imagine if you do a 100% refinance later, and now you've got all your money back out for this awesome property. There's some cool strategies that you can use to utilize the renovation loan and the refinance loan to, I don't want to say game the game, but to really, really leverage your benefit, but be careful when you're over-leveraging. All right, this sounds way too good to be true, so David, there's got to be a downside. Of course, there's a downside. There's a downside to everything. The downside is not enough people know about the VA loan. The biggest problem I have with the VA loan is the amount of people who don't understand it. Now, I will say, and I'm going to divert real briefly, if you over-leverage the VA loan, it can be dangerous, so just make sure that you understand the market you're getting into, and as always, buy as an investment, not as just some property that you're only going to live in for a couple of years. Think ahead, run the numbers. As long as that works, the VA loan is just an amazing, amazing benefit. My horror story with the VA loan starts in 2015. I read a couple books. I decided that I was just going to jump in, take action, and I was going to buy a duplex. I probably could have bought a fourplex, but I was going to buy a duplex, and for those of you who've listened, the numbers worked out at cash flows. I get a couple hundred bucks a month. It's really not a bad deal. Here's the problem. When I asked my realtor, who was awesome, about a VA lender, her lender did not necessarily specialize in VA loans, so she didn't really recommend it, so I went, and what I did was I found a lender. I actually thought of someone who had been pushing radio ads, so kudos to those of you who use radio. It actually was, you know, it still works somewhat, at least it did in 2015, and they advertised that they specialized in the VA loan, so I went and talked to them, and the guy seemed really nice and really friendly, but he told me, well, long story short, he talked me out of the VA loan. Basically, what I got out of that was that I could only use it once, and he said I could use it other times, but he mentioned that it was just a very complex problem, and he focused on the fact that the funding fee went from 2.15% to 3.3%, meaning that it would be more expensive the second time, and how complicated it was, and all the stipulations, and he really kind of tried to downplay the VA loan. He basically talked me into not wasting my VA loan on that duplex, but waiting until I had a bigger property to purchase, which is all well and good, but an $80,000 duplex barely even makes a dent in my certificate of eligibility. So here I am, listening, doing the thing, you know, whatever. I do the FHA loan, which is not terrible, but here's the problem is that I paid 3.5% down, which again, not terrible, but because it was less than that 20% down, I'm required to pay private mortgage insurance, which is a bummer, and like I mentioned before, that's $81 a month, which is just shy of $1,000 a year. So you figure I've owned this place for four years, so that's around $4,000 that I've paid in private mortgage insurance, which could have been cash flow into my pocket, and my closing costs and fees and down payment came out to just shy of another $4,000 when I originally bought the place. So in the last four years, that's $8,000 that I have spent, either spent on the FHA loan or missed out on through PMI that would have been completely avoided and in my pocket had I used the VA loan. The really, really crappy icing on the cake is that the VA loan has a lower interest rate, and at the time, it was like a quarter of a percentage lower interest rate, which adds up pretty quick over time. So over the last four years, I've probably lost about $10,000 just by not using the VA loan, which I would like to point out is more than my car payments and more than lattes would have been and more than, you know, most of those little petty things that people tell you to focus on with your budget. This cost me more than most of those things would have, and all it was was me trying to be ambitious and not having the right person to talk to. Again, this is a $10,000 mistake, roughly, and that's in a very affordable market. Imagine if that had been somewhere like San Diego, San Francisco, or Hawaii, where instead of an $80,000 duplex, it's a $500,000, $600,000 property. I can't even begin to imagine how much worse things would be. Moral of the story is, make sure you find a very solid VA lender and a realtor who works with a VA lender. The two, if you get quality lenders and realtors, can make your life so much easier. The problem is that we often go for the first person we run into or the person we know, and unfortunately, that might not be the best person to talk to. You need to shop around for lenders. You need to shop around for realtors, and really, you need to have someone there to help you out and hold your hand, which is why, if you click the link below, I have actually set up a page on my website. You go in and plug in a little bit of information. It's like five or six questions. It asks you what your name is, what market you're looking to invest in, rough ballpark, how much you're thinking you might have to spend, and timeline, whether you're thinking maybe next month you need to buy a house, six months, a year, or you're just curious. What I will do is I will take all of that information, because it'll email me, and I will go out of my way to hunt down two or three realtors that I think would be a very good fit, and obviously, I will look through who their lender is and all that, and as an agent, I'll vet them to my best of my ability, and what this will do for you is it'll give you a couple people to talk to and to ask questions of and to get familiar with that I've at least taken a look at to see if I would use them. Now, I'm not saying that if I would use them, they are the best person in the world, but having been burned before, I know what not to look for, and I'm gonna make sure that you are taken care of. This is an absolutely free service, and what I will do is I will then put you in contact with them, and if you have questions for me throughout the process, I'm there to help you out. My goal through this is that whether you are buying a home or you are an investor, I'm able to help you have a smooth transition and a smooth process, and hopefully two, three years down the road, you'll be looking at me and going, man, what a great decision it was to use that VA alone, and then I'll go, woo, high five.