Time to slay the myth around the magical unicorn called the “VA Loan”
Since transitioning out of the military, I've had the, um, "pleasure" of being around a lot more civilians. Some of the questions I'm asked on an annoyingly regular basis are, "Aren't VA loans awesome? Don't you get a free house? Did you get yours?"
After polling some veterans, I realized I should give a little brief on the subject. Time to slay the myth around what a VA loan is or isn't.
First: The VA loan is, in fact, not a loan at all.
The VA Loan Program, created in 1944 as part of the Servicemen's Readjustment Act, is a service the Department of Veteran Affairs created to help veterans returning from WWII buy a home.
According to the VA website, "VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms."
Essentially, the VA will co-sign a loan with you, and that gives you a few perks.
Why is co-signing helpful?
When new adults try to rent an apartment or buy a car, most people won't trust them unless they get a "guarantor" to co-sign the loan or the lease, usually in the form of a parent or older family member. After faithfully paying rent and payments on a loan or two, civilians in their 20s build up credit and no longer need anyone to sign off their financial choices.
Military personnel and veterans are a bit different. Our lifestyle inherently makes us look financially untrustworthy.
"How are you 24 with no rental history?" I live in a barracks.
"You seem to have moved every two years..." Yep.
"You disappeared from our system for over a year except for credit card transactions from… Afghanistan. Are you a terrorist?" It's called deployment!
Luckily, we have an Uncle Sam willing to co-sign on such a big purchase, or what's called a Purchase Loan. You'll be able to get better interest rates than your credit alone could get you, and you can skip the down payment.
Bonus: Uncle Sam will also insure the transaction, allowing you to skip Private Mortgage Insurance.
The Devil's Details
Just because you can get a loan for $0 down, doesn't mean you should. Regular people are expected to drop at least 20% value of the house as a down payment.
Here are three different scenarios. Same house, same interest rate, same 30-year loan.
The less you pay upfront, the more you have to pay in compounded interest for the next 30 years. 30 years. That's your entire military career plus half your next career!
Being able to do less of a down payment is useful in a few scenarios. For example, if you live in California, chances are you won't ever have $200K cash for a 20% down payment on the crazy prices out here.
Warning: Anything offered by Uncle Sam comes with a catchAccording to the VA website, "VA-guaranteed loans are available for homes for your occupancy or a spouse and/or dependent (for active duty service members). To be eligible, you must have satisfactory credit, sufficient income to meet the expected monthly obligations, and a valid Certificate of Eligibility (COE)."
A few takeaways:
- VA Loans are only for houses you will live in, NOT commercial or investment properties.
- You have to live in the house for at least one year.
- You can't buy a multi-family or multi-unit property. No duplexes or apartment buildings (Trust me, I tried).
- Banks set the terms of the loan (interest rate, payment schedule, etc.) based on your credit and current job, not the VA.
- The VA might not approve you.
- Requires at least 181 days active duty completed to be eligible.
- Dishonorable discharge not eligible
- Some dependents are eligible
- Can be used to BUILD a house
- Receiving a Certificate of Eligibility is required
- There is a loan fee charged by the VA
- Closing costs still have to be paid (typically 2-5% of the loan)
- There is a limit on how much you can borrow without making a down payment based upon where in the country you live.
When good loans go bad
After nearly an hour and being transferred 7 times, I finally spoke to the most unenthusiastic Federal Employee in existence to answer my unanswerable question: "Are VA loans any different in foreclosure or the foreclosure process than a regular civilian mortgage?"
The answer: No, mostly.
The VA will not step in and save you, there are no cash handouts, and the VA will not shield you from the banks that are after their money. The VA will take care of a few fees dealing with the lenders, but that is about it. For more questions: 1-877-827-3702 or visit the payment problems page.
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