5 Things You Probably Didn’t Know About a VA Loan
For active duty service members, reservists, and veterans, there is arguably no greater financial benefit than using a VA Loan to purchase a home. It simply can’t be beat.
Everyone knows the “headline benefits” of using a VA Loan – no downpayment, incredible interest rates (on average, .5% better than the national average), and no mortgage insurance. These are reasons enough to use a VA Loan, but there’s so much more.
Here’s 5 things you probably didn’t know about a VA Loan.
1. You Can Purchase a Home More than the VA Loan Limit
Many people think they can only purchase a home up to the VA Loan Limit in their area. In most counties throughout the U.S., this loan limit is $424,100.
However, these limits are on the amount of liability the VA can assume, not a price limit on the home you can buy. In other words, you can still purchase a $500,000 home if the VA Loan Limit in your area is only $424,100.
How so? As mentioned above, the VA will only assume liability up to the loan limit in your area, so if you purchase a home above that limit, you are required to put down 25% of the difference for a VA Jumbo Loan.
In the example above for purchasing a $500,000 home, you would have to put down $18,975, which is 25% of the difference ($75,900) between the purchase price ($500,000) and the amount of the loan the VA will assume ($424,100). Compare that $18,975 down payment of a VA Jumbo Loan to the $100,000 down payment (20%) you would have to put down for a conventional loan. What a deal!
The U.S. House of Representatives passed legislation to remove VA Loan Limits in 2016. However, the legislation was never passed through the Senate and subsequently signed into law. So, VA Loan Limits may hopefully be a moot point in the future, but it is still important to know that until the legislation becomes law, you can receive a VA Loan for more than the stated loan limit by only putting down 25% of the difference.
2. VA Loans Can Be Assumed By Another Buyer
A special feature of a VA Loan is known as VA Loan Assumability. This is when a homeowner who has used a VA Loan to purchase his or her property then sells the home to another buyer who qualifies for a VA Loan; the VA Loan is “assumed” by the new buyer at the same terms of the current homeowner.
For example, if a homeowner purchases a home in May 2016 using a 30-year fixed VA Loan with an interest rate of 3.375%, and in May 2018, interest rates are 4.25%, a new buyer who qualifies can receive a new VA loan at the same 3.375% interest rate. That’s a monthly mortgage payment difference of roughly $150/month, which is very attractive for any buyer when he or she is considering between a home with VA Loan Assumability and one without.
In the current times of low interest rates, VA Loan Assumability is rare. However, as the Federal Reserve continues to gradually raise the discount rate and mortgage rates increase over the next few years, VA Loan Assumability will become much more common, and it can be an attractive selling point of your home to the right buyer.
3. A VA Loan Can Be Used to Purchase a Rental Property
Yes, a VA Loan can be used to purchase an income-producing property. However, there is a caveat: the property must also be your primary residence. As a result, you must purchase a duplex, triplex, or quadplex – it doesn’t matter as long as you live there too! Also, the VA loan limits are higher for multi-unit properties.
Many service members buy multi-unit properties using a VA Loan, and the rent from the other units covers their mortgage, expenses, and generates income. Pretty cool, right? Absolutely, especially with no down payment!
4. VA Loans Can Be Used to Purchase Foreclosures and Short Sales
A common misconception is that VA Loans cannot be used to buy foreclosed homes or short sales. Indeed, some homes that have been foreclosed or listed as short sales are in poor condition and therefore don’t meet the requirements of a VA Loan (such as the home’s roof must have 5 years remaining of serviceable life).
However, not all foreclosures or short sales are in poor condition, and as long as the home condition requirements of a VA Loan are met, a VA Loan can be used to purchase a foreclosure or short sale.
Bottom line, use of a VA Loan is not tied to the property’s status; instead, use of a VA Loan is tied to the condition of the home.
5. The VA Loan Funding Fee Can Be Waived
In general, the VA Loan does charge a funding fee, which is 2.15% of the home’s purchase price. This funding fee is rolled into the life of loan and spread out in payments over 30 years. In other words, it is not an upfront closing cost.
However, the VA Loan funding fee can be waived for any veteran receiving any amount of compensation for a service-related disability. In other words, a veteran who is rated 10% disabled by the VA (lowest compensation amount) can have the VA funding fee waived. What an awesome benefit for those who paid a significant price!
The Bottom Line
Without question, the VA Loan benefit is an outstanding financing vehicle for those who are serving and those who have served. With interest rates at three-year lows, there has never been a better time to use your VA Loan benefits.
If you are thinking of buying a home in Jacksonville and using a VA Loan, we have helped many buyers use this fantastic benefit to buy the home of their dreams. As a Navy veteran and veteran’s spouse, it’s important to us to continue to serve by ensuring our clients are educated on all aspects of VA Loans. Give us a call at (904) 479-8785!