My first home purchase occurred in 2012. I conducted research on Realtor.Com and found a three bedroom two bathroom townhouse in Towson, MD. Because I had never purchased a home before, it was a new experience for me. The townhouse was on the market for $175,000.
My natural inclination was to use my bank as my lender. There were a variety of loan products available, but the one that garnered my attention was the VA loan.
There were a number of pros for using the VA loan as my vehicle to make an offer on the townhome. The first pro was that no money needed to be paid towards the purchase price. It was a no money down loan. Compared to a conventional loan, which might require five percent down or an FHA loan, which might require 3.5% down, this VA loan benefit meant that I did not have to dip into my savings to make the purchase.
The second advantage is that no monthly mortgage insurance premiums or PMI needed to be paid. This is unlike an FHA loan that has both an upfront and annual mortgage insurance charge. Conventional loans, on the other hand, typically tack on private mortgage insurance unless twenty percent or more of the purchase price is made. Each month that I received my statement, there were no additional premiums that I had to make.
A third advantage of the VA loan is that it has lower average interest rates than other types of loans. Because the loan is backed by the VA, the loan is considered a lower risk than a conventional loan or an FHA loan. At the time that I purchased my home, it was at a 3.5% interest rate. I considered that to be a huge benefit going forward.
A fourth advantage of the VA loan is that there are no prepayment penalties. Some loans charge a penalty fee if the loan is paid off early. VA lenders can pay off a loan early without any financial penalties.
Another advantage of the VA loan is that there are refinance options available to veterans. The first is that homeowners with existing VA loans have the option to lower their monthly payment with lower interest rates. The second is that if a homeowner financed with a conventional loan or FHA loan, they can refinance their property into the VA loan program.
Veterans can also purchase a second or third property if they have used their loan benefits already. The reason is that the veteran may not have used all of their loan benefits with their first home purchase. This typically occurs when a veteran or active-duty member moves from one location to another location. For instance, a veteran may have purchased a home in Hawaii but then moves to California for another job. If there is remaining benefits remaining, then that veteran may acquire a home in California even though he or she used the loan to acquire the property in Hawaii.
Another advantage of the VA loan is that it is an assumable mortgage, typically subject to VA and/or lender approval. This means that a veteran may be able to have someone take over his/her mortgage payment.
The funding fee on a VA loan can be waived if a veteran has a service-connected disability. While there typically are no origination fees on the VA loan, there is a funding fee. This can be waived if the veteran can show that he/she has a service-connected disability. When I purchased my Towson home, I had been determined to have a 10% service-connected disability. Therefore, my funding fee was waived.
Another advantage of the loan is that the VA loan program has a foreclosure avoidance advocacy program. There are employees who will advocate on behalf of homeowners to find alternatives to foreclosure.
There are a few disadvantages to the VA loan program.
The first is that there is a limitation on buyers closing costs. Sellers can pay all of a buyer’s loan-related closing costs and up to 4 percent in concessions.
The second is that the loan cannot be recast. This means that the loan can not be reamortized. The process occurs when a person puts in a lump sum toward the principal balance on the mortgage to reduce monthly payments. The interest rate and the term of the loan remain the same, but by recasting the loan the monthly payments are reduced for the remainder of the loan. I have paid additional loan payments towards my Towson home, but the loan payment is still the same.
The VA loans do not guarantee that the house that a veteran purchases, whether it is new or previously occupied, will be free of defects. When I purchased my property in Towson, I found that the carpet needed to be replaced and the downstairs bathroom needed an enclosure around it to make the property livable.
The VA appraisal is not an “inspection” of the property. In order for a prospective property owner to do a proper due diligence, it is usually in their best interest to have a home inspection performed. As I was going through the purchasing process, I hired an independent contractor to perform an inspection on the property. It gave me an idea on what needed to be replaced and fixed before I moved into the property. It also gave me some leverage in the negotiation process so that the previous homeowners would know what I wanted them to pay for before I acquired the house. This way, I knew there would be no disappointments or disagreements later down the road.
It’s important to note that the VA only guarantees the loan and does not cover legal expenses. It cannot guarantee that the property is a good investment. This was probably the scariest aspect of my home purchase. It was a huge investment on my end, but I had no idea whether it would have unnecessary risks.
If you are ready to begin the process of home ownership, then start using services such as Realtor.com to begin your home search.