If you've served in the military, a mortgage backed by the U.S. Department of Veterans Affairs may be your ticket to home ownership. VA loans don’t require a minimum down payment or mortgage insurance, and they often have lower interest rates than other mortgages.
"Using that VA loan is an opportunity to buy a chunk of America and build wealth," says Levi Rodgers, a former Green Beret and owner/broker at Re/Max Military City in San Antonio.
But applying for and using a VA loan involves steps other mortgages don't, and not all sellers or real estate agents are familiar with them. It's important to be prepared and choose the right professionals to help you, especially in a competitive housing market.
Here are some tips that can smooth the process.
1. Get your certificate of eligibility
Your VA certificate of eligibility is a document that shows you meet the military service or surviving spouse requirements to apply for a VA loan. You'll need it for the loan to close, so it's a good idea to get this done at the beginning, says Kevin Parker, a vice president at Navy Federal Credit Union.
You can request the certificate through the VA or ask a VA-approved lender to help you get it.
2. Compare experienced VA mortgage lenders
Not all lenders offer VA loans, and of those that do, some focus on working with military borrowers more than others.
"If you want a good steak, you probably want to go to a good steakhouse," Parker says. Likewise, if you want a VA loan, choose a lender that does a lot of VA lending.
The VA loan program has its own rules, so you want a lender that understands the requirements and can guide you through the process. Ask potential lenders if they have loan officers who specialize in working with military borrowers.
Another consideration when lender shopping: See if your state has any home buyer programs to benefit first-time buyers or veterans, Rodgers says.
Many state housing finance authorities combine low-interest mortgages, including VA loans, with closing cost and down payment assistance programs. Some states also offer home buyer tax credits you can use on your federal tax return. To take advantage of the programs, you need to work with a participating lender; your state housing authority can provide a list.
You'll want to get preapproved for a loan before you start looking for a property. A preapproval letter from a lender will indicate how much you can borrow, and show sellers and their agents you're financially qualified.
Apply with at least three VA-approved lenders. Once you have an address for the property you want to buy, a lender will provide a Loan Estimate, which spells out the terms, the estimated monthly payment and closing costs, and the annual percentage rate — your interest rate including fees. Compare Loan Estimates from different lenders to choose the best loan for you.
3. Decide how you’ll pay loan costs
Like other mortgages, VA loans have closing costs, which are fees charged to cover services and expenses such as the appraisal, inspection, title and origination fees. Closing costs typically run from 2% to 5% of the loan amount and are detailed in the Loan Estimate.
Another cost is the VA funding fee, a one-time fee most borrowers will pay, based on the down payment amount and prior use of the VA loan benefit. The 2020 funding fee for a zero-down loan on a first VA loan is 2.3% of the loan amount.
Here are the options if you can't pay these costs upfront:
Roll the funding fee into the loan. Doing so will increase your loan amount and monthly payment, and it will mean you pay interest on the funding fee over the life of the loan.
Ask the seller to pitch in. The VA allows the seller to contribute up to 4% of the loan amount to cover some closing costs and the VA funding fee. Keep in mind, though, sellers are less likely to make concessions when the competition to buy homes is fierce.
Find out if your lender is willing to cover closing costs in exchange for you paying a higher interest rate. Understand that this will increase your monthly mortgage payment.
Seek closing cost assistance through a state home buying program for first-time buyers or veterans, as well.
4. Prepare to bring some cash to the table
Though VA loans don’t require a down payment in most cases, you'll still need some cash to buy a home. Here's why:
Increase approval odds
Lenders will review your cash savings to make sure you're financially stable enough to ride out any hurdles, such as unexpected expenses, after buying the home, says Anthony "TJ" Powell, executive vice president of AAFMAA Mortgage Services, a subsidiary of the American Armed Forces Mutual Aid Association. "A lender will want the applicant to show that they have the ability to save money and are not living paycheck-to-paycheck."
Cover the earnest money deposit
You'll need some cash for earnest money when making an offer on a house. Earnest money is a deposit that shows the seller you're serious about buying the property. The money is applied toward the purchase, returned to you at closing, or forfeited if you back out of the deal without a valid reason. The earnest money is usually about 1% to 3% of the loan amount, but can vary widely depending on the market.
Pay for moving and other expenses
You'll need some cash for moving, home maintenance, furniture and other expenses that come with homeownership. "A new home purchase is stressful for a buyer, and financial stress will just add to an overwhelming feeling," Powell says. "Having cash savings will lessen the stress and make the home buying experience easier."
5. Choose a real estate agent with experience serving military clients
Because the VA loan process has special requirements, it's important to work with a real estate agent who understands VA financing. A good agent will guide you through the process and can advocate on your behalf to sellers. For example, an experienced agent will understand the VA appraisal process and can steer you to homes that are likely to meet VA minimum property requirements.
An agent who has experience working with military buyers will also understand your unique housing needs. Rodgers, who was wounded in action when serving in the U.S. Army Special Forces in Afghanistan, helps each of his buyers create an "exit plan" for selling or renting out the property if they have to relocate later.
Interview a few agents and ask about their experience serving buyers using VA loans and any extra training they've completed, such as the National Association of Realtors’ "military relocation professional" certification. Don't assume agents have VA loan expertise just because they served in the military, Rodgers says.