If you have read my previous posts about our super fun first time home buying journey, then you know we've been riding what seems like an endless rollercoaster since we arrived at our new duty station. Our carnival ride is finally coming to a halt...11 weeks later!
This post is about the VA parts of purchasing a home using a VA backed loan. Most information I'm sharing may be common knowledge from the start, but some of it may take you by surprise. To be frank, our painful home buying process has been pretty darn unique, no fault of Veteran's Affairs, and we've learned more than we bargained for.
Hopefully someone out there can find our experience helpful!
The VA backed loan process sometimes gets a bad reputation in blogs, vlogs, and even on certain lender websites. Sometimes sellers aren't even willing to consider a VA buyer.
Honestly, the VA backed loan process is not all too different than the conventional loan process, but does have quirks.
Some quirks:
- There is a funding fee for first time VA backed loans of 2.3%
- The home you plan to buy must meet MPRs (minimal property requirements).
- VA backed loans have a built in escape clause.
- The VA has their own contracted appraisers, just like lenders do.
- The VA backed closing process can sometimes be longer than conventional loans.
- Appraisal costs vary by state, but are flat fees
- Extra documentation for veterans
- Working with a Veteran affiliated lender
- Real costs
The Funding Fee
This is a one time, lump sum that generally every VA buyer will have. There are exceptions to the fee, though. If you are a gold star spouse who has not remarried, no fee. If you receive 100% VA disability, no fee. There are a few other exceptions out there for veteran purchasers who are exempt from the fee, but I'm not here to give an exhaustive list.
The percentage also changes for those who are buying a second or third home. The more homes you finance using a VA backed loan, the more the funding fee increases for each purchase. They call them tiers. Veterans are able to go back to tier one status, if the previous loan(s) is/are satisfied.
For the sake of us being first time home buyers with no exemptions, our fee is 2.3% (in 2021).
This means that for a home purchase price of, say $300,000, the funding fee will be $6,900.
Now, you can choose to pay this upfront at closing, but you can also have the fee rolled into your loan amount. Just note that if you roll it into your loan cost, you are paying interest on it.
Ex: That $300k home ends up being a $306,900 loan amount, if you roll it in.
Many VA buyers want to pay as little as possible out of pocket, otherwise they could have went with a conventional loan and paid the average 20% down, thus many buyers choose to roll the funding fee into their loans.
Honestly speaking, I heavily considered paying it upfront so it wouldn't incur interest throughout the life of our loan, BUT in the end, I decided against it for one big reason: this is not our forever home.
I see us living in this home for at least 3-4 years. If we had chose to pay the fee upfront and out of pocket, plus other expenses that I'll explain soon, achieving equity in just a few years time could be tough. There are no guarantees a house can sell for what you paid (or for your loan amount), but there are certainly no guarantees that any cash you shelled out at closing can be made up for later.
MPRs
The VA appraisal process is kind of scary. We went through it twice in the past TWO months with two very different properties and two entirely different outcomes.
In a conventional loan setting, an appraiser assesses value, but with a VA backed loan, the appraiser not only assesses value, but also uses a standardized list of MPRs the home MUST meet.
MPR=Minimal Property Requirements
My loan processor put it best: "They look for the three S's: safety, soundness and security."
Safety: Smoke detectors where they belong, and operational. Loose/exposed wiring. Trip/falling hazards. Fire hazards.
Soundness: Soft subfloors. Giant foundation cracks. Abnormally large cracks in driveway/garage concrete. General structure. Basic living amenities (stove, oven, working plumbing, AC/HVAC age, etc,)
Security: Doors & windows secure without missing locks or window panes. Neighborhood setting.
Basically, if the house is a major fixer upper, you may want to run away and not waste your time. If it is being sold "as-is", you may want to confirm with the seller's realtor that it does not have repairs that the VA appraiser will note before wasting your time.
Every appraiser has the same set of MPRs to look for, but not every appraiser is created equally. I would know...
Our first contract:
The house was built in 1989, traditional colonial. Beautiful, quiet neighborhood. But the 'seller' was in the process of repairs and renovation when my appraiser came through. Everything my appraiser found in terms of MPRs required fixes my seller had already agreed to do in our contingency list. Except one...
The bathrooms had no mirrors, and we didn't care. It actually gave me a clean slate to pick my own. But the appraiser required mirrors in all bathrooms before she could sign off for the VA to fund our loan.
What in the actual f*c*? Even though this house did not work out, the seller did install mirrors long before our deal went bad.
The others:
A missing kitchen cabinet door, missing light switch plates, missing smoke detectors, missing bathtub hardware.
The value came back as a nail on the head, though. The asking price was $349,900 and she valued it at $350,000.
*if you are curious to why this deal fell through -no fault to us-, read my previous posts! It wasn't the repairs, nor anything VA related...
The second contract:
The house is beautiful, built in 2012, with no expense spared in upgrades and finishes. Visually, and according to our home inspector, it is a well kept home. Our inspector did both houses and after the second one, he said the difference in issues were "night and day". I'll explain what our inspector found in the first home in a future post...I still have nightmares about it. But again, not the reason the deal went bad.
The VA appraiser for the second house was a different person (we don't get to choose). He found ZERO repairs needed.
BUT the appraisal value came in $25,000 less than the seller was asking. OUCH.
That is what I was afraid of...
He did use 5 comparable properties, and even reached out to my lender asking anyone (my agent and the sellers) to provide ANY comps they could find, even if out of the mile radius, that he would consider using in his final report. Unfortunately, the low value still stuck because there just wasn't anything out there to support the seller's asking price.
The VA Escape Clause:
In reference to the last chunk, it turns out that when the home builder recorded the square footage with the county, they accidentally included what would have been square footage above the great room, had it been finished for living space. It never was. The great room has a near 20 foot soaring ceiling height with a catwalk (open hallway) that looks over it. Our seller and his agent used the county square footage when pricing, never confirming it themselves before listing the property.
When the appraiser measured it, he was confused, had nobody discovered the above knowledge yet. Another VA appraiser went back out two days later (no cost to us) and double checked the original appraisers measurements, confirming something was askew. After the second measurement, everyone involved knew something was wrong.
Had that square footage existed, our seller's price point would be much closer to his original asking price, but you can't make a floor appear from thin air, literally. It changed all of the comparable properties and such.
Our seller was stubborn-ish. He wanted no less than $10k over the appraisal value. We weren't necessarily willing to come out of pocket ten-thousand over its value, unless it would be a forever home (and we knew it wasn't). Eventually, we met in the middle and agreed to pay $5,000 over appraisal value.
Our seller, a veteran himself, KNEW if he didn't come down to earth, we could very well walk away and get our earnest money back, no problemo. This is because of the VA Escape Clause.
The VA will never force a veteran buyer to be backed into a corner with a purchase. If the seller is unwilling to come down in price due to a low appraisal, and the veteran VA backed buyer is unwilling to makeup the difference out of pocket, the clause protects the buyer. Yes, the buyer would have to start all over in the home search, but at least they didn't lose any earnest money because of a stubborn seller.
The VA backed loan time line:
This is probably a large reason why VA backed loans get a bad reputation. Because the appraiser is contracted through the Veteran's Affairs organization, no one has control over when they appear to do the appraisal. Could be two days after they're contacted. Could be twenty-one days.
Yes, your lender still orders the appraisal, but again, they have zero control over when it will happen since it is contracted out.
Generally, most VA backed buyers will have a fourteen day appraisal contingency because of this. In peak buying times, a buyer may even have a twenty-one day or longer contingency. Sellers who don't understand the VA process tend to dislike the idea of waiting on their buyer any longer than normal, though this is out of the VA buyer and their lender's control.
VA appraisal costs:
What's nice is knowing upfront how much you will pay for a VA appraisal, but what sucks might be the state you plan to buy in.
Here in Georgia, the appraisal cost was a set $450 for the first inspection BUT the VA put out a new fee schedule that became effective December 1st, 2021 for this state. The new fee for Georgia is now $650, which is what our second appraisal cost us just a month after the first one :-/
Could be worse in California (varies by location between $700-$1,000)
You can check out the VA website and see your own state here: VA Appraisal Fee Schedule
We did have to pay this twice....ugggg. One for the first contract, and another for the second. I knew it was non-refundable if a deal were to fall through, and if you didn't know, now you do!
Our total, with two houses, in VA appraisal costs for our home buying adventure =$1,100
Note: If that first home would have worked out, we would have needed to pay an additional $150 dollars for the re-inspection, which would confirm all repairs listed were fixed. They would not have funded my loan without doing so.
Also, the VA appraisal sticks with a home for six months, but will only apply to other VA backed buyers. Even if we walked away from house two, the seller would still be stuck with the low appraisal in a military heavy neighborhood. We knew this, even though we went $5k over and out of pocket, and he knew it too.
Veteran documentation:
Unlike conventional loans, the utilization of your VA privilege requires extra documentation.
Things my active duty soldier needed:
- Certificate of Eligibility
- Signed letter (with official army letterhead) from his/her commander explaining his full name, active duty status and ETS date.
Retired veterans require a DD214 form, and those with 100% disability looking to waive funding fees should have documentation of their disability status, as well.
Also, be aware that you will (likely) have to provide many letters of explanation for weird things if you are active duty and moving to a new area. I had to draft one to explain to our underwriter why our driver's licenses are in the state of Arizona, another for why my address had changed after filing 2020 taxes (our landlord ended our lease and we had to move), another for why a new address popped up associated with our names (we had setup a PO box here shortly after arrival). There was one more, but my memory is lost at the moment.
Veteran affiliated lenders:
There are many to choose from, but choose wisely!
Sure, even household named banks we've all heard of work with VA backed buyers, but we could not have had a better experience than we have with Veteran's Lending Group (its parent company is Cross Country Mortgage).
From day one, my loan processor has answered -personally- every single call, email, question, concern, etc,. She's been my rock throughout this journey. I never had to sit and wait on a response. I never felt like a number. Was never put on hold.
After our nightmare of a first contract gone sour, this company has been working tirelessly to achieve our 21 day closing with the second contract, and they fulfilled it as of yesterday evening; we received our 'clear to close' at 19 days, two days before our set closing date.
19 DAYS!!!! That's very very rare with a VA backed loan. But proof a fast closing is possible as a VA buyer! You just need the right team, tons of perseverance & time management, and quick communication. Truly, the right team makes a giant difference.
They treat us like people, knowing we were in a situation that rarely happens to even the most experienced home buyers. But more importantly, they treated us like people from day one.
Because my lender only works with veterans, they thoroughly understand the ins and outs when working with a VA backed buyer. This is all they do.
I know large military banks do the same, but my problem when shopping for a lender was one key word: large.
Generally speaking, underwriters and loan processors are juggling multiple clients, not just you. But the larger the bank, the more time that may be required to complete paperwork, or get back to you because of client volume, and that was not something I wanted for our first time process.
I enjoy learning a process, especially one that costs me thousands of dollars and my sanity. I never felt confused or like a mushroom in the dark throughout this process, thanks to my lending team.
Would I use my lender again? 110% YES! I'm seriously itching to write them a stellar review once this is finalized.
Another thing to consider when choosing a lender is the origination fee. Some of the large military banks charge you 1% of the sale price of a home. Doesn't sound like much, but 1% of a $300,000 home is $3,000.
My lender charges a flat origination fee of $995. A $400k home? $995. A $150k home? $995
The only way this flat fee wouldn't be worth it is if the house cost less than $99,500
Real costs buying a home with a VA backed loan:
THIS. This is important to consider!!!
Our entire military lives we've heard numerous friends and colleagues talk about how they purchased a home using a VA backed loan and came zero dollars out of pocket.
This is NOT always the case. And it's definitely not our case.
It really depends on quite a few factors:
- Seller contribution & The housing market
In a buyers market, sellers may be more desperate to push a sale, thus more willing to contribute.
2021 is no picnic for any buyer.
- How large you are willing to make your loan?
Two major things are required for using a VA backed loan: The VA funding fee and the VA appraisal. You can't avoid these costs unless you are exempt.
We did roll our funding fee into our loan. The appraisal fee cannot be rolled into our loan.
- House inspection
This is different than the appraisal and not required. Honestly, I could've went without one for the second property, but after dealing with the first house, I needed an inspection for a peace of mind on the second.
Each inspection cost us, and could NOT be rolled into our loan. Each was $450
- Georgia Pest/ Wood eating organism/mold inspection
I know our lender required this, but I do not believe it is required by the VA. Regardless, to fund our loan, it had to be done.
- Miscellaneous fees
There are dozens of other fees that go into your 'closing' costs. Georgia requires an attorney to handle all real estate closings, so there's that (not as expensive as it sounds). Also title search fees, credit report fees, flood survey fees, recording fees, transfer taxes, title insurance (optional), etc,.
Real talk:
Our final closing cost on our closing disclosure is $18,203.00
Yikes!!!
But remember, we did roll our funding fee into our loan, so we don't have to pull that cost out of pocket. Our seller contributed $2,000 towards closing as well. We also had $2,000 in earnest money that will be applied to our closing costs.
So our total "cash to close" is actually $9,404.00
Our additional costs that do not involve our lender:
-$900 total for two home inspections
-$2,400 for an additional AirBnb reservation after the first deal fell through (unplanned cost)
-$2,800 for a refrigerator since it is not included in the home sale
We certainly are not coming $0.00 out of pocket like many others before us. Our first contract was estimated to be about $8k cash to close, even after seller contribution and such.
Our grand total, cash in our bank, needed for this to happen was $15,504
Each case is unique, and I am not trying to scare anyone out there, but there is a sense of realism most people need to hear. Be prepared to pay something out of your personal account in some way. You may get super lucky and not need to as a VA buyer, but it's better to assume the worst and hope for the best when home buying. You wouldn't want $100 being the difference of buying your dream home or having to walk away.
My biggest piece of advice is to gather up any and all documents you may need before even contacting a lender, which is what we did. As soon as they asked for it, they received it the same day. And when they needed additional documents, like letters of explanation and such, I was on it immediately. They never once had to wait on us to pick up the process, which honestly helps. Even my lender said so.
Things a VA lender will request:
- Certificate of veteran eligibility
- Letter from a commander, if active duty (not all lenders will want this, per se)
- Front and back, clear copies of driver's licenses of anyone on the purchase agreement
- the previous two years of tax forms (they can request them through the IRS, you do not need to print/scan)
- At least two months of bank statements from any account(s) you plan to use to fund your loan (do not alter these or they will not accept it).
- Social security numbers (they may ask for a copy)
- Previous landlord information
- LES/paycheck stubs
- W2s from your employer
- Orders to your new duty station where you are purchasing (if active duty)
*Because the world is technologically inclined, all documents were scanned and saved onto my laptop before we got started, as my lender requests everything digitally in an online portal. I also brought my printer/scanner with us for the move which was SUPER handy when a random request for a letter of explanation has happened.*
Note that your lender will continue to ask for new bank statements throughout the process, as well as for current LES/paycheck stubs. There were a few times I had to do transaction statements through my bank, too, just because it was too early in the month for a full statement to be issued. Your lender will also continue to monitor your credit, so don't run off and throw a fat new sofa set on your credit card, nor finance that new monster truck with a obnoxious lift-kit you've been eyeballing.
We continued to pay credit cards, but never once used them since we opened our loan in fear of fudging something up. We don't rely on them on a normal day, anyway. We also avoided transfers from our main checking and savings associated with our loan to any of our other accounts not associated with the loan, just to be safe. You will have to explain any untraceable transactions (both deposits and withdraws) that seem sus, heads up. Always make sure there's a paper trail, and a good reason while working with a lender.
Overall, our experience with using a VA backed loan hasn't been rough at all. If you've heard the horror stories about VA backed loans, hopefully some of our experience can be the good difference you needed to read before setting off on your VA home buying journey! I would totally go through the VA backed process again, if needed. But honestly, I do fancy a farmhouse fixer on acreage within the next ten years, so we'll see! Goats may be in our future....one day. Until then, hello suburbia!
*Update: Our lending team graciously did us an unexpected favor because of our slap in the face, totally odd first contract gone wrong, no fault of theirs or ours. They pooled together and paid our first VA appraisal fee (from the house gone sour), unbeknownst to us.
They did not have to do this, period.
AGAIN, it pays to have a great lender!!! I promise, good people on your side, watching out for your best interest can make a ginormous difference in your experience!
Many thanks to our people over at Veterans Lending Group (Kelli, Jamie, Adriyana, Julia, Edgar and anyone else I missed) . You will probably never read this, nor understand the magnitude of our appreciation and thanks for all you have done!
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