5 Common Misconceptions About VA Loans
When it comes to the VA loan, there tends to be quite a lot of misinformation. The internet is full of people who think they understand it because they bought their home five years ago with their VA loan. Please don’t take information about something this complicated from people not in the real estate or mortgage industry. Although they are framed in various ways across many Facebook groups, these five statements and questions that tend to pop up all the time with terrible answers!
There is a minimum credit score required!
There is a huge misconception here that the VA has a minimum credit score in order to qualify for a loan. Basically, its fake news! The VA does not have a minimum credit score requirement. That is because the VA only guarantees the loan underwritten by whatever mortgage company is handling the loan. Minimum scores only apply to the company you are applying to and what their minimum credit score standards are. Those will vary company to company depending on a large variety of factors.
2. You can’t purchase a foreclosure with a VA loan!
Wrong, you can purchase a foreclosure with your VA loan but, there are a few things to consider first. Most foreclosures are in what appraisers would consider C5 or C6 conditions. In other words fair to poor condition. These properties often times will feature obvious deffered maintenance and in need of significant repairs. In some cases this could be bad enough to affect the safety and integrity of the structure. That is why you will often times see the sales prices of these homes and think its a “deal”! Most properties, even foreclosures, will sell for about what they are worth so a “cheap” home is usually in need of extensive work. You might be thinking, hey I can do most of that stuff so what’s the big deal? The problem is, in order for any bank to lend money on a VA loan it has to meet strict safety and livability standards which obviously are not going to be meet with many foreclosures. In a regular resale situation you can ask the seller to repair things not up standard but an overwhelming majority of banks or asset management companies will not do or allow work on their properties prior to closing. Don’t loose hope though, they are out there its just going to be a bit harder to find one that will work!
3. You don’t pay closing costs with a VA loan!
Many people confuse the lack of a down payment with closing costs. These are two separate things. For a conventional loan you will need somewhere between 3% and 20% of the purchase price to be put down on the property and for FHA loans its just 3.5%. The down payment just gives you some equity in the home and the more you put down, the more your rate could change due to the decreased risk a lender takes. The VA loan is guaranteed, so they don’t require a down payment, although you could if you have the funds and want some instant equity. Closing costs are the costs and fees associated with your lender pulling your credit report, processing, verifying information and so much more. Every lender in this country is going to charge something, but for VA buyers this is usually wrapped up into the loan. Take for instance a $100,000 home. Your closing costs of lets say $2,500 will be applied on top of the loan amount so from day one, you owe $102,500. Generally this is not a bad thing, but if you have intentions of only living in a home for five years of less you may want to strongly consider or calculate how much equity you will have when you think you will move next. Selling expenses can sometimes reach up to or around 9% of you homes value.
4. I’m not going to need any money to buy with a VA loan!
If you see this question anywhere its likely tied in with point number three. Sure you may not be putting money down, if your disabled you may not have a funding fee and your closing costs may be wrapped into the loan but there are still expenses to consider. When you sit down with your Realtor to write up that offer on your dream home, they are going to discuss with you right away something called earnest money. Typically you might find that its somewhere between 1% and 3% of the offer price. This money is designed to show your sincere interest and intent to purchase. In my area of the country the money (check, cashiers check or money order) is turned over to the listing company, attorney or title company after your offer is accepted and signed. You may though the lending process get that money “paid back” via seller paid closing costs at closing but its still going to leave your bank account for a minimum of three weeks. Your lender may also have you pay for the appraisal up front. Here in the Midwest that is usually going to be $400 to $700. You will also likely have inspections. Between a whole home inspection (best money you can spend!), radon, lead paint testing, mold testing, well, septic/sewer tests, water samples among others, you can likely have a lot more to pay for than you might imagine. As a general rule, I would advise saving at least $2,500 for these inspections depending on what you feel you need. I strongly encourage you to discuss realistic prices with your Realtor for the area your planning on purchasing in.
5. If I pay for a VA “inspection”, why should I have a whole home inspection?
This might be the most confusing concept in this blog. The VA appraiser doesn’t “inspect” your home. Their main goal is to visit the property and verify the quality of construction, current condition, that the government records of rooms sizes/count is accurate, look for obvious issues based on loan type. For VA, think safety issues, peeling paint, inadequate electrical systems, insufficient HVAC systems, roof life expectancy, pest control issues and broken windows. They then go look for comparable properties that have sold within the last few months, in the same conditions, in the general geographic location to determine value. They don’t “inspect” anything really. If something is noted it means both parties need to agree on who should come actually inspect or repair that issue. Many of these can be caught with your Realtor when looking at the home or by the whole home inspector.
Written By: Keith McKeever, Battle Buddy Podcast Host and Licensed Realtor with RE/MAX Preferred Choice
