After a PCS, you may have several options for housing. You may be able to move into on-post or contracted family housing immediately. You may choose to rent an apartment or home. And, of course, you may decide to take the plunge and purchase your own home. Military personnel do not have the same all-inclusive relocation packages offered to corporate employees. One of the biggest differences is the lack of a program to ease the burden of homeowners facing relocation. While many corporations will actually go so far as to buy your home, with the military you’re on your own. Therefore, military personnel should consider all the possibilities when deciding to buy a home. When PCSing away from the home that you own, you could:
• Sell the home. You may actually take a loss after paying the commissions and closing costs.
• Rent the home out. This works great for some people, for others it’s a disaster. Your home may be abused and destroyed by a tenant, or the tenant may never pay the rent. You still must make the mortgage payment.
Home ownership is best considered near retirement, when the soldier has decided where to live after the career is over. But, make sure that the retirement pay will be enough to pay the mortgage!
The Home-Buying Process
In general, your buying process should follow this basic outline:
• Select a qualified real estate agent.
• Pre-qualify with your lender.
• With your agent’s assistance, select properties for preview.
• Select the home you would like to purchase and then decide on what price to offer.
• The agent presents the offer and negotiates price
• Offer is accepted or countered until an agreement is reached.
• Escrow is opened.
• Complete the loan process.
• Loan is accepted
• Property is inspected by home inspector.
• Contingencies are satisfied and removed.
• Buyer walk-through.
• Escrow is closed—the home is yours.
• Move in!
Selecting a Real Estate Agent
When choosing a real estate agent, look for an efficient, qualified, conscientious agent who will take the time to determine your buying needs. You want an agent that represents you, the buyer.
Seller’s agents have contractual relationships with their clients that preclude them from advising you about how much to offer or recommending any special considerations you might receive from the seller. A buyer’s agent represents you, the buyer, when purchasing property in a real estate transaction. The agent owes full fiduciary responsibilities, duties and loyalty to you, the buyer. A buyer’s agent represents you exclusively, will negotiate on your behalf and is not concerned with finding the best price for the seller. The agent is compensated either by the buyer or the seller depending on the laws of the state in which you are purchasing the home. Please check with your assigned agent for full disclosure of the laws regarding agent compensation. It is important for you to discuss the buyer’s agent compensation during your initial interview with your assigned Realtor and find out what type of written agreement needs to be signed prior to being shown any properties. Your buyer’s agent will help you:
• Evaluate your specific needs and wants and locate properties that fit those specifications
• Assist you in determining what amount you can afford by getting you pre-qualified
• Select properties to view that meet your specific criteria
• Research the selected properties to identify any problems or issues to help you decide on what price to offer
• Present the offer and negotiate the price (provide "earnest money" to help your agent negotiate the best price)
• Review and explain all legal documents
• Research potential qualified vendors for inspections, insurance, legal issues, etc.
Effective Strategies for Home-Buying
The basic rule of home buying is prepare, prepare, prepare. To avoid frustration and confusion later on, you want to make sure that your finances are stable far in advance. Once you actually begin the process of looking, the more organized you are, the more smoothly the purchase will happen.
• Be Prepared: Long before you are ready to buy, start reading real estate classifieds and attend open houses. If you qualify, send for your VA certificate of entitlement, just in case you want a VA mortgage.
• Check Your Credit: Contact a credit bureau and request your credit report. The reports are often free, and even if it costs a little, it’s worth the price to know there are no mistakes or if you have been confused with someone who has a similar name.
• Manage Your Money: Skip that weekend trip or night on the town and put away some money for a down payment and closing costs. Also, if someone is making a large cash gift toward your purchase, try to get the funds into your own account several months before you apply for a mortgage loan.
• Put Away Your Plastic: Don’t make any large purchases on credit. Buying a house needs to come before that new car or boat—and before applying for any new credit cards.
• Don’t be a Big Fish in a Small Pond:When you do start actively looking, try to buy the least expensive house in the most expensive neighborhood. This improves your chances for a higher profit if you resell.
• Don’t Buy Someone Else’s Problem: Don’t fall into the trap of looking at the location first and the building second. If a house is too big or overbuilt for a site, then it becomes a problem—one you don’t want.
• Take Notes: A map and notepad are essential for good house hunting. Mark the location of the home on the map and write down special features and things to remember on the notepad. Also, if the owner offers a fact sheet, keep it; a house you are not initially excited about might grow on you later.
• Don’t Overdo It: Never look at more than three houses at a time. After that, all homes seem to blur together. See three in the morning, have lunch, see three more, have dinner and then, maybe see three more. Six to nine houses in a day should be anyone’s maximum. Even then you may find it difficult to keep the features straight.
• A Picture is Worth a Thousand Words:Bring a camera or camcorder to take pictures of any house that appeals to you. Visual cues and a comfortable chair will help you remember why you were interested and give you as much time as you need to mull things over.
• Finish the Process: If you purchase a newly constructed home, make sure you get a builders warranty for any faults that may appear in the first two years. Also, check with the assessor’s office about the amount of taxes to be levied.
If you are thinking about buying a house, especially your first one, you may have some basic questions about the home financing process. The following answers may help.
How large a mortgage will you be able to get?
A general rule is that you usually can qualify for a mortgage loan of two to two and one-half times your household's income. For example, if your family has an income of $30,000 a year, you can usually qualify for a mortgage of $60,000 to $75,000. Lenders use many other factors to determine how large a mortgage they will give you. For example, lenders generally prefer that your housing expenses (including mortgage payments, insurance, taxes, and special assessments) not exceed 25 to 28 percent of your gross monthly income. Other long-term debt (monthly payments extending more than 10 months) added to your housing expenses should not exceed 33 to 36 percent of your gross monthly income. Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) mortgage loan percentages may vary. In addition, lenders want to know about your employment and credit history. This includes finding out about your job and income and how well you handled and repaid loans in the past. Legal safeguards exist to ensure this information is used fairly. For example, the Fair Credit Reporting Act states that lenders must certify to the credit bureau the purpose for which this information is sought and that it will be used for no other purpose. The Equal Credit Opportunity Act prohibits discrimination in lending based on sex, marital status, race, national origin, religion, age, or because someone receives public assistance.
How about the down payment and closing costs?
Lenders usually expect you to be able to make a down payment of between 10 and 20 percent of the house's price and to pay closing costs, often three to six percent of the loan amount. If you make a down payment of as little as five percent, but less than 20 percent, the lender will require you to pay for private mortgage insurance. (Requirements for
VA or FHA loans may differ.) Under the federal Real Estate Settlement Procedures Act, the lender must provide you with information on known and estimated closing costs.
How do you shop for mortgage loans?
Mortgage packages vary widely, and it is important to investigate several options to find the one best for you. If, for example, you are using a real estate agent or broker to shop for a home, you may want to consider their suggestions about lenders and mortgage packages. Check real estate or business newspaper sections, which may include brief tables on mortgage availability. Look in the Yellow Pages under "Mortgages" for a list of mortgage lenders in your area.
Call several lenders for rates and terms on the type of mortgage you want. In addition, consider shopping the internet for mortgage lenders. Compare the mortgages offered by several lenders before you apply for a loan. Most lenders require you to pay a fee when you file your loan application. The amount of this fee varies, but it can be $100 to $300. Some lenders do not refund this fee if you are not approved for the loan, or if you decide not to accept the loan terms offered. Before you apply, ask the lender whether they charge an application fee, how much it is, and under what circumstances and to what extent it is refundable.
What kind of mortgage should you select?
There are two major types of mortgage loans -- those with fixed interest rates and monthly payments and those with changing rates and payments. However, there are many variations of these plans on the market, and you should shop carefully for the mortgage that best suits your needs.
Common fixed-rate mortgages include 30-year, 15-year, and bi-weekly mortgages. The 30-year mortgage usually offers the lowest monthly payments of fixed-rate loans, with a fixed monthly payment schedule. The 15-year fixed-rate mortgage enables you to own your home in half the time and for less than half the total interest costs of a 30-year loan. These loans, however, often require higher monthly payments.
The bi-weekly mortgage shortens the loan term from 30 years to 18 to 19 years by requiring a payment for half the monthly amount every two weeks. While you pay about 8 percent more a year towards the loan's principal than you would with the 30-year, one-payment per-month loan, you pay substantially less interest over the life of the loan.
Keep in mind, however, that with shorter-term loans, you trade lower total costs for smaller mortgage interest deductions on your income tax.
Mortgages with changing interest rates and/or monthly payments exist in many forms. The adjustable rate mortgage (ARM) is probably the most common, and there are many types of ARM loans available. ARM loans usually offer interest rates and monthly payments that are initially lower than fixed-rate mortgages. But these rates and payments can fluctuate, often annually, according to changes in a pre-determined "index"; commonly the rate of return on U.S. Government Treasury bills. Some adjustable loans, for a fee, contain a provision permitting you to convert later to a fixed-rate loan. Another type of mortgage loan carries a fixed-interest rate for a number of years, often seven, before adjusting to a new interest rate for the remainder of the loan. A "buy down" or "discounted mortgage" is another type of loan with an initially reduced interest rate which increases to a higher fixed rate or to an adjustable rate usually within one to three years. For example, in a "lender buydown," the lender offers lower monthly payments during the first few years of the loan.
What features should you compare with different mortgage loan packages?
Probably the single most important factor to look for when shopping for a home mortgage is the annual percentage rate, or the "APR." The APR includes all the costs of credit, including such items as interest, "points" (fees often charged when a mortgage is closed), and mortgage insurance (when included in the loan). Lenders must disclose the APR under the Truth in Lending Act. The lower the APR, generally, the lower the cost of your loan. Advertisements that state other rates, such as "simple" interest rates, do not include all the costs of the loan.
What is a VA Loan?
VA loans are made by a lender, such as a mortgage company, savings and loan or bank. VA's guaranty on the loan protects the lender against loss if the payments are not made, and is intended to encourage lenders to offer veterans loans with more favorable terms. The amount of guaranty on the loan depends on the loan amount and whether the veteran used some entitlement previously. With the current maximum guaranty, a veteran who hasn't previously used the benefit may be able to obtain a VA loan up to $203,000 depending on the borrower's income level and the appraised value of the property. The local VA office can provide more details on guaranty and entitlement amounts.
Who is Eligible?
More than 29 million veterans and service personnel are eligible for VA financing. Veterans with active duty service, that was not dishonorable, during World War II and later periods are eligible for VA loan benefits. World War II (September 16, 1940 to July 25, 1947), Korean conflict (June 27, 1950 to January 31, 1955), and Vietnam era (August 5, 1964 to May 7, 1975) veterans must have at least 90 days' service. Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days' active service. Veterans of enlisted service which began after
September 7, 1980, or officers with service beginning after October 16, 1981, must in most cases have served at least 2 years.
Persian Gulf Conflict. Basically, reservists and National Guard members who were activated on or after August 2, 1990, served at least 90 days and were discharged honorably are eligible. VA regional office personnel may assist with eligibility questions.
Members of the Selected Reserve, including National Guard, who are not otherwise eligible and who have completed 6 years of service and have been honorably discharged or have completed 6 years of service and are still serving may be eligible. The expanded eligibility for Reserves and National Guard individuals will expire October 28, 1999. Contact the local VA office to find out what is needed to establish eligibility. Reservists will pay a slightly higher funding fee than regular veterans. (See paragraph entitled "Costs of Obtaining a VA Loan").
VA Loan Highlights
Before arranging for a new mortgage to finance a home purchase, veterans should consider some of the advantages of VA home loans.
1. Most important consideration, no down payment is required in most cases.
2. Loan maximum may be up to 100 percent of the VA-established reasonable value of the property. Due to secondary market requirements, however, loans generally may not exceed $203,000.
3. Flexibility of negotiating interest rates with the lender.
4. No monthly mortgage insurance premium to pay.
5. Limitation on buyer's closing costs.
6. An appraisal which informs the buyer of property value.
7. Thirty year loans with a choice of repayment plans:
a. Traditional fixed payment (constant principal and interest; increases or decreases may be expected in property taxes and homeowner's insurance coverage);
b. Graduated Payment Mortgage—GPM (low initial payments which gradually rise to a level payment starting in the sixth year); and
c. In some areas, Growing Equity Mortgages-GEMs (gradually increasing payments with all of the increase applied to principal, resulting in an early payoff of the loan).
8. For most loans for new houses, construction is inspected at appropriate stages to ensure compliance with the approved plans, and a 1-year warranty is required from the builder that the house is built in conformity with the approved plans and specifications. In those cases where the builder provides an acceptable 10-year warranty plan, only a final inspection may be required.
9. An assumable mortgage, subject to VA approval of the assumer's credit.
10. Right to prepay loan without penalty.
11. VA performs personal loan servicing and offers financial counseling to help veterans avoid losing their homes during temporary financial difficulties.
The CRV (certificate of reasonable value) is based on an appraiser's estimate of the value of the property to be purchased. Because the loan amount may not exceed the CRV, the first step in getting a VA loan is usually to request an appraisal. Anyone (buyer, seller, real estate personnel or lender) can request a VA appraisal by completing VA Form 26-1805, Request for Determination of Reasonable Value. After completing the form, it can either be mailed to the Loan Guaranty Division at the nearest VA office for processing or an appraisal can be requested by telephoning the Loan Guaranty Division for assignment of an appraiser. The local VA office may be contacted for information concerning its assignment procedures. The appraiser will send a bill for his or her services to the requester according to a fee schedule approved by VA. To simplify things, VA and HUD/FHA (Department of Housing and Urban Development/Federal Housing Administration) use the same appraisal forms. Also, if the property was recently appraised under the HUD procedure, under certain limited circumstances, the HUD conditional commitment can be converted to a VA CRV. The local VA office can explain how this is done.
It is important to recognize that while the VA appraisal estimates the value of the property, it is not an inspection and does not guarantee that the house is free of defects. Homebuyers should be encouraged to carefully inspect the property themselves, or to hire a reputable inspection firm to help in this area. VA guarantees the loan, not the condition of the property.
The application process for VA financing is no different from any other type of loan. In fact, the VA application form is the same as that used for HUD/FHA and conventional loans. The mortgage lender verifies the applicant's income and assets, and obtains a credit report to see that other obligations are being paid on time. If all is well and the appraised value of the property is enough to cover the loan needed, the lender, in most instances, can then close the loan under VA's automatic procedure. Only about 10 percent of VA loan applications have to be submitted to a VA office for approval before closing.
Five Easy Steps to a VA Loan
• Apply for a Certificate of Eligibility. A veteran who doesn't have a certificate can obtain one easily by making application on VA Form 26-1880, Request for Determination of Eligibility and Available Loan Guaranty Entitlement, to the local VA office.
• Order an appraisal from VA. (Usually this is done by the lender.) Most VA regional offices offer a "speed-up" telephone appraisal system. Call the local VA office for details.
• Apply to a mortgage lender for the loan. While the appraisal is being done, the lender (mortgage company, savings and loan, bank, etc.) can be gathering credit and income information. If the lender is authorized by VA to do automatic processing, upon receipt of the VA or LAPP appraised value determination, the loan can be approved and closed without waiting for VA's review of the credit application. For loans that must first be approved by VA, the lender will send the application to the local VA office, which will notify the lender of its decision.
• Close the loan and the buyer moves in.
For What Can I Use a VA Loan?
• To buy a home, including townhouse or condominium unit in a VA approved project.
• To build a home.
• To simultaneously purchase and improve a home.
• To improve a home by installing energy-related features, such as solar or heating/cooling systems, water heaters, insulation, weather stripping/caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA. These features may be added with the purchase of an existing dwelling or by refinancing a home owned and occupied by the veteran. A loan can be increased up to $3,000 based on documented costs or up to $6,000 if the increase in the mortgage payment is offset by the expected reduction in utility costs. A refinancing loan may not exceed 90 percent of the appraised value plus the costs of the improvements. Check with a lender or VA for details.
• To refinance an existing home loan up to 90 percent of the VA established reasonable value or to refinance an existing VA loan to reduce the interest rate.
• To buy a manufactured home and/or lot.
Requirements for Loan Approval
• To obtain a VA loan, the law requires that:
• The applicant must be an eligible veteran who has available entitlement.
• The loan must be for an eligible purpose.
• The veteran must occupy or intend to occupy the property as a home within a reasonable period of time after closing the loan.
• The veteran must be a satisfactory credit risk.
• The income of the veteran and spouse, if any, must be shown to be stable and sufficient to meet the mortgage payments, cover the costs of owning a home, take care of other obligations and expenses, and have enough left over for family support.
• An experienced mortgage lender will be able to discuss specific income and other qualifying requirements.
The Cost of Getting a VA Loan
• A basic funding fee of 2.0 percent must be paid to VA by all but certain exempt veterans. A down payment of 5 percent or more will reduce the fee to 1.5 percent and a 10 percent down payment will reduce it to 1.25 percent.
• A funding fee of 2.75 percent must be paid by all eligible Reserve/National Guard individuals. A down payment of 5 percent or more will reduce the fee to 2.25 percent and a 10 percent down payment will reduce it to 2.0 percent.
• The funding fee for loans to refinance an existing VA home loan with a new VA home loan to lower the existing interest rate is 0.5 percent.
Veterans who are using entitlement for a second or subsequent time who do not make a down payment of at least 5 percent are charged a funding fee of 3 percent.
NOTE: For all VA home loans, the funding fee may be paid in cash or it may be included in the loan.
Other Closing Costs
Reasonable closing costs may be charged by the lender. These costs may not be included in the loan. The following items may be paid by the veteran purchaser, the seller, or shared. Closing costs may vary among lenders and also throughout the nation because of differing local laws and customs.
• VA appraisal
• Credit report
• Loan origination fee (usually 1 percent of the loan)
• Discount points
• Title search and title insurance
• Recording fees
• State and/or local transfer taxes, if applicable
No commissions, brokerage fees or "buyer broker" fees may be charged to the veteran buyer.