The Ultimate Guide to VA Loans

Watch the entire 1 hour 19 minute class that James taught on VA Loans here:

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This class was taught on Veteran's Day, November 11, 2020 via webinar.

Benefits of VA Loans

  • Nothing down
    • Including the ability to buy new or resale properties including duplexes, triplexes, fourplexes
  • No Private Mortgage Insurance (upfront funding fee instead)
  • Less stringent credit requirements
  • Typically lower rates (set by lenders in an open-market not the VA)
  • Ability to do rate-and-term refinances even after you’ve moved out at owner-occupant rates
  • No maximum loan amount (although VA does limit their guarantee amount)
  • Loan may be assumable
  • Can be part of your Nomad™ real estate investing strategy

VA Loan Eligibility Requirements

To get the full eligibility requirements, go directly to the VA eligibility page.

For more folks, this is what you will need to know about being eligible for a VA loan.

  • Active duty now – 90 continuous days
  • You separated from service after September 7, 1980, or After October 16, 1981, if you served as an officer
    • 24 continuous months, or
    • The full period (at least 181 days) for which you were called or ordered to active duty, or
    • At least 181 days if you were discharged for a hardship, a reduction in force, or for convenience of the government, or
    • Less than 181 days if you were discharged for a service-connected disability

However, if you feel you might still qualify, there are additional ways to qualify that are shown on the VA eligibility page linked above.

VA Loan Limits

To get it straight from the VA, check out the Loan Limits page on the VA website.

As of 2020, if you have full entitlement, you don’t have a VA loan limit.

If you have full entitlement, you don’t have a home loan limit.

Eligible Veterans, service members, and survivors with full entitlement no longer have limits on loans over $144,000. This means you won’t have to pay a down payment, and we guarantee to your lender that if you default on a loan that’s over $144,000, we’ll pay them up to 25% of the loan amount. You have full entitlement if you meet either of the requirements listed below.

At least one of these must be true. You’ve:

  • Never used your home loan benefit, or
  • Paid a previous VA loan in full and sold the property (in this case, you’d have your full entitlement restored), or
  • Used your home loan benefit, but had a foreclosure or compromise claim (also called a short sale) and repaid us in full

Note: You may have heard the terms additional entitlement, bonus entitlement, or tier 2 entitlement. We use these terms when we communicate with lenders about VA-backed loans over $144,000. You won’t need to use these terms when applying for a loan.

VA Loans For Investment Properties

So, can you use VA loans to buy investment properties. In a word: no. But… and it's a big “but”.

Here's what you can do:

  • You can use a VA loan to buy an owner-occupant property that you eventually, later, turn into an investment property.
  • You can use a VA loan to house hack where you get roommates.
  • You can use a VA loan to buy a duplex, triplex or fourplex and rent out the units you are not living in. You can also get roommates for the unit you are living in.
  • You can keep the VA loan in place when you move out and rent the property.

Occupancy Requirements for VA Loans

In general, the borrower must owner-occupy the property if you're going to get a VA loan.

The borrower must move in within a reasonable amount of time (which the VA has stated is within 60 days) unless there are exceptional circumstances.

For VA loans, spouses can fulfil occupancy requirement.

You may be able to get an extension from the VA with exceptional circumstances, but you'll want to get approval from VA (and the lender) in advance.

No Private Mortgage Insurance With VA Loans

One of the benefits of the VA loan is that you are not required to pay for private mortgage insurance (PMI). Instead, you pay the VA a single, up-front funding fee which the VA uses to pay for their operating expenses and to cover losses experienced by the lender if borrowers default.

Not having PMI tends to reduce the expenses on the property which makes it easier to qualify for future mortgages (if you're keeping this property) and would make for better cash flow if you decide to convert your property to a rental.

VA Funding Fees

The following are the latest VA funding fees for getting a new VA loan broken out by down payment and whether it is your first VA loan or subsequent ones.

The funding fee can be rolled into the loan so you don't have to bring this amount to closing. You can finance it. You will need to bring the other closing costs to closing unless you're able to negotiate seller concessions with your offer to purchase.

And these are the VA funding fees for refinances of VA loans into another VA loan.

Cash out refinance fees are the same regardless of the amount of equity.

If you are assuming a VA loan, the fee for that is .5% of the loan balance.

Waiving VA Funding Fees

From the VA's page on funding fees and closing costs:

You won’t have to pay a VA funding fee if any of the below descriptions is true. You’re:

  • Receiving VA compensation for a service-connected disability, or
  • Eligible to receive VA compensation for a service-connected disability, but you’re receiving retirement or active-duty pay instead, or
  • The surviving spouse of a Veteran who died in service or from a service-connected disability, or who was totally disabled, and you're receiving Dependency and Indemnity Compensation (DIC), or
  • A service member with a proposed or memorandum rating, before the loan closing date, saying you're eligible to get compensation because of a pre-discharge claim, or
  • A service member on active duty who before or on the loan closing date provides evidence of having received the Purple Heart

You may be eligible for a refund of the VA funding fee if you're later awarded VA compensation for a service-connected disability. The effective date of your VA compensation must be retroactive to before the date of your loan closing.

Interest Rate Reduction Refinancing Loans (IRRRL)

A significant benefit of VA loans is the ability to do Interest Rate Reduction Refinancing Loans (IRRRLs) to refi into a lower interest rate.

Veteran need just certify they previously occupied the property as their home. They do NOT need to currently live in the property and they still get owner-occupant VA rates.

NOTE: This is different than conventional financing and a significant benefit for VA loans.

A VA Cash-Out Refinance will require the borrower to certify they are currently occupying the property.

Comparing VA Loans to Other Loan Programs

I originally received a version of this chart from a local lender. I have since modified it and updated it from when I originally received it but did not update it specifically for this class. So, the rates are over a year and a half old, but still show the relative rate differences between a variety of loan programs and is still highly instructive.

It is a great visual of a variety of loan programs and how they compare to each other.

The following chart shows the monthly payments for all the owner-occupant loan types. As you can see the VA loan is, by far, the best AND this is with having put nothing down.

The following chart now includes the monthly payments for all owner-occupant loans AND the monthly payments for a variety of non-owner-occupant loans as well. You have a better monthly payment getting a VA loan and putting nothing down than you do buying with a 20% down payment non-owner-occupant loan. That's amazing.

Nomading™ with VA Loan First

Nomads™ who opt to use their VA loan first, could mean:

  • Lower initial down payment on your first property/properties
    • Can save more, have better reserves
    • Can buy properties faster since you don’t need to save for at least one down payment
  • You get a lower interest rate on your first property/properties
  • No PMI and financing your funding fee
  • Better cash flow
    • Was $98 better cash flow with VA loan over 5% down with monthly PMI from example table/charts
  • Easier to qualify for next property purchase
  • More in reserves (no down payment or upfront PMI required)
  • Multi-family might mean larger amount borrowed
    • More debt paydown, appreciation, depreciation and, in some cases, cash flow
    • Once paid off might be much better cash flow

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Want to learn more about financing real estate investments? Check out these other classes on financing your real estate purchases:

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