Are you interested in learning more about how you can help someone who has bravely served our country? Working with a VA-loan client can be an extremely rewarding experience.
However, for real estate agents who have never worked with VA clients before, the process can seem a bit daunting.
After all, financing is one of the most complicated parts of the business. While you may know enough about conventional loans to help the majority of your clients, you may not be as confident about your understanding of the VA Home Loan process.
To help you gain more confidence in your ability to help our soldiers, we’ve gathered information on everything you should know about working with VA-loan clients.
How Does A VA Loan Work?
In an effort to make homeownership more affordable and thus viable for veterans and members of active duty, the Department of Veterans Affairs guarantees loans for eligible borrowers to protect lenders against potential loss. VA loans can only be used to finance one- to four-unit residential properties that the veteran intends to occupy.
The Benefits Of VA Loans
The VA loan program helps veterans qualify for financing by lowering the costs and minimum requirements needed to obtain a mortgage. Through VA loans, veterans are able to purchase a home without needing a down payment. And, even though veterans finance 100% of the market value of their home, they don’t have to pay private mortgage insurance.
Since VA loans are backed by the federal government, they are viewed by lenders as involving less risk. As a result, lenders are able to offer veterans interest rates that are typically .5% – 1% lower than rates offered for conventional loans.
“There are some major benefits for clients who have earned the VA Home Loan benefit. Not having to pay PMI or provide a down payment are the big ones,” says Jake Kraft, director of agent relations for Veterans United Realty. “It’s also important for agents to understand there are some fees VA buyers are not allowed to pay. These non-allowable fees are another benefit for Veteran buyers. Particularly important for agents to note is that VA buyers cannot pay any real estate broker or agent commissions or fees.”
The Costs Involved In VA Loans
In spite of these savings, VA borrowers do have to pay a funding fee when the loan is originated. This fee costs 2.3% of the loan amount for first-time VA-loan borrowers. For veterans who have already obtained a VA loan at least once before, the funding fee increases to 3.6%.
However, a VA borrower can lower their funding fee by making a down payment. A down payment of 5% reduces the fee to 1.65%, while a down payment of 10% reduces it to 1.4%.
What Should Agents Know About VA-Loan Clients?
When you work with any client, it’s essential that you go into each pitch or interview feeling prepared. Therefore, you may be wondering if working with VA-loan clients is any different than working with clients who obtain convention loans.
Francine Viola, REALTOR® with Coldwell Banker Evergreen Olympic Realty, has experience living and working in a military community, and she believes that VA clients may have slightly different expectations.
“The only difference I see when working with VA buyers is they confuse a 0% down loan with a 0% cost loan. When the topic of closing costs comes up, many are very surprised,” she says. “In our current steep seller’s market, sellers are not very willing to cover a buyer’s closing costs, so the VA buyer should be prepared to cover their own loan costs, or be prepared to go above their offer price to include their closing costs.”
Therefore, when working with VA clients, you should be prepared to explain finances immediately, so they have a clear understanding of the true costs of purchasing a home. As Kraft explains, “Most VA buyers don’t have a lot of cash reserves to spend on things like a down payment. For that reason, a lot of people using their VA loan will need closing cost assistance. This is something an agent can plan and account for when they show homes and submit offers.”
By having an open discussion about their savings, you can determine whether your clients will require such assistance early on in the process. The more you know from the beginning, the easier it will be to help your VA clients find a home that is suitable for their budgets.
What Does A Client Need To Be Eligible For A VA Loan?
In order to be eligible for a VA loan, your client must be a veteran or active service member who has fulfilled one of the following service requirements:
- Served for 90 consecutive wartime days
- Served for 181 peacetime days
- Served in the National Guard or the Reserves for 6 years or at least 90 days of service under Title 32 with a minimum of 30 of those days being consecutive
Your client may also qualify if your client is a surviving spouse of a service member, who lost their life either in the line of duty or due to a service-related disability.
Before your client can obtain a VA loan, their lender will need a copy of their Certificate of Eligibility, which is a document provided by the VA as proof of their qualification. While the lender can obtain this form independently through the VA’s automated system, your client will need to provide the lender with proof of service.
To prove their military service, veterans must provide a Report of Separation (known as a DD Form 214). Clients on active duty will need to provide a Statement of Service instead.
Although the VA does not require a specific minimum credit score to qualify, lenders do. As a result, there can be slight differences between lenders’ requirements. Typically, VA borrowers are required to have a credit score of at least 580; however, your client should check with a few different lenders to see how their requirements differ.
What Should Agents Know About VA Loan Home Requirements?
In order for your client to be able to obtain a VA loan, the home that they wish to purchase must meet the VA’s minimum property requirements. These requirements revolve around ensuring that the home is safe, sanitary and structurally sound. Therefore, determining whether the home qualifies for a VA loan will primarily be the responsibility of the VA appraiser. However, as a real estate agent, there are certain basic requirements that you should keep in mind.
To qualify for a VA loan, the property must:
- Be residential in use. If there is any portion of the home that is not intended for residential purposes, that area must make up 25% or less of the property’s total square footage.
- Have sufficient space to meet fundamental needs. As such, the property must include a living area with suitable space for a kitchen, bathroom and bed.
- Be accessible from the street. There must be a safe way to access the home. Acceptable access could include a public street, private driveway or permanent easement.
- Possess its own utility services. If the property is a unit in a multifamily home, the unit must at least have a separate shut-off.
What Do VA Appraisers Look Out For?
You should be aware that there are some differences in the VA loan appraisal process. “Not all appraisers are certified to do appraisals for VA borrowers, so the appraisal has potential to be delayed just due to the unavailability or lack of VA appraisers,” says Viola.
Although it’s commonly believed that VA appraisers are exacting and unforgiving in their assessments of properties, remember that their guidelines are centered around ensuring that the property is safe, sanitary and structurally sound. Therefore, their focus is on preventing VA-loan borrowers from purchasing homes that may have major defects in their construction, craftsmanship, plumbing, ventilation, etc.
While your VA-loan clients may not be able to purchase a fixer-upper, they shouldn’t have any problems with a home that is in good condition. Here are some of the issues VA appraisers specifically look out for:
- Roofs that are in poor condition or unlikely to last for the foreseeable future.
- Defective electrical or plumbing work.
- Unsafe or unsuitable HVAC systems.
- Water supply failing to meet health department standards – such that property doesn’t have access to hot water, safe drinking water or reliable sewage disposal.
- Crawl spaces that aren’t accessible, vented or free of water and debris.
- Hazards that make properties unsafe for occupants.
- Lots that are poorly graded, preventing water from draining and causing it to pool close to the home.
- Evidence of termites, fungus and dry rot.
- Use of lead-based paint.
What Happens If The VA Appraiser Discovers Issues With The Property?
It’s possible that VA appraisers are known as sticklers merely because any property issues they identify must be fixed before the deal can close. Although navigating property flaws can be a rockier road when your client is financing with a VA loan, there are several routes by which your client can go about it.
“If buyers are interested in a home that has an MPR issue, they have a few options: they can look for a different property, negotiate for the seller to cover the cost of repairs or, if they have the funds, they may be able to cover the cost of repairs themselves,” says Kraft. “Borrowers should always consult with their loan officer before choosing to cover the cost themselves.”
Of course, it’s not always the items on the appraisal that create a problem. Sometimes it’s the estimated home value itself that may lead to second thoughts or financing hiccups. Again, your client will have options if the appraisal comes back lower than expected.
“VA borrowers are not required to continue with the purchase if the home does not appraise at the agreed-upon value,” says Viola. “Some sellers are concerned with this paragraph in our financing addendum, but a VA borrower shouldn’t pose additional risk to a seller in this regard.”
How Do Sellers Tend To Feel About VA-Loan Buyers?
Up until recently, the VA did not allow its borrowers to pay the majority of closing costs. Although the lack of fees was intended to be another benefit to VA borrowers, the guideline made it more challenging for them to find willing sellers.
“Sellers have a few old misconceptions about VA loans that they are burdensome, take longer to close, have more requirements, etc. but for lenders, VA loans are one of the easier loan types,” says Viola.
However, as Viola explains, these concerns are not warranted. Your VA-loan clients are now able to pay many of the fees that were once non-allowables as part of their closing costs. Furthermore, in 30 days – the same amount of time it typically takes to close a conventional loan – a knowledgeable lender can close a VA loan.
According to Kraft, sellers may actually be more apprehensive about the strength of VA-loan buyers. “There’s a common misconception that people using a VA loan are less qualified since they don’t have a down payment requirement,” he says. “But VA purchase loans had a higher closing success rate in May and June than both conventional and FHA loans, according to data from mortgage software firm Ellie Mae. Beyond that, VA loans have been the most foreclosure-resistant mortgage product on the market for most of the last decade, according to the Mortgage Bankers Association.”
What Should Agents Do To Better Assist VA-Loan Clients?
To better assist your VA-loan clients, you should make sure they have access to all of the information they need. You should do everything you can to become your clients’ go-to resource for anything they may need during the process. Just as you probably have a contractor, designer and plumber that you refer to your clients, you should also have a lender you trust on hand.
“VA loans are different than other mortgage products. Teaming up with a lender who really understands VA loans is critical for ensuring a smooth transaction for your clients,” says Kraft. “Finding a lender who can help navigate the differences in the VA Loan can help your clients understand their VA loan entitlement, help procure the necessary documentation and expedite the entire homebuying process.
“It’s no secret that markets all over the country are experiencing unprecedented competition. Multiple offers over asking price are not uncommon,” he adds. “Having a VA loan preapproval in hand before starting your client’s home search ensures they’re able to remain competitive and make an offer when they find a home they want to buy. Getting ahead of any roadblocks that keep your client from securing a VA Loan will be beneficial in the long run.”
After you help your VA clients connect with an experienced lender and obtain the preapproval they need to compete in the market, it’s important that you continue to educate them on the process. Make sure to walk your clients through the financials, so they know exactly what to expect. “A buyer needs to set a budget and have an understanding of what the sales price means for a monthly payment,” says Viola.
By taking the time to educate yourself about the VA Home Loan program, teaming up with a knowledgeable lender and carefully guiding your clients through the responsibilities of homeownership, you can provide your VA-loan clients with the kind of service they deserve.
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