VA Loans and the Home Buyer Tax Credit for Veterans

The one thing I’ve always loved about VA loans is how every unique guideline is designed to benefit the veteran.  More information regarding these benefits can be found on a related blog post here.  Many of my colleagues who do home loans prefer not to do VA loans due to the complexity of the guidelines.

I’ll be the first to admit that VA loans are different.  They’re designed for a niche market and requires a fair amount of training to be an expert, but it’s nice to see that our government is always looking out for those who look out for us.

In my opinion, there is not a better loan program for this housing market than a VA loan.  Many home buyers would like to buy a home but cannot because they do not have the money to put a down payment.  This is true for both first time buyers or move-up buyers.

HOW TO BEST UTILIZE YOUR VA LOAN ENTITLEMENT AS A FIRST TIME BUYER

Most veterans know they can put zero down on a VA loan.  Outside of that, veterans buying their first home do now know much about VA loans.

Most buyers do not want to buy until they financially prepare their own budget.  The biggest reasons a buyer will hold off on buying is to improve their credit, pay off some debt or save up for a down payment.

The guidelines for a VA loan usually can cure all 3 problems without the wait.  Credit score requirements are very lenient compared to conventional loans.   The VA actually allows the veteran to negotiate with the seller to pay some of the veteran’s debt at closing (the only loan program I know that allows this!).  Lastly, VA loans not only are 100% financing, they do not require the veteran to contribute any funds to the purchase.

My suggestion to all veterans who are thinking of buying, find a VA loan expert.  Write down all the financial and credit hurdles you see between you and homeownership.  A good VA loan representative will be able to find out if they are truly factors worth waiting before buying.  More often than not, the veteran does not need to wait to buy.

HOW TO BEST UTILIZE YOUR VA LOAN ENTITLEMENT AS A MOVE-UP BUYER

The VA allows a buyer to buy with no money down.  You can utilize this benefit for first time buyers, but this is also very helpful for move-up buyers.  On several occasions, I’ve had veterans who wanted to sell their home and buy a new one but do not have any proceeds from their sale.  The ability to buy their new home with little to no money into the transaction makes the ability to buy a new home much more feasible.  In fact, it usually ends up being beneficial for the veteran to move-up now, even if they do not make any money from their sale.  Here’s an example:

Let’s suppose a family of four is casually looking at buying a bigger home.  The kids are getting bigger and the 1,500 square foot home with only 1 bathroom is getting too cramped.  They see a developer building new 3,000 square foot homes in 2007 listed for sale for $450,000.  At the time, their house is worth $280,000 and they owe $200,000.

They’re told from a real estate agent that if they sold their home, they would have approximately $60,000 to put down on the new home after selling costs.  They get a quote for a VA loan at 6% at $390,000, which is $2,338.25 a month plus taxes and insurance.  All together, they’re estimating their new payment to be $2,700 a month.  They love the home, but they decide the payment is too much for their budget.

Fast forward to today.  The same home is listed for sale for $350,000.  This is $100,000 less than what it was listed for sale 3 years ago! However, their house has also dropped in value.  After talking to a real estate agent, they’re told they would probably have to list their house for sale at $225,000 and would have to pay for the buyers closing costs.  A whopping $55,000+ less than what it was worth 3 years ago.  They owe slightly less on their home so after selling costs, they’re told they would only have $6,000 to put down.

$6,000 isn’t enough to even put 3.5% down on a FHA loan, but luckily Dad is a veteran.  They then make a bid on the new home for $350,000 with the builder paying closing costs and the builder accepts.  The family decides to keep the $6,000 in sale proceeds for new furniture and move in their new home with zero down.  They get a quote from a loan officer for a VA loan at $350,000 at 4.875%.  The payment is $1852.23 plus taxes and insurance.  That’s almost $500 less a month and $40,000 more in equity than they would have had if they bought 3 years ago!

Lastly, the VA guidelines also allow a veteran to convert their old home into a rental property in case the veteran does not want to sell yet or does not have the equity to sell.  VA guidelines do not require any equity in the home being converted to a rental property and do not require the veteran to have a history managing  rental property.  No other loan program makes it this easy for a homeowner to rent out their current home and buy a new one.  The only caveat is the veteran cannot have a VA 2 loans on two properties, so the loan on the current home cannot be a VA loan.  If a married couple both served in the military and both have their VA loan entitlement, then you can have two VA loans.

UPDATE

VA loans have finally joined conventioanl and FHA.  They now require a veteran to prove they have 30% equity in their home if they wish to convert the property to a rental and use the rental income to qualify.

HOW VETERANS SHOULD USE THE HOME BUYER TAX CREDIT

On November 6th 2009, President Obama signed a bill that extended and expanded the home buyer tax credit. The $8,000 first time home buyer tax credit was extended and now includes a move-up buyer tax credit of $6,500.  They also increased the income limits.  There’s three scenarios in which a veteran can use the home buyer tax credit.

Until April 30th, 2010, a veteran can buy their first home and qualify for a $8,000 first time home buyer tax credit.  The VA guidelines allow the veteran to buy with little money down and loose credit guidelines.  All veterans who are not homeowners and have considered homeownership should explore what it would take to become a homeowner.

Veterans who currently own a home and have lived there for 5 years can qualify for the $6,500 move-up buyer tax credit.  As you can see from the example above, many veterans may feel they cannot sell and buy a new home due to the reduction in their current home value.  The use of their VA loan entitlement can potentially solve that problem.  The deadline for this tax credit is also April 30th, 2010.

Lastly, active-veterans who serve serve on an official, extended duty service outside of the united states for at least 90 days during the period of December 1st 2008 through May 1st 2010 will be granted a 1-year extension on the home buyer tax credit.  In other words, any active veterans who served overseas for over 90 days between the the aforementioned dates can qualify for the same home buyer tax if they are in contract to purchase by April 30th, 2011 and complete the transaction by June 30th, 2011.  Any veteran who’s thinking of buying a new home who served overseas during this timeline should be happy to know they have an extra year to find a new home.