A Step By Step Guide To Buying Your First Home With A VA Loan
For many military men and women the process of buying your first home can seem incredibly daunting. There is so much information out there and so many pieces to the puzzle that it’s hard to know where to even start. I spent months researching online trying to build a better picture of the process before I actually took the first step. Because I don’t want you to have to go through the pain that I did, I’ve put together the exact step by step process to go from sitting in your cramped apartment listening to your neighbors fight, to lounging in your very own living room with a cocktail in hand in no time.
1. Do Your Research
As Benjamin Franklin said, “An investment in knowledge pays the best interest”. Before you go hard charging into a real estate deal you need to do your research. The more you know about the process of buying homes and VA backed financing, the better off you will be. A lot of people out there think they can rely on their real estate agent, mortgage broker, contractor, etc. for the best advice and guidance.
I hate to break it to you but at the end of the day the only person who truly cares about your well-being (and money) is YOU.
In today’s day and age it’s so easy to be well-informed that you really have no excuse not to be. An excellent source for all of your real estate needs is biggerpockets.com. It’s a free resource with step by step guides for making your first home purchase. Though it’s geared towards real estate investors it has a vast wealth of information from people who do real estate deals for a living. Definitely check it out.
2. Research and meet with a lender
Some people like to go house hunting before they ever talk with a bank since having to speak with a loan officer is the “scary” part of the process. Maybe years ago it was, but these days banks will pretty much fight over you to get your business. Remember, you are a customer of theirs and your business is making them A LOT of money. I recommend meeting with a lender first so you can get a general idea of your price range. It would be really frustrating to find the home of your dreams, make an offer on it, only to realize that you have no chance of ever getting financing for it.
Most military folk like to start with USAA since many of us bank with them. Personally, I chose to meet with a local lender just to have the face to face interaction. The main information a lender needs to determine the VA loan amount for which you qualify is your debt-to-income ratio. If you have car, boat, credit card and student loan payment every month, the bank is going to compare this to your monthly income. The less debt you have versus your income the greater amount they are willing to lend. Guidance says that the maximum debt-to-income ratio for a military borrower is not to exceed 41% but there are exceptions.
Go ahead and let them run your credit (which hurts it if done often) so that they can give you a pre-qualification letter the instant you need it if you need to make an offer on a house fast. Have them give you a copy of your credit report for use later when you actually choose a lender.
3. Find A Good Real Estate Agent
Use an agent! There’s absolutely no reason not to. In fact, they’re free for you to use as the buyer! When a house is sold the seller’s agent pockets a commission from the sale and then splits it with the buyer’s agent. No money out of your pocket, you get to use their expertise, and you get to have someone do all the complicated/boring stuff such as drawing up contracts and paperwork. Usually when I PCS into a new town I have no idea what the area is like. Most agents are locals and able to point you in the direction of an area that will best suit your situation whether you’re looking to be right in the middle of the action, near the best schools for your kids, or just a location that’s nice and quiet.
If you’re a member of USAA I’d recommend you look into their MoversAdvantage Program. By enrolling in the program they will put you in contact with a local real estate agent who they have vetted and deals with military and the VA loan process frequently. The big benefit is that you get a credit towards your closing costs for using the program. Depending on the price of the property it can be up to $6000!
Using friends or in-laws that happen to have a real estate license as your agent is not recommended. Mixing friendship and business is a disaster waiting to happen and certainly a gamble. If an agent isn’t meeting your needs you need to be able to “fire” them quickly and move onto another who can help you get into your new home for the least amount of money. Having to do that with one of your buddies or your awkward brother-in-law won’t be as easy.
4. Figure out what you want
Spend some time online checking out what’s available. Zillow, Trulia, Realtor, and militarybyowner are great places to start. They can give you a feel for price ranges in particular areas. Put together a list of potential houses and sit down with your agent to explain your wants and needs. They use all the same online sources to look at houses but they also have access to the multiple listing service (MLS) that sometimes has houses that aren’t listed yet on the public sites.
5. Go check them out
Put your agent to work. He or she will arrange everything with the listing agents, go get keys for you, and even drive you around! If you plan on looking at multiple properties in a day I recommend taking a notepad and a camera so that you can review the different homes later on. You won’t think about it at the time, but everything can start to blur together after a full day of house hunting. Check out as many properties as possible. The more you see the better idea you’ll have of how far your dollar will go in the city. After looking at enough houses you can start to figure out which ones are under/over priced.
Take some time when you’re done searching and really think hard. This is probably going to be the biggest purchase yet in your life. Make sure you’re getting exactly what you or your family needs.
Once you decide on a home, have your agent pull the tax records. The lender you eventually use will want to know how much you will have to pay on taxes per year to give you an estimate on monthly payments and closing costs.
6. Get a quote on insurance
Shop around! I would recommend at a minimum check with USAA, a local insurance agent, and then whoever does your car insurance (they often offer discounts for adding on to your existing policy). Make sure you have all of the general information on the house including when it was built and the square footage. Also, make sure you fully understand the policy and what will and will not be covered. The price quoted for your premium is another number your lender will want to know.
7. Make an offer
Here is where the process starts to get exciting! Sit down with your agent and figure out a reasonable offer for the property. Your agent should have a good understanding of the market and how aggressive you should or should not be. If the property has been sitting on the market for months and months there is a chance you might have a motivated seller and can offer much lower than the asking price. If the home just went on the market and there are multiple people putting in offers it is not unheard of for buyers to offer higher than the asking price.
Take the advice of your agent but be prudent, you agent only gets a commission if you actually buy the house. They are motivated for you to seal the deal so don’t get talked into spending more money than you should.
When you decide on a price, call the lender you spoke with and have them send your agent a pre-qualification letter to go along with your offer. Important: make sure the letter only states that you’re qualified up to exactly what you’re offering and no more. For example if you’re going to offer $150k for a home but are actually approved up to $200k you don’t want the seller to know or they could be more inclined to counter.
The seller has three choices at this point: refuse, accept, or counter your offer. More likely than not you are going to receive at least one counter from the seller so plan on that in your negotiation process. You absolutely MUST draw a line in the sand for a price on this home that you will not cross. Negotiations can be an emotional time and often buyers get caught up in the moment and end up spending more money than they should after getting emotionally attached to a property. Don’t be afraid to walk away from a deal!
There are only two outcomes to the negotiation process, either you and the seller can agree or you cannot. If you can’t then go back to step 4 and start this process over again. If and when you can, then it’s time to shop for a mortgage.
9. Decide on a lender
What a lot of new home buyers don’t understand about mortgage rates is that they change daily (sometimes multiple times a day). The only way to accurately compare rates from different lenders is to get all of your quotes on the same day. At the very least call USAA, a local bank, and a mortgage broker. A mortgage broker is someone who works with multiple banks and can shop around for you but be aware they take a cut.
When they ask if they can run your credit bust out that report you already have from earlier and ask them to give you a quote based on those numbers. I’ve been told that if multiple lenders check your credit within a short period of time it doesn’t hurt your credit, but mine dropped after four different banks ran it. Go ahead and try your luck if you’d like.
Lenders will give you a good faith estimate (GFE) that can be overwhelming to understand if you don’t go in prepared. There are going to be a lot of pre-paid expenses that go along with a loan such as paying for taxes and insurance are the same for every lender. The two big things you need to focus on are the rate and any origination fees. The rate has the biggest impact on what your monthly payments are going to be and the origination fee is just you paying money straight to the bank. A better gauge for how one lender compares to the next is the Annual Percentage Rate (APR). The bank offering the lowest APR is the one that is going to save you the most money. For a discussion on the difference between rate and APR click here.
When you decide on which lender you would like to work with they are going to have to let them run your credit and fill out a TON of paperwork. It can get pretty boring but don’t let them hurry you through all of the documents. If you don’t understand something make sure you get clarification.
10. Perform Your Due Diligence
Get a professional inspection. Would you buy a used car without looking under the hood? An inspection will cost you a few hundred dollars but it could save you tens of thousands.
Personal experience: On my first purchase, the inspector discovered the whole property was wired with aluminum which is a serious fire hazard. I sent an electrician in to get a quote which came out to a few thousand dollars. I was able to negotiate with the seller to have this fixed. The few hundred dollars I spent saved me thousands.
A VA appraiser is also going to have to visit the house. They are there for two reasons, one to access the value of the house, and two to see if anything needs to be fixed for the house to be livable. This can be a stressful point in the purchase of a home. If you and the seller agreed upon $200k for the house but the appraiser decides it’s only worth $150k, either the seller has to lower the price, or you have to come up with $50k. Low appraisals have killed many a deal. If you think the appraisal was way off you can request for another appraiser to come out (on your dime) and do another, with no guarantee of a difference.
On my first real estate deal we agreed on $210k for the property and it appraised at $212k. Talk about cutting it close. It’s a frustrating ordeal but one you can’t avoid.
Because VA loans are for your own personal residence they want to help you out by making sure the house isn’t going to fall apart on you. The other job of the appraiser is to access the livability of the house. For more information on what they look for click here. Anything they find wrong must be corrected and an appraiser must be sent out again (guess who pays for it) to make sure repairs have been made.
11. Close, Move In, And Live Happily Ever After
Once you’ve negotiated, completed all repairs, and the house has appraised for at least the sale value you’re in great shape. At this point you just sit back and let the bank do its work. If all of your ducks are in a row you shouldn’t have any issues but there’s always problems your lender can have and I’ve heard of deals falling through the day there were supposed to happen. Don’t consider the deal done until all papers are signed and the keys are in your hands!
Overall it’s a long process that can be frustrating but also very exciting. It really is a great feeling to walk into a house knowing that it is yours and no one else’s. I strongly recommend checking out biggerpockets.com and learning as much as you possibly can about buying property. I spent a few months absorbing info before I made my first move into real estate and I consistently cruise their blog when I need a question answered or advice.
Be on the lookout for a post about how I purchased my first property with no money down and got a month vacation to Costa Rica out of the deal for free!