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Guest Post by Rob Greenbaum
For any first-time homebuyer, navigating the loan and mortgage process can be complex and even a bit scary. Some new homebuyers don’t know where to start or they may be overwhelmed with the amount of information and resources available — including websites, real estate agents, homebuilders, and lenders. Many turn to friends and family members who may have already gone through the mortgage and home-buying process.
However, for members of the military, it can be even more challenging.
Due to frequent moves during a service member’s career, many of which are arranged or supported by the military, a military member or recent veteran tends to make their first home purchase at an older age than their civilian counterparts. As many servicemen and women approach the end of their military careers, they seek out their final duty stations, where they can reside long-term. This is the time when many consider buying a home for the first time.
For a servicemember or veteran looking to become a homeowner, it’s a good idea to assess your finances (e.g., savings you can use for a down payment and home-related expenses), research the options available, and consult a trusted lender who can guide you through the process.
1. Assess your finances: a little preparation goes a long way
The first step of any house-hunting process should always be an assessment of your family’s budget. Your finances are likely stable if you’re considering a home purchase, but it’s always a good idea to bolster your savings and “emergency” fund in the event you need to make repairs to your new home or run into an unexpected expense.
If you are preparing to retire or have the flexibility in your career to choose where your new home will be, it’s important to conduct some research into your chosen destination. Factors to consider include the commute to your/your spouse’s job, the quality of the local schools if you have or plan to have children, proximity of shopping and entertainment, and overall cost of living in the area, especially property taxes.
If you’re moving to a new state or town, don’t forget to account for changes to recurring expenses. The amount you need to set aside for utility bills, groceries and other amenities could go up or down depending on where you live. Do the research and adjust your budget accordingly to avoid any unpleasant surprises.
Remember, when the air conditioning or furnace breaks, you cannot just call the landlord to fix it. This will be a repair you have to coordinate and will have to pay.
2. Research mortgages types available: VA loans, FHA loans, and conventional loans
There are many different mortgage products available for purchasing a home. If you are a servicemember or veteran, you can pursue a conventional mortgage, which is also available to the civilian population, or you may also be able to qualify for a VA home loan – made possible by the U.S. Department of Veterans Affairs.
This year marks the 75th anniversary of the GI Bill. This bill made it possible for veterans to access a wide range of benefits including low-cost and low- or no-down payment mortgages plus education and vocational training, health care, and other benefits.
VA mortgages are available exclusively to qualified current and former servicemembers and might be an attractive option for certain military individuals, based on their financial situation.
What’s the difference between the loans available, and what are the pros and cons?
VA loans typically require a lower down payment than traditional conventional mortgages. Based on your eligibility, you may qualify for a mortgage with 3-5 percent down, or even a mortgage with no down payment. With conventional mortgages, you would typically have to put 20 percent down or pay mortgage insurance (MI), often referred to as PMI for private mortgage insurance.
With a VA home loan, you don’t have to pay MI, but you may have to pay a one-time VA funding fee, which can be included in the loan, unless you receive VA disability compensation and then you may be exempt from the fee. The first step would be to get your Certificate of Eligibility (COE) which verifies your eligibility for a VA-guaranteed loan, as your lender will need this. For eligibility requirements and more information on the VA loan benefit, visit the VA website.
There are also Federal Housing Administration (FHA) loans, which require a minimum down payment of 3.5 percent, but those low down payment FHA loans require mortgage insurance.
While VA and FHA loans are great options for many individuals who cannot handle the burden of a large down payment, most lenders will advise homebuyers to consider putting some money down if they plan on remaining in the home for a while. If you plan on owning your home for many years, making a larger down payment may lower your interest rate.
There are conventional mortgages, which are backed by Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSEs). These are the most commonly-known and available to anyone who is qualified, regardless of military service.
With conventional mortgages, it is best to put down a minimum down payment of 20 percent if you can afford to do so. A lower down payment might not disqualify you, but you might be required to pay PMI. Again, this is a monthly fee added to your loan payment which actually protects the lender due to the increased risk of providing a loan with a higher loan-to-value ratio (LTV).
The LTV is simply the loan amount divided by the lower of the purchase price or appraised value for a purchase transition and the appraised value for a refinance. There may be a way to structure conventional financing with a first mortgage of 80 percent LTV and then a second mortgage at 10-15 percent LTV. This enables the borrower to put less money down, but not pay PMI because the first mortgage is 80 percent or less of the home’s appraised value.
With a conventional loan, as well as VA and FHA loans, you also need to think about the terms of the loan such as the length of the loan and different types of interest rates. If you have the ability to pay a higher monthly mortgage payment, you may want to consider getting a 15-year or 20-year mortgage instead of a 30-year mortgage as the interest savings can be significant over the long term. In addition, you are able to pay the principal amount financed down more quickly so that you can build equity more rapidly as long as the value of the home stays the same or increases over time.
Another decision is whether you should get a fixed rate or an adjustable rate mortgage (ARM).
It may be preferential to get an ARM loan if you only plan to stay in the home for five years or less because you may be able to reduce your interest rate in the short term with an adjustable versus fixed rate mortgage.
However, if you plan to stay in the home for a long time, then locking in a fixed rate may make more sense.
These decisions all depend on your current financial situation and how long you plan to stay in the home. Online loan calculators are available to estimate these rates and help inform your decision, but be wary, as most calculators don’t include other fees and taxes.
When in doubt, it’s always a good idea to consult a licensed loan officer/lender for more information.
3. Work with a military-friendly lender
Military and veteran families are fortunate enough to have specific resources available to help guide them through the mortgage process. This includes loan officers and mortgage providers who are familiar with or even deal exclusively with military members.
These lenders are more likely to have a strong understanding of military lifestyle, such as PCSing, and will make suggestions with the homebuyer’s best interest in mind. It’s important to set up an appointment with a loan officer early in the process, particularly if you are a first-time homebuyer. They can help explain your options, the steps you need to take to get approved, and what to expect in terms of fees.
Often, the first question a potential buyer is encouraged to ask when pursuing a home loan is “What is the interest rate?” What many buyers, particularly first-time ones, may not realize is that there are many other factors which need to be considered when you are exploring loan options – such as the down payment amount, length of loan, type of interest rate and fees.
This includes origination points, which are upfront financing fees based on a percentage of the loan amount financed that are included in the loan. These origination points may be beneficial because by paying them you may get a lower interest rate on your mortgage. If you stay in the home longer, it may be worthwhile to pay this fee.
Additional fees include costs for credit application, home appraisal, title insurance, state and local taxes and filing fees. All of these fees, and any other applicable fees, should be disclosed to you in a loan estimate.
Also, remember that you will need to pay property taxes and homeowner’s insurance. Usually the property taxes and insurance are included in your monthly payment – this is referred to as your escrow amount – and would make up your total monthly payment for PITI. This refers to the principal, interest, taxes, and insurance paid monthly to your mortgage company, the entity that services your loan.
There is a lot to consider when you are preparing to make your first home purchase and getting your mortgage. However, service members and veterans can take solace in the fact that there are many online resources available to help understand the process as well as dedicated, military-friendly loan officers who will have your best interests in mind.
Rob Greenbaum is currently the VP Sales and Marketing with AAFMAA Mortgage Services LLC (AMS) and has almost 30 years of experience in the mortgage sector. AMS is part of the American Armed Forces Mutual Aid Association (AAFMAA), the longest-standing not-for-profit member-owned association, and offers low-rate and low-cost mortgages exclusively to the military community.