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For many veterans like myself, the VA home loan guaranty is a benefit earned through years of sacrifice while performing military service.  Generally speaking, almost anyone who has served at least 90 days on active duty since August 2nd, 1990 will qualify for a VA Loan.  Prior to August 2nd, 1990 you will need to check the VA’s website to see if you qualify.  VA Loans are also available for members of the guard and reserves who have served at least 6 years.  However, I urge all veterans to check their eligibility on the VA’s website.  While VA loans offer some great incentives such as 100% financing of your home (no down payment), and the elimination of Private Mortgage Insurance (PMI), there are a few facts you should consider that will help you avoid any pitfalls.

Understand the VA Loan Funding Fee

I bought my first house using a VA loan in July of 2002.  I paid a meagerly $45,000 for the home in upstate New York.  It was a bit of a fixer-upper, but it was in decent shape and I decided I was going to renovate it while I lived there.  The funding fee for first-time use with no down payment was 2.15% of the value of the home – or in my case $967.  A small price to pay for no money down and no PMI insurance.

I sold the house in November of 2007 for $60,000.  Although at first glance it seems like I made $15,000 profit, I had actually invested $15,000 worth of renovations into the house at that point (through the use of a home equity loan) so my net profit was actually $0.  When I sold the house it had been on the market for 8 months at a time when home prices were deflating.  I was just happy I didn’t have to carry the mortgage and pay for heating through the upcoming winter.

Fast forward to May 2008.  My wife and I are looking to buy our first house *together* (my second house).  We settled on a newly built townhome in a subdivision on the outskirts of Atlanta.  Because this is my second time using the VA loan benefit, the VA funding fee is no longer 2.15% ($7,095) but 3.3% ($10,890) – or in my case a difference of $3795.  This seems strange to me, but here’s the VA’s rationale behind the increase:

“The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment.”

This might be fine in a perfect world where housing prices generally go up, but we are living in a time when we’ve seen a general deflation of housing prices nationwide that has caused chaos in our current economy.  I find it difficult to believe the VA has not suspended the increase, but like all bureaucracies, they are slow to respond to fast changing current events.  I do have the option to lower the funding fee to 1.5% if I choose to put 5% down on the home.  Which, had I made money on the home I sold, would not have been a problem, but since that is not the case I’m stuck paying the full $10,890 funding fee.

I mention this to you only to make you aware of this requirement.  If you are in the market for a new home and you’re eligible for a VA loan, I urge you to check out the VA funding fee table to see what you are required to pay.

If You Sell Your VA Backed Home, Make Sure They Know About It

Of course, why wouldn’t they know about it.  Simple… nobody tells them.  For some reason, I made the assumption that the VA was notified when you paid off a VA backed mortgage.  This is not the case.  I discovered this when I applied for my second Certificate of Eligibility.  When I received it I was surprised to see that my old loan was still in an “Active” status and that I was only eligible for a small portion of my benefit.

The solution was simple.  I only had to send in the application for my Certificate of Eligibility again with proof that the mortgage was paid off.  In my case it was the Satisfaction of Mortgage receipt from the county clerks office.  I had plenty of time to get this error corrected, so it was not an issue.  Had I waited to within a month or two of closing, it may have been a different story.

Does Your Builder Have A Builder ID?

Should you decide you want to build a new home and use your VA Loan benefit, the builder you choose must be registered with the VA and posses a valid VA builder ID.  When we initially chose our builder, we didn’t realize they didn’t have a valid VA builder ID or that they even needed one until we sat down to sign the contract.  Had we waited to raise this question, the closing on our new home may have been in jeopardy.  Thankfully, we had plenty of time and our builder was willing to take the necessary steps to register with the VA.  For more information about this, look at the Construction and Valuation section of the VA’s Home Loan website.

Beware of Additional Local Requirements

Because our new home is being built in Georgia, we do not have any additional requirements that need to be met before receiving our VA Notice of Value.  However, many states do have requirements that go above and beyond the general requirements of the VA.  For a list of requirements by state, go to the Local Requirements page under the Construction and Valutaion section of the VA’s Home Loan website.

Well, this is by no means a comprehensive list but a few of the minor pitfalls I’ve had to navigate around while applying for my second VA loan.  I can’t stress enough how important it is to start the process as early as possible.  Some of these problems may have been deal breakers had they come up around the time of closing.  I encourage everyone who is eligible and looking to use their benefit to read the VA’s website on the Home Loan Guaranty.  It can really save you a lot of time and trouble.  If anyone has any other tips or would like to share their experiences with the VA loan process, please feel free to leave comments.