INTRODUCTION
If you’re in the military and considering buying a home, there are some issues you should consider that are unique to active-duty military members. Some of these issue include: the decision to rent vs. buy, advantages and disadvantages of getting a Veterans Administration (VA) guaranteed loan, and other issues related to finding a home and closing the deal.
SHOULD I RENT OR BUY?
The answer is, it depends. The main complication for military homebuyers is that the duration of an assignment to any Command is usually limited to just a few years. Therefore, the potential price appreciation of a home is a key consideration. If a home is likely to appreciate during your assignment more than the fees associated with selling the property, then it may make sense to buy. However, if you are moving to a region in which home prices are likely to remain stable or decline during your residency, then it probably doesn’t make sense to buy a home. Keep in mind that conventional fees for selling a home range from 5% to 7% of the home’s price, so factor this into your cost-benefit analysis.
It’s also hard to predict how easy or difficult it may be to sell a home when you are ready to move. Although there are many factors that impact this issue, homes tend to sell quickly if demand exceeds supply, and slower, when there are too many homes and few buyers.
Besides the issue of price appreciation, there are some circumstances in which it may make sense to buy a property. For example, if you are moving to a community that you could be your final retirement destination, then you may want to buy a property during your assignment. Since property values tend to increase over time, this would allow you to buy a home at a lower price and hold on to it until you retire. In this situation, military homebuyers usually rent out their home after being transferred to another assignment, and then return to the property at retirement.
If you’re considering holding onto the property for rental purposes, be sure you understand the typical costs involved in maintaining a rental property. Some of these costs include: rental agent or property manager fee (if used), maintenance and repairs, property taxes, property insurance, etc. You should determine if the benefits of retaining the property outweigh the costs of being an out-of-town landlord.
The obvious dilemma is that no one can predict the future; your decision should be based on the advise of experts and your own research and judgment.
VETERANS ADMINISTRATION GUARANTEED HOME LOANS
Ok. You’ve decided to buy, now what? Well, its time to start looking into getting a loan. If you’re in the military, then you are probably eligible for a VA-guaranteed loan. In addition, many reservists and veterans are also eligible, but check with your local VA office to find out if you qualify. One other VA rule to keep in mind; you must intend to occupy the property you plan to purchase.
The first step in getting a VA-guaranteed loan is to obtain a Certificate of Eligibility (COE) from the VA. You can apply for the COE by completing VA Form 26-1880, which is available on the VA’s web site. After getting the COE, you are now ready to begin the home loan process.
With your COE in hand, find a lender or mortgage broker who is familiar with doing VA-guaranteed loans. To find these people, ask for referrals from your friends, accountant, attorney, real estate agent, etc. Keep in mind that the home loan business is a competitive industry, and you want to select a lender who can get you the best deal.
You should know that private lenders provide the money for VA-guaranteed loans, and if you don’t repay the loan, the federal government will reimburse the lender up to 25% of the loan amount (but not to exceed $104,250 as of 2006). While the government will reimburse a portion of the loan amount, you will still be held responsible for the debt, so it’s in your best interest not to default on the loan.
SHOULD I GET A VA GUARANTEED LOAN OR A TRADITIONA LOAN
The answer depends based on your situation. In addition to typical costs associated with a loan, the VA-guaranteed loans charge a funding fee ranging from 1.25% to 2.4% of the loan amount (as of 2006), depending on the amount of your down payment. This fee certainly adds to your costs. Some non-VA loans also have similar fees, so it’s important to compare the details of various loan options. Ask your lender to provide you a written Good Faith Estimate (GFE) for both VA and conventional loans. The GFE provides an itemization of the predicated costs associated with different loan types. This will help you to compare loan products and reduce any ambiguity on what a particular lender can provide. Remember, the home loan business is a competitive industry, so be sure to compare different lenders to see who can get you the best deal.
GETTING A LOAN PRE-APPROVAL LETTER
As you talk to different lenders, they will all ask you about how much money you make, how much debt you have, your credit rating, and other financial questions. Based on this information, they will give you an idea of how much you can afford, as well as the predicted monthly payment on your home loan. If you qualify, they will also give you Loan Pre-Approval Letter, which is important because it lets home sellers know that you are a serious buyer.
HOW DO I FIND A HOUSE THAT I LIKE?
Probably the most useful thing you can do to locate a house that meets your needs is to first locate a Real Estate Agent (sometimes called Realtor) to help you. In most circumstances, the home seller pays the buyer’s agent, so there is no cost to you for using an agent. Find an agent who lives and works in the community that you are moving to. It’s also helpful if you can find an agent who has experience working with military homebuyers. You should let the agent know your price range, the type of property you need, the kind of community you want to live in, the size of house you desire, and all the other factors that are important to you.
Your Real Estate Agent should do at least the following:
1. Advise you about lenders they know who can provide competitive bids on your home loan.
2. Get you access to the MLS from their website so that you can search for homes yourself if you wish.
3. Set up automated property notifications so that you receive emails of any homes that come on the market that meet your criteria.
4. Advise you about the advantages and disadvantages of buying a home in different communities. Recommend different communities based on your unique needs.
5. Advise you about the differences between a condo, townhouse and a single-family home.
6. Estimate driving times (rush hour vs. off hours) from different communities to your job or other frequent destination.
7. Provide information about local resources such as schools, libraries, shopping centers, etc.
8. Take you to different homes until you find the one you like.
9. Recommend an offer price (usually a range) based on their research and experience.
10. Prepare written offer documents and negotiate on your behalf to get you the best deal possible.
11. Help you throughout the home closing/escrow process.
There are many other aspects of home buying that your Realtor should be able to help you with. The list above is simply a starting point of the areas that you should expect help from your agent.
FOUND A HOUSE THAT YOU LIKE…NOW WHAT?
The short answer is that you have to make an offer on the property that is attractive enough to be accepted by the seller. Your Real Estate Agent should guide you through all the important issues you need to consider when making an offer. In addition to the price you are willing to pay, you should decide if you want a home inspection, when you would like to move into the home, how much deposit you are willing to provide, etc. Keep in mind that in a market where there are many buyers and few home sellers, offer prices tend to increase. Conversely, in a market when there are too many sellers and few homebuyers, offer prices tend to decline. Again, your agent should advise you about the various issues you need to consider at this point in the process.
Once you have determined your offer price and considered all other relevant information, your agent will prepare a written offer document, which is then delivered to the seller’s agent. The seller will review your offer and either accept your terms, reject the offer altogether, or make a counter offer.
If your offer is ultimately accepted, there are many things that need to occur before you become the owner and move into the house. These steps typically take at least 30 to 45 days after the offer has been accepted. This process is known as “closing” or “escrow.” Your agent can advise you about the various activities that occur during the closing/ escrow process, and the actions you need to take during this time.
During the closing/escrow process, there are many service providers such as home appraisers, home inspectors, termite inspectors, title companies, escrow companies, real estate attorneys, and others, who will provide you services. These services are typically required by your lender to process the loan, or by local law and regulation to transfer the property. These providers charge a fee for their services, which are collectively known as “closing costs.” The Good Faith Estimate mentioned previously should have an estimate of the amount of these closing costs.
BOTTOM LINE
Buying a home, condo or any other type of real estate can be a complicated process. However, by doing some research beforehand, and finding a good Realtor and lender, you should have a smooth and successful experience.