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Buying Advice

5 Myths About VA Loans on Oahu

I hear many myths about using VA Loans on Oahu, from both veterans and from other Oahu REALTORS. When we first PCS-ed to Oahu, about 15 years ago, even we were wary of using a VA Loan. We mistakenly thought it was more difficult and expensive. After the purchase of our first home, without the VA loan, I took it upon myself to learn as much as I could about VA loans on Oahu. Since then, I’ve helped many Veterans purchase homes with their VA Loan benefit, including our family! I’ve also been the listing agent on many VA purchases, so understand both sides of the process.

Choose An Experienced REALTOR

If you are using your VA Loan Benefit on Oahu, it is important to choose REALTOR to be experienced in working with both VA buyers and with VA lenders on Oahu. They will help identify all of your options when obtaining a VA loan. Ideally, your realtor will be a REALTOR-Broker (B), such as myself, who is also trained in VA purchases and holds the MRP (Military Relocation Professional) designation.

VA Loan Basics

If you are unfamiliar with VA loans on Oahu, you can review VA Loan Basics as a start. The VA Loan is a great benefit for most Veterans and you can get into a property for much less than you might think. Even if you are on Active Duty and plan to leave the island in a few years, it is often a better long-term financial decision to purchase a home on Oahu, using your VA Loan benefit, than to live in base housing.

5 Myths About VA Loans on Oahu

So here are the most common myths about VA Loans on Oahu, debunked:

1. You Can Use Your VA Loan Benefit Only Once and for Only One Property

This is a myth. The VA Loan benefit may be used multiple times. It is not a first time buyer program or a one-time use benefit to Veterans.

Here’s an example:

Veteran purchases a home for $300K in San Diego in 2015 using his VA Loan Benefit. He lives in it three years and then sells it when PCS-ing to Oahu, Hawaii. Seller purchases new home in 2018 for $700,000 using her VA Loan Benefit. This is A-OK!

And even more interesting:

Two or more VA Loans may be active at once. This is provided that the total loan amount made without a down payment does not exceed the conforming VA Loan amount for the area in which the latest purchase is being made.

Here’s an example:

Veteran purchases a home for $300K in San Diego in 2015. She lives in it for three years and then rents it out when PCS-ing to Oahu, Hawaii. VA conforming loan limit on Oahu for 2018 is $721,050. Seller has $421,050 left of her benefit to use (plus any additional loan balance on the first loan paid off in years 2015-2018, but for ease of this illustration, let’s just assume this amount is $0). Veteran wants to purchase a home for $700,000 on Oahu in 2018. The VA Loan conforming limit on Oahu for 2018 is $721,050.  Veteran-Buyer can use the $421,050 remaining VA Benefit and not have to pay a down payment on that portion of the loan. For the balance of the purchase price: $700,000- $421,050 = $278,950, the Buyer will have to pay 25% down payment or $278,950 x .25 = $69,737.50, which is about equal to 10% of the total purchase price of the home. Please note that there is a break-even point in some loans, where the down payment for a 10% down conventional loan is less than with a VA loan. You can see about where that happens for the loan in the example above. Please ask your lender where this is for you and your loan. You should consider that there are some other benefits to a VA loan besides a low or no down payment (e.g. assignability, credit requirements and points may be less, etc.). There may also be some downsides: e.g., the funding fee that is not part of a conventional loan.

2. VA Loans on Oahu are Limited to a Total Loan Value of $1.5M

This is a myth. The VA does not have a maximum limit for VA Loans on Oahu. The limits are set individually by VA Lenders. Some VA Lenders do limit the total loan amount to $1.5 Million. Others do not. I have heard of lenders going as high as $3 million, even without dual eligibility (two veterans purchasing together). While loans of this high amount are uncommon, due mainly to affordability and because not as many lenders will go this high, they are possible. If a high-balance VA Loan is of interest to you, please let me know and I can put you in touch with VA Lenders that may be able to help.

3. VA Loans on Oahu Cannot be Obtained on Properties that Have Areas Built Without Permits

This is no longer true. It used to be that the VA would not loan on homes that had rooms or other areas that were built without building permits. This rule was changed in 2014 when the VA decided that so long as the improvements in question were habitable for the standpoint of safety, structural soundness, and sanitation, and a contractor would state in writing that the improvements were built to code, a VA Loan may be approved for the property. This was known as an MPR (Minimum Property Requirements) Waiver or Exemption. In addition, the Veteran had to sign a form stating that they held the VA harmless for the unpermitted improvements. The VA went even further in July 2017 and no longer requires a formal MPR Waiver or Exemption for unpermitted improvements. As long as the property meets other minimum requirements, they will issue the appraisal “as is.” They, however, still will not allow an appraiser to give value for the unpermitted improvements. This is the basic rule also for a conventional loan.

Why is this important?

MANY single-family homes on Oahu, particularly in the older homes, have some improvement that is unpermitted on the premises - additions, bathrooms, etc. This is not quite as much of a problem on the Leeward side (Ewa Beach, Kapolei, etc.), with newer construction and with condos. However, I have had clients who have done VA Loans on Oahu homes with unpermitted additions, even with Mililani townhomes. Choosing only fully permitted homes to buy on Oahu is ideal, as having an unpermitted area presents certain risks and valuation issues, but it does limit your options.

4. You Cannot Have a Purchase Money Second Mortgage with a Jumbo VA Loan on Oahu

This is a myth. The VA doesn't prohibit obtaining a second mortgage, to help obtain the down payment for a nonconforming “Jumbo” VA Loan. This is done by lenders on a case-by-case basis and depends on many factors. Not many lenders will do this type of loan, but there are a few. If you need something like this for your home purchase, consider working with me. I will put you in touch with the right lenders who may be able to help.

Here's an Example:

A veteran wants to purchase a home for $1,400,000. Conforming VA loan maximum in Hawaii for 2018 is $721,050. At this price, the Veteran will need to come up with down payment of ($1.4M -$721,050) x .25 = $169,737.50. The veteran has $85,000 for down payment. Veteran takes a second mortgage out (in addition to the VA Jumbo) for the balance of the down payment = $84,737.50. Veteran is able to purchase a $1.4M home with approximately 6% down.

5. VA Loans on Oahu Have Worse Rates and Terms than Conventional Loans

This is not typically true, but with a few caveats.

Rates

In my dozen years' experience with VA Loans on Oahu, the interest rates for VA Loans have often been lower than or equal to those for conventional loans. However, I cannot promise that this will always be the case. Generally, rates for VA Loans on Oahu pretty much track right along with the conventional loan rates. It's best to check both VA and conventional rates to make sure.

Lower Minimum Credit Scores

The VA Loan generally requires a lower minimum credit score for the same rate. Some veterans can even get into VA loans on Oahu with a credit score under 600. Because of this, a veteran may avoid having to pay points to get the same rate as they would for a conventional loan. This can be a big cost savings. In some cases, Veterans with a lower credit score may be able to get a VA Loan where they would not qualify at all for a conventional loan.

Funding Fee

There's one area where VA loan costs can be higher than with conventional loans. This is the VA funding fee, paid by the veteran. The funding fee ranges from 1.25 – 3.3% of the loan amount depending upon a veteran’s eligibility. This is an additional cost that is not paid with a conventional loan. Normally, however, this fee can be wrapped into the loan and is not a cost paid out of pocket at the time of closing. It's important to consider that you may end up paying more points with conventional loan products to get the same interest rate as a VA loan. Therefore, you should compare the cost of discount points on a conventional loan with what you pay for the VA funding fee. Also, you should look at overall costs to actually assess if the costs are higher, on a case-by-case basis.

Non-Allowables

The VA does not allow the veteran-buyer to pay certain closing costs on a VA Loan called non-allowables, IF, they are also paying an origination fee. It used to be that these non-allowable costs were always passed onto the seller of the property, making selling a home to a buyer with a VA Loan slightly more expensive to the seller. Now, many lenders will pay the non-allowables and these costs are NOT passed on to the Seller. Obviously, not paying non-allowables can make your closing costs less than with a conventional loan.

Origination Fees

Even so, you should always find out if the Oahu VA lender is charging an origination fee, as well as whether they pay non-allowable costs. The VA limits the origination fee to 1%. If you have to choose between paying an origination fee of 1% and paying non-allowables – which usually are equal to less than 1% of the loan amount – you might want to go with a lender that does not charge origination. In this case, you are allowed to pay your non-allowables yourself. If your lender is charging origination and not paying non-allowables, your offer may not be as attractive to the seller of a property you want to buy, in a competitive offer situation, AND you may be paying more than you have to.

Here’s An Example:

Veteran is purchasing a home for $700,000. Origination fee of 1% = $7,000. Non-allowable closing costs = $1,350. Which would you rather do: work with a lender that charges no origination fee and pay the non-allowable closing costs yourself ($1,350)? Or work with a lender that charges you an origination fee ($7,000) and have the lender or even worse, THE SELLER, pick up the non-allowable closing costs for you? This is a no-brainer. Your agent can help you find a lender that will get you the best deal possible.
If you are eligible for a Hawaii VA Loan and have questions about buying on Oahu or VA lenders or VA loans on Oahu, please give me a call. My husband and I have a VA loan ourselves, and, over almost a dozen years, have helped many VA buyers, as well as sellers who have sold to VA buyers. I’d be honored to help you find a property to purchase on Oahu and find a VA lender, if needed. Other blog articles which may be of interest:

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