Real Estate

I’ve long held the assumption that you could only have one VA loan. I assumed you had to sell your first home or refinance before moving to a second. Well as a current holder of two VA loans, I can definitely tell you that you CAN take out two VA mortgages!

Why Two VA Loans?

My original VA loan was for a home near Shaw AFB. That property is financed with a low rate (2.25%), 15 year mortgage. The rental income almost covers the payment each month, but the loan is paying off fast! I did not want to sell the home but rather wanted to keep paying it off for a while to gain equity.

We did not plan on buying a home when we moved to Robins AFB, but after looking for several months we changed our mind. Rent is fairly high in Warner Robins and many nice, affordable homes were for sale that kept us well under BAH.

We had enough money for a small down payment on a house, but not the 20% that is typically required to avoid Private Mortgage Insurance (PMI), which can add over $100 per month to your mortgage. I was also unsure if we would qualify for an almost 100% financed home without VA.

VA Loan to the Rescue

The second VA loan gave us the 90% financing we were looking for, at a low interest rate. It did not have any effect on our previous VA loan.

We purchased an awesome 2,300 sq ft home in a nice neighborhood, with good schools.

Unfortunately, the second VA loan is not a completely new entitlement, but rather a remainder of what you originally spent on the first home.

How to Calculate Your Remaining VA Eligibility

Step 1: Calculate your maximum VA loan limit at your new base, which according to the VA is located here. For most areas this amount will be $417,000. Assuming I am moving to Robins AFB, my new loan limit for Houston County, GA, is $417,000.

Step 2: Subtract the loan value you started with to purchase you first home from the limit. So let’s say I purchased a home at Shaw AFB for $200,000. My VA eligibility at my new base is $417,000 – $200,000 = $217,000.

So the end result is after purchasing a $200,000 home near Shaw AFB, I can take out a second VA loan of up to $217,000 at Robins AFB.

To help understand this, the VA has some examples posted here. I have used a simple way to calculate remaining entitlement, but they are multiplying the same numbers by 25%, because technically that is how much of the loan the VA guarantees. Even though they use 25%, the numbers work out the same.

What if the Home I Want is More Than My Eligibility?

If the home you want to buy is over your remaining eligibility, you will have to make a down payment equal to 25% of the amount that is over. So from the previous example you saw my eligibility for Robins AFB was $217,000. The home we wanted to purchase was $240,000 or $23,000 over. So our required down payment was $23,000 x .25 = $5,750.

Why 25%? Technically, when the VA backs a loan for you, they are guaranteeing to pay 25% of the loan if you default. So in reality, your VA entitlement is $104,250, which can buy a $417,000 home. If you use buy a home at $200,000, technically you have $54,250 in VA eligibility left… and $54,250 can get you a $217,000 loan.

My Bank Says I Have Zero Eligibility

From my experience many banks do not understand how to calculate eligibility for a second VA loan. Additionally, when banks try to look up your VA certificate it will sometimes appear that you have zero eligibility remaining.

I initially tried to get a second loan with Pentagon Federal and they were adamant that I had already used my VA loan. I even talked to a supervisor and could not convince them of the process for a second VA loan. I finally cut my losses and went with Navy Federal who understood it completely.

Beware of the Higher VA Loan Funding Fees

Your first VA loan has a funding fee of 2.15% if you did not provide a down payment. Every VA loan after that has a funding fee of 3.3% funding fee. This is a fairly high fee, and for a $200,000 loan would be $6,600!

The fee applies even if you sold the first home and were not taking out two VA loans at one time. The fee can be financed into the loan, but I do not recommend it.

Let’s say you purchase a home worth $200,000 and finance the funding fee of 3.3%. So your beginning loan balance is $206,600. With a 30 year mortgage at 3.0%, your loan balance in three years will be $192,874. With a 6% realtor fee you would need to sell for at least $204,500 to break even.

The way to avoid this fee is to put at least 5% down. At 5% down your funding fee drops to 1.5%. So from the last paragraph, if we put down 5% ($10,000) but finance the funding fee, our beginning loan balance is $200,000 – (200,000 x .05) + (190,000 x .015) = $192,850.

Can I Take out More Than Two VA Loans?

Man you are greedy! Just kidding. From what I have read, technically you could take out as many loans as you want as long as you do not go over your VA eligibility.

So for most areas your entitlement is $417,000. You could purchase four homes at $100,000 each, all financed on VA loans. The catch is that you have to live in every one of those homes to get the initial loan. So that would have to be four separate assignments where you purchased homes at each.

My wife and I have been landlords for about six years. The biggest and costliest mistake we made during that time is renting to a subpar tenant. What do I mean by subpar tenant? Story time!

We were fortunate to have a great renter during the first three years of renting out our home. Our tenant got orders and moved to a new base in January, which is a bad time to rent out a home. We listed the home for rent, and our property manager helped advertise the house.

After almost two months of waiting for a renter, my wife and I got nervous. This vacancy had cost us almost $3,000 and we couldn’t take it. Our property manager called one day and said she had potential renters. It was a married, Army E-4 with bad credit. She were offering $150 less than our normal rental rate. Our property manager said it was risky but she would leave the decision up to us.

We decided to cut our losses and accepted the new tenant.

Fast forward one year. Our property manager tells us the tenants are unable to pay their rent on time, but promised to catch up in three weeks. I didn’t worry about it. But in three weeks she pays $300 instead of $1250! Now I’m getting nervous. She says she needs just two more weeks to come up with the money. We wait a bit longer. The two weeks comes and she pays $200!

She is getting further behind so we tell the property manager to start the eviction process. I also call her squadron first sergeant on base to notify him of the situation. He was concerned and talked to her, but said her husband was leaving her and there was nothing they could do. When she finally moved out, she left damages on the house of over $2,000!

We were able to get some of our money back, but in the end we took a $3,000 loss on missed rent and damages due to the the bad tenant.

The lessons learned for us were:

1. Being in the military does not make someone a good tenant, and military leadership cannot FORCE someone to pay their bills
2. We needed a vacancy reserve to calmly ride out the time between tenants. Now I try to save up three months of expenses to get through those times
3. Trust your property manager and your gut when accepting a tenant.

Overall, it was an expensive lesson learned for us, that luckily has not been repeated.

This calculator provides an average annual property tax bill, which can be used to estimate property tax before purchasing a home. I tested it against my home in South Carolina, and it was within $50.

The data is based on a 2010 study (PDF) of average owner-occupied state property tax rates conducted by the Tax Foundation.

State Property Tax Rates

Purchasing a home while in the military is easy.

The VA will help you get a loan with no down payment. Realtors will show you all over town and not mention anything about commission (that’s the seller’s responsibility). Overall, it’s good to be a buyer.

But before rushing into a home purchase, be mindful of these five pitfalls:

1. You will probably not break even in three to four years

Before I purchased a home, I envisioned paying my loan over three years, then selling before moving to a new base. I figured that paying a loan for three years would surely give me room to make a profit. With the VA funding fee and realtor’s commissions this is not the case.

Your realtor probably told you not to worry about commission and other fees because they are paid by the seller.  So what happens when you are the seller? A real estate agent will likely charge you 5% of the selling price to sell your home.  Let’s say you bought your house for $180,000. We will assume you paid cash for the VA funding fee of $3,870.00, but that is often financed. After four years with a 30 year loan at 6% interest, you would have a balance of $170,000.  If you sell your home for $180,000 you’ll pay your realtor a $9,000 commission!  That leaves you with $1,000 from paying down the home.

The bottom line is that you will have little room for bargaining if you try to sell your home in four years. Almost all the home owners I’ve met in the last couple years have rented their homes rather than sell them. So be prepared to own and rent your home out for the long haul.

2. Property taxes may increase if you rent your home out at the end of your assignment

Many states reduce tax rates while a home is “owner-occupied” but then increase the tax rate once the home is rented.

For instance, in South Carolina a $200K home costs about $1,200 a year in property tax. That increases to around $3,500 when the owners move out. In this scenario if you rent your home out you’ll need to account for an extra $200 per month on top of your usual mortgage, property tax, and insurance once you move and rent your home out.

3. The VA fee takes takes a year to pay off

A VA mortgage saves you money by avoiding mortgage insurance (PMI). However, the VA charges 2.15% of the purchase price to facilitate a loan. Going back to our first example, our $180,000 home has a funding fee of $3,870. Your bank will gladly roll that into your loan, but it will take the first year of payments on your home to pay it off.

4. Your home may sit empty if you can’t sell it before you PCS

Depending on the market, realtors will tell you that your home should sit on the market for at least three months once it’s empty to try and snag a buyer. Those three months are expensive. You have to pay your mortgage, insurance, property tax, plus keep the electricity and water turned on.

You always have the option to rent. But if you only want to sell, be prepared to let your home sit empty for a bit.

5. Your home may have damages you didn’t know about when you purchased

The home inspection processes should protect you from this pitfall. But I still hear about it happening. If you let something slip by when you purchase the home, a savvy buyer will likely find it when you sell. Ensure you get a good home inspection completed before you buy a home.

While I’ve listed some pitfalls, owning a home still has its advantages. Paying a home off over the years is a great way to build up a nest egg for retirement. It also provides tax incentives that will help decrease your annual tax bill. Make sure you purchase a home aware of the possible drawbacks.