Four VA Loan Considerations for Real Estate Agents

Real estate agents:  This is an article I originally wrote for military members.  Even if you don’t have much experience working with servicemembers, I hope this article serves you well.  Many of your ‘civilian’ clients may also be using a VA loan to fund their home purchase. They might also have a VA loan on the home they’re trying to sell. This article is intended to focus on working with active duty clients, but these principles do apply to veterans as well.

Although military families are very experienced in evaluating neighborhoods and renting homes, buying a home is a whole different story.  In this regard, they are very much like a lot of your civilian clients, and they rely upon you to guide them to a good decision.  As you know, veterans and servicemembers are able to use their VA loan benefits, which helps them finance a new home purchase, even with no money down.  Having access to a VA loan is a great opportunity, but that opportunity comes with a risk most people don’t have to face.

Note:  Although I originally wrote about three considerations regarding VA loans, I added a fourth because as a real estate agent, you might be on either side of a transaction, so it’s important to see this from both perspectives.

What’s a VA Loan?

One of the benefits of joining the military is being eligible for a VA loan.  A VA loan is a mortgage provided by a private lender, sponsored by the Department of Veterans’ Affairs.  VA loans help servicemembers and their families qualify for home mortgages by guaranteeing a portion of the loan, allowing lenders to provide the loan at competitive rates.  Some of the major benefits include:

  • Being able to get a mortgage with little or no down payment
  • Not having to pay private mortgage insurance (PMI) for a home with less than 20% equity
  • Streamlined refinancing, also known as Interest Rate Reduction Refinance Loan (IRRRL).  As interest rates go down, an IRRRL allows a lender to refinance a mortgage with much less paperwork.

With that said, buying a house is a significant undertaking.  Regardless of the type of loan, a prospective homeowner should do a lot of due diligence, research, and budgeting to ensure they’re able to afford the home.  With VA loans, here are four considerations:

  1. 100% financing is possible with a VA loan, but is it prudent?

Lenders generally require a 20% down payment on the purchase of a home, or they will require that the borrower obtain private mortgage insurance.  This is to protect the bank’s investment in the case of a default.  However, there is another argument that can be made that indicates ‘skin in the game’ is an important consideration.

For example, this theory states that a couple buying a $250,000 home would be much less likely to default on a mortgage if they paid a $50,000 down payment, than a couple buying a similar home with zero down payment, since the first couple made a considerable investment.  While there are studies that support both sides of this argument, we can at least assume that a couple with the financial discipline to have saved $50,000 in the first place may be better positioned to pay their mortgage than the couple that did not.

Instead of trying to finance 100% of a home purchase, it might be more prudent to save money for a down payment.  When  considering a home purchase within 5 years of retirement, a servicemember needs to seriously consider whether that house is going to be the one that they’ll live in during their transition.  If you think you’ll move after retirement or separation, you need to think twice about committing to a home purchase in the first place.

  1. The costs of a VA mortgage should still be compared to the costs of a traditional mortgage. 

First, there is a VA-mortgage funding fee.  This can range from .5% of the mortgage for an IRRRL to 3.3% for a zero-percent down purchase of a subsequent purchase.  There are several exceptions to the VA’s fee policy.  For a veteran receiving disability benefits, or a surviving spouse of a veteran who died in service or from a service-related disability, this fee is not applicable.  However, most people should plan to calculate the VA funding fee into the cost of their mortgage.  There are also other considerations, such as types of closing costs that can be included in a VA loan, and other restrictions.

Also, interest rates differ for VA mortgages than from conventional mortgages.  This may or may not be a significant difference.  However, you should run the numbers (down payment, total closing costs, principal and interest) for a VA & conventional mortgage.

  1. The same homeowner can have more than one VA-sponsored mortgage at a time, depending on the circumstances. 

We bought our first house in Norfolk in 2002, then refinanced 3 times over the following 12 years, going from 6.75% down to 3.5%.  Each time we refinanced, we did so under the VA’s IRRRL program, which minimized paperwork at minimal cost.  Also, each time we refinanced, the VA reset our mortgage balance and issued a new certificate of eligibility.

In 2014, we purchased our current home in Tampa.  Because we had used much less than our entitlement (then $417,000) for our Norfolk house, we were able to use the remaining entitlement amount on our Tampa home and have a second VA-backed mortgage.  We still needed a down payment, but this was something we had planned and budgeted for.  Servicemembers do move around a lot in the military.  As a result, they may be in a position of being able to buy a second (or third) property inexpensively.

  1. In five years, will this place still be a primary home, or a rental? 

Ask yourself twice, then run the numbers to see how it will work as a rental.  Unless this is a retirement home, if it doesn’t work as a rental, your clients shouldn’t buy it.  Most servicemembers buy a first home that is much smaller than the one they want to raise a family in.  However, these servicemembers often end up getting having to rent it out because they have to relocate.

Trust me-I’ve got the horror stories to prove it.  You’re in the best position to help your military clients make the right decision.  You can do this by helping them figure out what they can afford.  You can also ask tough questions to make sure they’re the right clients for you.  It might not be great to get a client into a smaller house than they would have gone for.  It’s even worse to convince that client this isn’t a good time for them to buy a house.  However, you’re in the best position to know what type of house your clients belong in.  The goodwill you generate will come back to you in the long run.  Much more than that slightly larger commission check.

There are many other variables that can impact the decision to use a VA-sponsored loan.  There is a lot of information on the VA’s website, www.benefits.va.gov.  Also, most lenders have specialists who are knowledgeable about VA loans.  These lenders can walk your clients through the process of applying for a VA mortgage.  If you have a client who is overwhelmed, you should help them schedule an appointment with a fee-only financial planner.  Working with a trusted professional is the best way to make sure that your clients make the right decision.

As always, this blog serves to answer your questions and address concerns.  If you like this blog, please forward it on to other people who may benefit.  If you have issues or concerns, or if you have a question you’d like to have me answer, please feel free to contact me.  You can reach me through my website, www.westchasefinancialplanning.com, or via email at forrest@westchasefinancialplanning.com.  In the meanwhile, take charge of your life!

 

3 Tax Concerns When Selling A Home

For real estate agents, this topic might seem like a no brainer.  However, your clients might not know the tax implications of their pending transaction, and this article can be used as a conversation starter with them.  Feel free to use this article to engage your clients in their critical thinking so they can make the right decision.

When a homeowner makes the decision to sell their home, it can be for any number of reasons: relocation, buying a bigger home, downsizing, or because it makes financial sense to do so.  As their real estate agent, you will be the first person your clients turn to when these questions come up.

Whatever the reason for selling a home, there are three tax considerations that warrant a further look.

Tax concern #1: Your realized gain

When selling any real estate, the IRS definition of realized gain takes into account a lot of things you may not have thought about.  According to the IRS, the basic formula for calculating your realized gain is:  Sale price – selling expenses – adjusted basis.  This means you need to calculate two things:  selling expenses & basis.  Properly calculating these two things could mean the difference of thousands of dollars in tax liability.

Selling expenses include any seller’s closing costs, real estate commissions, and any other related selling costs.  You should comb through your closing documents to make sure you’ve properly accounted for all selling expenses.  Do not include city & county property tax, but do include transfer taxes, if applicable.

Basis includes the original purchase price of your house, plus fees incurred during home closing, such as title insurance, legal & recording fees, or survey fees.  Basis also includes the cost of any major improvements, renovations, or system replacements.  The IRS makes a clear distinction between repairs that are a normal part of keeping a home in good condition (such as repairing leaks), and an improvement (such as replacing the plumbing system).

For a more comprehensive list of what can & cannot be included in selling expenses or basis calculation, you can refer to the IRS Publication 523, ‘Selling Your Home,’ which is user-friendly and available online.  Real estate agents:  Even if you’re not a tax practitioner, you probably are able to help clients figure out what constitutes selling expenses, as well as the difference between repairs and major improvements.

Tax concern #2:  Section 121

Under Section 121, the IRS allows a taxpayer to exclude the first $250,000 of capital gain ($500,000 for married couples filing jointly) on the sale of their primary residence if they meet certain ownership and use requirements.  If you owned the home for at least 24 months of the 5 years leading up to the sale, you meet the ownership requirement.  If the home was your primary residence for at least 730 days of the previous 5 years, you meet the use requirements.  If you’re married filing jointly, you must each meet the use requirement, even if only one person meets the ownership requirement to qualify for the $500,000 exclusion.  If you’re not married, but selling the house with someone else, you may each take the $250,000 exclusion as long as each of you meets the use requirement, and at least one of you meets the ownership requirement.  Even if you do not meet the requirements for a full exclusion, the IRS allows partial exclusions if you sell the home due to work or health related moves, or due to unforeseeable events such as death, divorce, natural disaster, unemployment, or other qualifying reasons.  IRS Publication 523 contains more details.  Real estate agents:  you should have this information at the ready in case someone asks about the tax implications, even if you aren’t prepared to give tax advice.

Tax concern #3: Long Term or Short Term Capital Gain?

If you owned the home for at least a year and a day, any gains are taxed at long-term capital gains rates, which range from 0% to 23.8%.  Otherwise, your gains are taxed at short-term capital gains rates, which are the same as ordinary income rates.  Long term capital gains rates calculations are based upon a taxpayer’s marginal tax bracket, but are more favorable.  For example, a taxpayer in the 15% tax bracket will pay 0% on a long-term capital gain.  If you’re considering the sale of your home at a profit within a year of purchase, you may want to consider whether you can sell it in a manner that qualifies the sale as a long-term gain.  However, if you’re selling your principal residence for a loss, you do not qualify for any type of deductible loss.  For real estate agents, this is worth discussing with your clients if you believe that timing is not on their side and they would be better off waiting.  For example, they may be trying to sell in the middle of winter, when no one likes looking at houses, or you’re trying to recommend some repairs in order to get their selling price.

This article is by no means an adequate substitution for unbiased advice, based upon the unique circumstances of your personal situation.  Before you make any major decisions, you should sit down with a fee-only financial planner in your area so that they can help you take into account all of the other factors that can affect your planning decision.  Having a relationship with a trusted professional who can help account for life’s changes is the best way for you to put together a plan that achieves your retirement goals.

Forrest Baumhover is a fee-only financial planner and the principal of Westchase Financial Planning.  To find out more about Westchase Financial Planning, go to www.westchasefinancialplanning.com.