5 Financial Reasons for California Veterans to Buy a Home


There are many reasons a California Veteran should by a home. Property values in California have fully recovered in most counties compared to values in 2008 after the “mortgage meltdown”. Mortgage underwriting standards are now much stricter than they were prior to the crash, which has helped to stabilize the real estate market., Homebuyers are still optimistic about searching for and purchasing a home. Home prices have experienced nice appreciation rates over the past few years are expected to continue that trend in 2018.There are many reasons that it makes financial sense, especially for California Veterans, to purchase a home now. Here are a few of those reasons:

  1. A home is one of the best leveraged investments currently available

When purchasing a home, the purchaser stands to potentially make significant gains on their investment. For example, say a borrower pays a 20% down payment on a $400,000 home. That is $80,000 down payment. If the value of the home they purchased rises 10% to a value of $440,000, they will have realized a 50% return on their initial investment. For every percentage point the value rises the borrower gets a 5% return on investment. If a mortgage has a smaller down payment, then the increase in ROI is even greater. In the case of a California Veteran that uses the VA program where no down payment is required, a rise in value would mean an exponentially immeasurable increase in ROI. It is, of course, important to also compare the total mortgage payment to a comparable rent payment and make sure the mortgage payment fits your budget.

  1. Whether you own or rent, you are still paying for housing

In either case, you are likely paying someone’s mortgage principal. When renting you are paying the landlords principal plus a rate of return to help cover their costs. When owning, you will be paying your own principal and moving towards paying off your mortgage. You also get much more favorable tax treatment when owning your home.

  1. Owning is a form of “forced savings”

Many individuals will delay saving money for the future due to current debt and current costs. Owning a home acts as a storage of value and can serve as a long-term asset. When purchasing a home with a mortgage, you have to pay into your home by paying off your mortgage. This is a forced savings since the money you paid to close out your mortgage is stored in the long-term value of your home.

  1. There are significant tax benefits to owning

Compared to renting, there are many more tax-related benefits if you own your home. When you own your home, you are able to deduct property taxes and mortgage interest from your income. Of course, it is always important to consult with your CPA or tax preparer to see if there will be a tax benefit for you or not. Recent tax changes may have reduced or eliminated the tax benefit of owning a home at certain price ranges. Every situation is different.

  1. Owning your home is a hedge against potential inflation

For potential homeowners with a fixed rate mortgage, their housing costs could be essentially fixed with only utility costs, insurance, and property taxes changing over time. When renting a home, rents and related costs will change over time with higher rates of inflation. The potential for future inflation provides homeowners with an attractive possibility for future savings. And in California, because of Proposition 13 (passed in 1978), property taxes are severely limited to increasing in step with inflation. Proposition 13 only allows the county to increase your properties assessed value by a maximum of 2% per year. Since 2000, the average annualized property appreciation rate in California is 5.03%. (from 1st Quarter 2000 through 3 Quarter 2017 – source https://www.neighborhoodscout.com/ca/real-estate  )  That even takes into account the downturn in 2008. Somebody who bought a home in 2000 for $300,000 is now sitting on a home valued at $708,120. But their property tax bill is not based on the estimated value of $708,120. Because of Proposition 13, the assessed value would only be $420,000. Since the property tax bill is based on the assessed value, this works as a great hedge against inflation. The base annual property tax bill would be 1% of $420,000, or $4,200. But if someone new move into the neighborhood and buy a home valued at $708,000, their base property tax bill would be $7,080. The sooner you buy a home the better. Lock in that payment before property values go higher.

It is very important to make sure you have a clear understanding of the numbers involved in purchasing a home with VA financing. You want to make sure you know your budget so that after you buy a home you are still able to save for retirement and go out to dinner now and then. To understand the numbers, call a California VA loan officer prior to shopping for a home.This should always be your first step. Similar to shopping for a car, you need to know what payment you can afford and what that payment equates to in purchase price. Your California VA Loan Officer will be able to quickly assess your situation and prepare custom VA loan scenarios for you.

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.

Example of a $450,000 Home Purchase using VA Financing in California

va loan applicationBuying a home in California can be a challenge. The biggest hurdle preventing most potential homebuyers is the down payment. While there are loan programs, like FHA, that allow for down payments as little as 3.5% down, it can still take time to save that much money. Someone buying a home for $450,000 in California with 3.5% down would need $15,750 for the down payment. And that amount doesn’t include closing costs, prepaid expenses, etc, that could easily add up to another $10,000, bringing the total amount needed to close to over $25,000. But for California Veterans, there is a much better option. A program that doesn’t require any down payment. The VA loan program.

The VA Loan Program allows 100% Financing up to your County Loan Limit

The VA loan program has been around, in some form, since 1944. It was conceived as a way to help returning military Veterans purchase a home. (or farm, etc). Rather than give a cash bonus, VA would guaranty a percentage of the loan, making it a safe program for lenders to offer. In its current form, the VA guarantees 25% of the loan amount, for loans up to a specified county limit. That VA California county loan limit is determined once a year by the Federal Housing Finance Agency, or FHFA. The base limit for most counties in the country and throughout California in 2018 is $453,100. But there are higher cost counties in California, like Los Angeles County, Orange County, Contra Costa County, and many other, with limits as high as $679,650. In those high-cost counties, California Veterans can purchase a home for $679,650 with $0 down payment. For today I am going to give you an example of what a $450,000 purchase using VA financing will look like.

What Do the Numbers Look Like for a $450,000 Home Purchase with $0 Down Payment?

First, we do need to make a few assumptions. We are going to assume this is a single family detached home with no homeowners association dues. We are going to assume a property tax rate of 1.25%, which is fairly typical in California. There are some areas where tax rates are between 1% and 1.05%, and some areas where the property tax rate is nearly 2%. But most are close to 1.25%. I am also going to estimate the homeowner’s insurance using a factor at .25% of the loan amount divided by 12. The homeowner will need to shop for their own insurance, but .25% will work as a solid estimate.  I am also going to assume this is the California Veterans first time using VA financing, resulting in a VA Funding Fee of 2.15%. For members of the Reserves or National Guard, the VA Funding Fee would be 2.4% for being first-time users of VA financing. A Veteran with a service-connected disability rating will not have a VA Funding Fee. And lastly, I am going to assume a FICO score of 720+. The example will break down the total payment, including principal, interest, property taxes, and insurance. I will also estimate the required income to qualify for this purchase price. I will also give an estimate of the typical closing costs and prepaid expenses, and give strategies for potentially having the closing costs and prepaid expenses covered using a lender or seller credit.
Loan scenario for $450,000 VA loan

There is No Down payment required, so the VA loan will equal the purchase price. There is a VA Funding Fee equal to 2.15%, or $9,675 in this case, that is financed into the loan. This makes the total VA loan $459,675.

Interest rates vary from one day to the next, but as of February 12, 2018, and assuming a FICO score above 720, we’ll use 4.25% at 0 points (APR 4.521%). That results in a Principal & Interest (PI) payment of $2,261. Property taxes and homeowners insurance are also part of the payment. They are the “TI” in PITI. The total “PITI” monthly payment is $2,824.

What Income is Needed to Qualify for a $2,824 mortgage payment?

The Debt to Income ratio is the ratio or percentage that compares a borrower’s gross income compared to their monthly payments. The guideline Debt to Income ratio is 41% on VA loans. But realistically VA does not have a maximum Debt to Income ratio. It is not unusual for the DTI on a VA loan to be 50% or higher. If we assume that 50% of the California Veterans gross monthly income can go towards their total payments. And if we assume the Veteran has a car payment of $500 and a minimum credit card payment of $50, then the estimated income needed to qualify for a mortgage payment of $2,824 and other payments of $550 (total of $3,374) would be approximately $6,774. ($3,374/.50% = $6,674).

Closing Cost Breakdown

There are closing costs and Prepaid expenses on all real estate and loan transactions. Even on a VA loan. There are ways to have some or all of those costs paid for (by the seller) or credited by the lender, but one way or another the costs to close do need to be accounted for. Understanding this before getting an accepted offer is very important. Typical closing costs include lender fees, appraisal, credit report, escrow and title fees, and recording fees. In our example, I have estimated those fees to total $6,000. Some of these fees will adjust based on the loan amount or purchase price of the home. The choice of escrow and title companies are negotiated through the purchase contract, but in most cases in the current real estate market, the seller or their real estate agent will have the upper hand in choosing those companies.Also, for this loan example, I have chosen an interest rate at 0 points, meaning there are no Discount points associated with the interest rate. You do have the option of “buying” the interest rate down by paying Discount Points. One Point is equal to 1% of the loan amount. If the loan amount is $459,675, then 1 Discount Point would be $4,597, which would be added to the closing costs. One Point may lower the rate by .25%, which would lower the PI by $66 per month on a $450,000 Base VA loan amount. That may or may not make sense, depending on several factors that should be discussed with your California VA loan officer. On the flipside, it is also possible to go higher in rate. By doing this you would receive a lender credit that could be used to cover closing costs and/or prepaid expenses.

PrePaid Expenses

Prepaid expenses include mortgage interest, property taxes, and homeowners insurance.FAQ on VA cashout refi

  • Prepaid mortgage interest occurs when a loan closes at some time in the middle of the month. For example, if a VA loan closes on June 15 then there would be 15 days of “prepaid interest” due at closing. The time period covering June 16-June 30 is the 15 days. Your first mortgage payment would not be due until August 1, or 45 days after the closing, which is awesome. If the loan were to close on June 29, then there would only be 5 days of Prepaid interest. But the first payment would still be August 1, or only 31 days after the closing. Either way, the homebuyer is just paying for the interest covering the time period they are in the home that is not going to be covered by the first payment. In our example, we are estimating 15 days of Prepaid interest at $61 per day, or $910.
  • Property taxes are paid and/or prepaid/deposited to an escrow/impound account through the closing of the loan. Property taxes and homeowners insurance will be paid through each month along with your Principal and Interest. An Impound account is set up at the closing to make sure there will be enough funds to pay those bills when they come due. The number of months of property taxes deposited into the impound account is dependent on the month the loan closes. Loans that close in April will require 4 months of property taxes to be collected and deposited into the impound account. There may also be “prorated” taxes due to the seller based on property taxes they have already paid that will cover a time period the new buyer will be occupying the home. In the example, we are estimating 6 months of property taxes for the impound account, which is a good conservative estimate. This comes to $2,913. ($468.75 x 6).
  • Homeowners Insurance is also prepaid. At closing a 1-year premium is paid. Also, 3 months of insurance are deposited to the impound account. By depositing three months of insurance into the impound account, the lender is making sure there will be enough funds available for renewal 12 months after the closing. In our example, we estimate the 1-year premium and 3 months insurance to be $1,406.

The Impound Account is essentially a savings account for the VA buyer that is held by the VA lender. Your monthly mortgage statement will give you a breakdown of the balance, deposits, and disbursements in your impound account. It is important to keep on top of your impound account. It is also important to be aware that in many cases the lender will not pay the Supplemental tax bill when it comes due. The homeowner should be aware of the Supplemental tax bill in the first year after their home purchase.

In our example, the estimated Prepaid expenses are $5,129. The Closing Costs are $6,000. This means the total amount needed to close is $11,033. As mentioned earlier, the Veteran can negotiate to have the seller pay some or all of the closing costs and prepaid expenses. Another option is to choose a higher interest rate and then use “Yield Spread Premium” to help cover costs. For example, if you went with an interest rate of 4.75% (APR 4.874) you could get a YSP of 1.75%, or in this case, $8,044. ($459,675 * 1.75% = $8,044). This is enough to cover all of the closing costs and even $2,000 of the Prepaid expenses.

The important thing is to understand the numbers BEFORE you make an offer on a home. Make sure the total PITI payment will fit your budget. Make sure you have a way of covering the closing costs and prepaid expenses. Know ahead of time whether you will need to negotiate with the seller to pay costs because you’re not going to be able to negotiate after the offer is accepted and you’re in escrow.

Get PreApproved for a VA Loan Before you make an Offer on a Home

This all seems like a lot. But working with the right real estate professionals can help to make the process easy. You will want to get PreApproved for a VA loan before you make an offer on a home. At the very start of the PreApproval process, you will have a phone or in-person consultation with a California VA Loan Specialist. The VA Loan Officer will then be able to prepare custom loan scenarios based on your qualifications, taking into consideration your payment comfort level, credit, income, etc. Your California VA Loan Officer will also prepare a custom video of your loan scenarios, explaining the numbers and answering questions you may have. Going through this process will give you confidence when you begin making offers on homes.

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.