by Tom Kelly
The tremendous growth of the second-home market is being pushed along by the sluggish economy, shrinking 401(k) plans and the idea that real estate is a wise investment.
In fact, the second-home market is so huge and important to the United States’ economy that the largest survey ever conducted by National Association of Realtors was dedicated to the second-home phenomenon that grew 40 percent in the number of homes sold from 1995-2000.
Just how are these homes being financed?
The typical method is to pull out equity from the principal residence for the down payment on the second home and then mortgage the property. Second-home mortgages usually come with the best possible interest rates because lenders view the second home as a personal residence.
However, there is another possible avenue available for second-home purchase, one that is often overlooked by veterans of military service.
While federal regulations require that all loans insured by the Department of Veterans’ Affairs be used only to acquire a “primary residence,” it is possible to purchase a second home using your VA loan guaranty. As in many cases involving the use of real estate, the definition of primary residence is the place you live “most of the year.” So, if you use the home more than six months of the year, it can be defined as your primary residence.
For example, let’s say a Navy officer or enlisted person is getting ready to retire and wants to buy a home in Jacksonville.
They want to avoid the summer heat, so the plan to is to use the home October through April. That seven-month period would constitute the largest block of time they live in any one place. Therefore, their new home in Jacksonville would qualify as the primary residence.
“The VA requires that you move into the home in a reasonable amount of time and that you keep it as your primary residence,” said Paul Johnson, VA loan specialist for Washington Mutual Bank. “If those are your intentions at the time you apply for the loan, then there is nothing to keep you from using your VA guaranty to purchase any property.”
“Once used, then gone” is not necessarily the case with VA loans, even though it’s a common belief: those eligible can borrow up to $240,000 with no down payment, or the conventional ceiling of $322,700 with a 25 percent down payment.
The critical requirements for eligibility are an honorable discharge, an eligibility certificate and the ability to make the loan payments.
All VA loans have a funding fee for a borrower’s first VA loan, which is 2 percent of the loan. That 2 percent is reduced to 1.2 if the borrower puts more than 10 percent down.
The VA will guarantee a maximum of 25 percent of a home loan amount. So, if a veteran wants to borrow the maximum, no-down payment amount of $240,000, the VA will guarantee $60,000, which can be viewed as a substitute for the cash down payment.
Veterans who want to purchase in a high-cost area or refinance a home loan with a price in excess of $240,000 can either put down a 25 percent down payment on any amount over $240,000 or have sufficient equity in their property for that amount.
For example, let’s say the new home will cost $265,000. The maximum VA loan amount would be $240,000 with no down payment, and the veteran would need to come up with a cash down payment of 25 percent of the amount greater than $240,000. Since the difference is $25,000, the cash down payment would be $6,250 and the mortgage amount would be $258,750. In addition, the funding fee must be paid in cash for loans greater than $240,000.
If you purchased a previous home with a VA loan and the buyer assumed your loan, your eligibility can be restored only when the assumer has paid off the loan. The only other alternative would be if the assumer is an eligible veteran who is willing to swap his or her available eligibility for yours.
Some seniors and aging boomers still don’t know that reservists are eligible for VA programs.
After 50 years of offering loans only to vets who served active duty, the VA changed its ways in 1992. Men and women who have completed six years in the Army, Air Force, Marine Corps or Coast Guard Reserves, or the Army National Guard or Air National Guard, are eligible for VA home loans, including no down payment programs.