|Jason: Good. Hey, what’d you think about that joke this morning?
|Shane: I think your delivery was exceptional.
|Jason: We’re going to talk about VA loans specifically, because that’s an area, a niche that you’re uniquely qualified to talk about. You help a lot of people like that. Before we do, let’s talk about the real estate market. What’s your experience with the real estate market right here locally in Kitsap County these days?
|Shane: Well, it’s very, very, very exciting. It’s crazy, actually. It’s almost not practical. There are more buyers than there are houses by probably about a 5:1 ratio. If you’re a buyer, you’re not having a good time. If you’re a seller, you’re very thankful.
|Jason: I think recently we were out to lunch, and you had shared with me that there was some kind of … You said the number of people that you had prequalified for loans right now that were out shopping for homes was pretty high, and you were encouraging me. You said, “Jason, if you were ever thinking about selling your house,” you would feel strongly that this could be a good time to do that.
|Shane: Well, you know, in the real estate market, it’s actually really simple. You buy low and you sell high. We’re coming off of one of the worst housing markets in our country’s history, the worst, I would say. With that, a lot of people were in a holding pattern from buying a house, with jobs and economic instability. Now all those people are now fully employed, prosperous, doing well with our economy growing, and they’re all wanting to buy a house. What does that mean? Supply in demand is on your side as a seller, so sellers should be excited about the opportunity to sell, because if you bought in the last ten years, eight years, you probably are going to see a significant upside in the value of your home.
|Jason: Okay. What about interest rates? What’s going on with the interest rate world today?
|Shane: This season … Maybe this has happened before in the past, but not in my life. This is one of those unique seasons where both the interest rates are as low as practical, probably even impractical. They’re really, really low, and they’re in the threes, which creates a really incredible opportunity for someone who’s going to buy a house, because you can get the lowest payment and the most amount of home.
|Jason: What do you think is going to happen to the real estate market as interest rates start to rise?
|Shane: This is, I think, the crystal ball method, here. I don’t know for sure how it will respond. I think this has happened in the past. We have a pretty good history that we can look at. Here’s my thought. If you couple the amount of houses that are being built right now with the amount of demand for housing that we have in our area, to the greater Puget Sound area, you’ll see that … Some people who are smarter than me have run some analytics, and they’re building houses at an alarming rate. If that’s the case, then I think for the next three to five years, we should see probably one of the strongest housing markets we’ve ever seen in our entire area.
|With that, I think at some point, once the demand and the supply kind of find a medium ground, I think you’ll see a slow-down, but I don’t think the rates will have anything to do with growth.
|Jason: When you are doing a lot of these mortgages today, Shane, are you finding … How are things going with the upper end of the market, the folks buying the $600,000, $700,000, $800,000, $1 million, $1 million-plus homes? What do those look like today?
|Shane: When you want to evaluate a market, there is a couple sectors of the housing market, and the upper echelon of the pricing is usually when you can tell we’re moving, because the timeline market associated to that demographic tells you how many people are moving up and progressing, and willing to come out of that. A lot of people were sitting on their money for a long time, and now they’re coming in. We’re seeing as much demand in the high market as we are in the low market. Bainbridge Island had the least amount of listings it’s ever had, ever, last month. That says that they’re selling, they’re not sitting on the inventory, they’re not sitting on the market waiting for someone to come buy it. They’re actually being sold as soon as they come on.
|Jason: All right. In terms of fixed-rate versus variable-rate loans right now, what are you recommending people consider?
|Shane: I think holistically, almost completely, I would say variable rate is not the answer. What I’ve found though, is, when you are buying in the upper echelon of pricing, a lot of your options are best through the adjustable rate loans, and those are probably the people who are most fit, those kind of loans, anyways, because they’re the people who have the financial fortitude to be able to deal with what they’re actually doing and not going to be living paycheck to paycheck.
|For all of you average people like me, I would say conventional, just aggressively pursue paying it off as quick as you can. Up your payments and just let it cruise. I would stay with not as many moving parts inside your mortgage. Just make it simple.
|Jason: 30-year or 15-year mortgage? What do you prefer?
|Shane: I think that depends on what person you’re talking to, and what demographic, and what their personal things are. Me, I’m more of a 30-year kind of guy, and then set yourself an automated payment schedule that’ll get you a 15-year result but allows you the option, should life happen, to change it.
|Jason: Okay. Now I want to transition out of the overall real estate market and your overall thoughts on mortgages in general, and get into the nuts and bolts of the VA program, because I’ve heard both good and bad regarding VA loans. This month of March, we’re trying to focus on federal employees, state employees, military benefits for veterans. That’s one of the reasons we wanted to talk to you specifically today about the VA loans.
|Shane: Good question. I actually am pretty passionate about this. First and foremost, what you have to realize, in order for you to do a VA loan, you have to have served your country. That alone makes the idea around the VA loan amazing. When VA was first started, it was kind of created to help those people transitioning from war environments into home ownership, and now it’s since gone. Some of the perks associated with VA is, if you were to put it side by side with three or four other options, you would see that the cost of the loan is amongst the highest.
|Jason: The cost of the loan, upfront cost, is amongst the highest, for the VA loan.
|Shane: Correct. It is the highest, actually. The interest rates associated to it are the lowest, and the reason is, is because-
|Jason: When you talk about the cost, are you talking about the cost over the life of the loan or the upfront cost to get it initially?
|Shane: The upfront cost to get it initially. VA requires, unless you have a disability rating of zero or above, they require you to pay a funding fee. It’s broken in two categories. The first one is the first time use, which is 2.51%, that’s of your loan amount. It’s … What veterans don’t realize is that it’s oftentimes financed, meaning it goes above your loan. If you were to buy a $100,000 house, you’d be $102,150. It goes above your loan and you don’t have to come out of pocket with it, but it is a cost that you amortize over 30 years, and it does do some things to you.
|Then, you have what’s called a subsequent use, which is the second time you used it, and every time after that, it’s 3.3%, which, if you think about it, you’re buying a house and you add 3.3% on the top of it, that’s a big chunk of money that you’re adding to the top. It’s not free.
|Jason: Are the lenders taking advantage of our veterans, then, or is this really a good deal for them?
|Shane: I like it, and here’s why. I don’t think they’re getting taken advantage of. What the value of the VA is, is you’re coming into a home. You can buy up to a four-plex, meaning four units, with zero money out of your pocket. Your cash on cash investment for acquiring even a single family or all the way up to a four-unit is zero dollars.
|Jason: Zero dollars out of pocket. That’s one of the advantages of the VA loan, is you don’t have to come up with any down payment. Unlike the rest of the world that has to come up with 10%, 20% depending on the type of loan that we’re getting, the VA veterans, they don’t have to come up with any down payment.
|Shane: Nope. I oftentimes will compare Buyer A and Buyer B, Buyer A being a veteran and Buyer B being a non-veteran. If they were to both go at the market to buy a $200,000 duplex, each, one would have to put 25% down, and the other would not. If you did the math, they’d have to put $50,000 down in order to buy that duplex, when the veteran wouldn’t. Day one, the veteran would start making money on their money, and obviously, the non-veteran would have to recoup their $50,000 investment to do so.
|Jason: I’ve read about debt-to-income ratios. Are those more generous for-
|Shane: Very much so. In fact, they’re almost not even considered in the same way. There’s another calculation that happens for a veteran, and it considers the amount of debt they have and the utilities associated with the square footage of their property. If that is within the tolerances that the VA allows based on the size of their family, they can actually go far, far higher than anybody else. They can go 50%, 60% of debt-to-income ratio.
|Jason: Is that right. Have you ever done an analysis to kind of crunch the numbers and say, “Okay, you’ve got a higher upfront cost than you would with a conventional mortgage — that may be 2.5% to 3.5%, somewhere in that range — but you’re going to have a lot lower interest rate. Does that lower interest rate, if that’s a home that you’re going to be in for a long time, does it offset that cost? Do you end up paying less money over time as a result of the lower interest rate, or does it break even? Is it a wash? Where do people come out there?
|Shane: I don’t know if I’ve ever done the math to speak super exact, but I would say the interest rate would probably super exceed the cost. The loan is guaranteed by the VA. It’s one of the only loans that are guaranteed. Because it’s guaranteed, the lenders, they’re kind of incentivized, if you will, to offer great rates to consumers to get them to use the VA loan, because if the buyer were to default, the guarantee is actually to protect the lender against the buyer. That lender would have recourse with the VA to go and minimize their risk in the event of a default. It does no benefit to the veteran, other than the fact that the rewards of the guarantee in the form of an interest rate is passed on to the veteran.
|Jason: It benefits them in the sense that they don’t have to come up with a down payment, which is a big deal. It benefits them in the sense that they have a lower interest rate. It benefits them in the sense that they can have higher debt-to-income ratios than a conventional mortgage. Did it backfire on veterans back in 2008? Were they overleveraged? Did a lot of people end up defaulting? Were more VA loans defaulted on than conventional? Do you have any idea?
|Shane: Here’s what’s crazy. VA loans are the number one performing loan on the planet. If you compared them against all the other loans available, they have the highest performance rate holistically, completely. What’s kind of crazy about that is, one thing that a lot of you people may not even know about, your listeners, VA has this thing called a VA streamlined IRRL, I-R-R-L — I think it’s three R’s, actually — and what it does, it allows you to not consider your appraised value, in the event that you could benefit from refinancing.
|What that means is, it means that you can refinance and you could not consider your value in the equation, but if you can get a new term and a better rate that would be advantageous for you based on some metrics they have built, you can actually refinance your time at any given time.
|Jason: “Uncle IRRL” steps in and allows people to say, if you can get better terms on that VA loan, you can refinance without having to worry about the home appraising. In 2008, if people were upside down, they had a 5%, 6% interest rate on their mortgage, because they had a VA loan, even though their house is worth more, or they owe more on it than it’s worth, they could actually go in and qualify for one of these new 3% mortgages or 4% mortgages.
|Shane: Yeah, they can absolutely do it.
|Jason: “Uncle IRRL” to the rescue.
|Shane: Yeah. It’s even cooler than that. Yeah. It’s insane.
|Jason: That’s awesome. That is pretty cool.
|Shane: I don’t know who “Uncle IRRL” is. Who’s “Uncle IRRRL”?
|Jason: Isn’t that what you called it? I-R-R-L, IRRL?
|Shane: Oh, I see what you’re doing there.
|Jason: Isn’t that a fun little play on words there?
|Shane: I like that.
|Jason: Is that better than my “Let it Go” joke?
|Shane: Think so. Yeah. That’s good. It’s a lot of fun. What’s really cool about doing loans, if you get away from just the math of the VA loan itself, it’s who you get to do a loan for, and it’s their story. Man, I could tell you some stories. I could tell you some really cool stories. I’ve helped people who don’t have all their limbs; I’ve helped people who are socially awkward because of things that they’ve had to endure. In fact, I just helped a client just yesterday get into contract. When you’re in the military and you have kids and you get deployed a lot, it kind of makes you an unfit parent sometimes because you can’t be there for the children, and so, this particular guy had his child taken away from him while he was underneath the ocean, and had no ability to protect himself in any way. Consequently, he lost his daughter for two years. Then, when he got back, he was able to get some legal counsel from the military and get his child back, but for two years, he wasn’t even allowed to see her. I’m now helping him buy his first house, where he’s going to have a room for that daughter.
|Helping veterans has a lot of … For me, being a veteran myself; it’s a fulfilling thing for me. If I’m going to take a call from someone at 7:00 at night and take an application after hours when I would rather be with my family, I’m going to do it for a veteran before I’m going to do it for someone who’s not.
|Jason: What about … I’ve read, regarding credit score, that the credit score doesn’t have to be quite as high. Is that still a true statement in today’s market for the VA loans?
|Shane: Yeah, the standard, uniformly, is that your credit score needs to be a 640 and above, but for VA, it can go as low as 580.
|Shane: There are some exceptions there. Usually the rule of thumb is a 620 or above, but yeah, they can go as low as a 580.
|Jason: Are they penalized with higher interest rates for a lower-
|Shane: Yes. For a long time, there was no tier pricing in VA. It was either a yes or a no. Now, it’s tiered. It’s got three tiers. Yeah, three or four tiers.
|Jason: Okay. Can people … Maybe they didn’t know about the VA loan when they were first purchasing their home, but they’re a veteran and now they’re thinking about maybe refinancing. Is a VA loan available for a refinance for somebody that didn’t start out with a VA loan?
|Shane: Yeah, here’s my thought. Remember that funding fee. You have to make sure that funding fee makes sense. When you’re doing a refinance, you have to pay, on the IRRL, you only pay 0.5%, “Uncle IRRL,” you only pay 0.5%.
|Jason: You see? I just changed your life.
|Shane: You did. Good. That’s a gift that keeps giving, I like it. If you’re doing a refinance from a conventional into re-fi, what’s really cool about a VA is you can actually do 100% of the value of your appraised. If you have your home appraised at 100%, and you want to switch from a conventional to a VA, you can do that.
|Jason: Cash out? Are the VA loans allow for cash out, so if somebody needs to put a new roof on their house, is that-
|Shane: Yes, sir. That’s a great option.
|Jason: What about lines of credit?
|Shane: There are no VA lines of credit, but you could pay off a line of credit and consume it into your VA, if you wanted to re-fi. I strongly, if you’re not in a VA loan and you have the ability to, specifically if you have a disability rating, you absolutely almost unequivocally need to be in a VA loan.
|Jason: The advantage of the disability rating again is?
|Shane: You get to forego that funding fee.
|Jason: If you have any disability rating, you’re receiving some kind of compensation as a result of a service-related disability; you don’t have to pay that upfront funding fee.
|Shane: Not at all, forever.
|Jason: Is there any disadvantage for a veteran that has a disability of some sort?
|Shane: Not one. I truly believe it’s one of the best things that you could do for yourself. Remember that IRRL, because if you get into a VA loan, then that IRRL becomes something that you get to use going forward. Not only do you get to benefit from the lowest rates and the most versatility and 100% loan to value, all those kind of blessings that will kind of get you into your VA loan, but also, once you have it, you have the tools, should the market present you … Every year, about twice a year, the market will drop three quarters of a point, or something. In that moment, you could literally save yourself $200 or $300 for the same house and thousands of dollars over the life of your loan.
|Jason: What if somebody has a conventional mortgage currently, but they want to buy their retirement home in a sunny place like Arizona? Can they use a VA home loan for a second home, vacation home?
|Shane: No, it’s a primary residence only. You have to have the intent to live there and you have to be occupying the home within 60 days of closing the loan.
|Jason: What if they do it backwards, where they use the VA loan for their primary residence and they take out a conventional mortgage to buy that vacation home? Is that going to work for them?
|Shane: Yeah. By rule, you’re supposed to buy your VA loan with the intent to occupy it. Now, should life change or should things progress in life and you decide that you want to move from that home and buy another, you could technically buy your next home VA as well. You have a certain amount of entitlement.
|Those of you who need to hear this, because I hear this a lot as a misunderstanding or a misconception, you can use your VA loan as many times as you want. It’s not a one-time use, and you can actually have more than one at any given time. You can have up to four or five, I guess, technically. You have a certain amount of eligibility that’s offered to you, based on the county that you’re in, because there’s a kicker associated with counties that have higher price points, and you can max out that number.
|Jason: What is the highest loan you can get with the VA? Is there a maximum on how much people can borrow?
|Shane: There is, based on your county. It changes. In Kitsap County, it’s $417,000.
|Shane: Out of pocket.
|Jason: What if they find an $800,000 house on the water?
|Shane: Good question, good question. What it looks like is, they will guarantee … the way VA does it is they guarantee the top 25% of the loan up to $417,000. If you want to do something more, you have to bring in 25% of the difference. For simple math, if you bought something for $517,000 versus $417,000, you would have to bring in $25,000 for the whole loan, that’s it.
|Jason: Folks, I want to remind you this morning, you’re listening to Episode 088. I have Shane McGraw on the program. He specializes in VA loans. He’s a veteran himself. This is an area of expertise for him. He’s been rated as one of the top 1% of loan originators in the country by, what was the name of that organization?
|Shane: Mortgage Executive Magazine.
|Jason: Mortgage Executive Magazine. Top 1%. That’s really something to be proud of, Shane.
|Shane: I framed it and put it on my wall.
|Jason: There’s people out there listening that aren’t veterans, but they probably know somebody that is a veteran. Maybe they’re looking to buy their first house; maybe they’re looking to refinance a house. I just want to encourage you, if you’re driving down the road this morning and you know somebody that’s a veteran that’s thinking about a real estate transaction, refer them back to this program, Episode 088. This could be a really great educational resource for them.
|Shane, if people want to learn more specifically about the work you’re doing, how can they find you?
|Shane: I do a lot for the community. I think one of the things that I would tell the listeners if I had the chance to is, I teach a lot of classes on this stuff. I believe that you have to understand your financial situation and you have to understand the loan options. You need to learn those things. I teach a class every Wednesday night, so you can come to that. It’s from 6:00 to 7:30, and then I think you can call me, (360) 519-7567.
|Jason: Shane McGraw, thank you so much for being a guest on Sound Retirement Radio.
|Shane: Thank you very much.
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|Jason Parker is the president of Parker Financial, an independent, fee-based wealth management firm, located at 9057 Washington Ave. NW, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us online at soundretirementplanning.com.