Your VA Loan Benefit: A Powerful and Flexible Financial Tool

Aug 04 2014

Published by under VA Benefits

housekeysBy Joe Gladden, Veteran Realty Serving America’s Military and
Susan Wallace, Senior Loan Officer, Access National Bank

Ten years ago, a VA loan made little sense for eligible VA loan purchasers in many of the country’s higher cost areas. Why? As home prices escalated in the hundreds of thousands, the maximum VA loan amounts with “zero down payment” were capped at $144,000. This meant that in most areas, a VA loan came with a very substantial down payment requirement. Concurrently the mortgage industry had responded by offering many conventional loans with two trusts. These products allowed most purchasers to buy a home with little to zero down, and avoid the private mortgage insurance (PMI), which dramatically reduced monthly payments.

Again…times have changed! Following the housing market collapse in the mid-2000’s, the conventional two trust loans fell out of favor and now most conventional loans require between 10-20% down. And, Congress has raised the maximum zero down loan limits for VA loans. These limits vary by county nationally. As an example in the Northern Virginia/DC region, a VA eligible home purchaser can borrow up to $692,500 with no money down.

But there are a number of other highly valuable features of the VA loan which make it the best home financing product on the market today. It is a highly flexible financial tool for VA eligible borrowers and should be considered as a key element in overall financial planning. Below is a summary of the primary features of a VA Loan:

  • Zero down financing – But, even if the contract sales price exceeds the maximum VA zero down loan limit for a specific county, the veteran does not have to make up the full difference.   And, in many cases, the amount of down payment required is substantially less than a conventional loans 10-20% down payment requirement.
    • Example:   $692,500 max zero down county limit; $800,000 contract sales price
      • With VA, buyer puts $26,875 down ($800,000 – $692,500) x .25
      • In comparison, with a 10% down conventional loan, buyer puts $80,000 down and would likely incur a substantial PMI (non-tax deductible) increase in the monthly payment.

Link to limits nationally by county (PDF).

  • A veteran can have more than one VA Loan at the same time – Really!
    • Known as a “2nd Tier VA Loan,” this little known benefit will be addressed in detail in a follow on article.
  • A VA loan is assumable. There are no assumable conventional loan products.   Those of us “mature enough” to remember the early ‘80’s know that interest rates can easily go double digit. So, when selling a home in an environment of increasing and / or high interest rates, “assuming” your VA funded loan at a lower interest rate looks far more affordable / attractive to purchasers whose alternative is to finance a home with conventional financing.
  • The funding fee for a veteran with any rated VA disability is waived for any / all VA loans, to include new loans, refinances, or 2nd Tier VA Loans which can save the veteran thousands of dollars.
    • Ex: This can save approximately $21,000 with a 3% funding fee on a $700,000 home.
    • If a funding fee is applied to a loan, the borrower generally has the option to roll that amount into the loan if desired.
  • VA Loans can be used for new construction and / or custom home builds.
  • Statutory requirements safeguard veterans for all contracts whereby the veteran chooses a VA loan, regardless of contract language. These safeguards include required:
    • Appraisal contingency
    • Finance contingency
    • Termite inspection / remediation
  • Obtaining a Certificate of Eligibility (COE) is now easier than in the past. Most lenders can access / confirm the COE on line.
  • VA appraisers may note obvious substantive defects in a home during their onsite review and can require seller correction before loan can be funded.

Note: Though unusual, sellers (including builders) can decline to sell to a buyer using VA financing. Buyers of course must meet lender credit standards and required income to debt ratios for loan approval.

The unique features of a VA Loan can be a powerful tool in your financial planning. Combined with today’s historically low interest rates, they can improve cash flow and give the VA eligible borrower the flexibility to redirect funds to retirement accounts, college bills, or in other areas that may benefit their financial planning.

We hope you find this first in a series on your VA Loan benefit helpful. Our next article will address the specifics of the 2nd Tier VA Loan.

Thank you for your service!

No responses yet

Medicare Advantage Plans

Aug 04 2014

As a Medicare/Tricare for Life (TFL) enrollee, what happens if you are notified your doctors no longer accept Medicare coverage?

You can ask family or friends where they go. You can do a www.Medicare.gov search for other Medicare providers in your area. You can start calling doctors in your neighborhood. Or your doctor may offer the option of enrolling in a Medicare Advantage plan.

Medicare Advantage plans are Medicare. The Advantage plans are also known as Medicare Part C. With an Advantage plan, the government is not your insurer as in original Medicare. A health insurance company becomes your Medicare insurer.

Medicare approves and contracts with insurance companies to offer Medicare Advantage plans. The Advantage plan becomes your Parts A and B Medicare coverage. Per Medicare, the Advantage plans must be as good as, if not better than, the original Medicare Parts A and B. Only hospice is not covered by the Advantage plans but original Medicare continues to cover this for Advantage plan members.

Medicare Advantage plans work with Tricare for Life benefits as your Medicare Parts A and B. However, coordination between TFL and an Advantage plan may not be as smooth so talk with TFL at 1-866-773-0404.

The premium amount of the Advantage plans can vary but many use your Part B premium amount as their monthly premium cost. Your Part B premium will pay the insurance company rather than Medicare. Some plans’ premiums can cost more than the Part B premium however for the extra cost they usually provide extra benefits. Advantage plans can provide extra insurance in the form of dental, vision, hearing, or health and wellness coverage. Your Advantage plan may have other costs beyond the premium so stay alert when shopping.

You must comparison shop to purchase an Advantage plan. Advantage plan availability varies by locale. The Advantage plan web site (www.medicare.gov/find-a-plan) allows you to customize the features and cost. You may find some added features worth the extra cost. Medicare supplement insurance (Medigap-Plans A through N at www.medicare.gov/supplement-other-insurance) cannot be used with an Advantage plan—shouldn’t be an issue for TFL users.

Beware, many plans provide automatic drug coverage. As TFL members, you probably won’t want drug coverage. Your Tricare pharmacy benefits are better and because extra drug coverage has to pay first, you may find yourself filing manual claims to Express Scripts to exercise your Tricare drug coverage.

This only scratches the surface. Note the timelines with getting in and out of Medicare and Advantage plans. Download the Medicare and You 2014 handbook for details or call 1-800-633-4227.

No responses yet

How the CFPB Serves YOU

Jul 21 2014

Published by under Military Benefits

EHAS_hero_landing_pageWhen it comes to making financial decisions, knowing where to get help and who to trust isn’t always easy. The Consumer Financial Protection Bureau is there for you, and they want to hear your story. Your feedback will help the CFPB protect consumers and create a fairer marketplace.

You can even check out stories from other people looking for help along their financial journey.

Watch Captain Jamison share a story about a servicemember having trouble with mortgage lenders:

No responses yet

Millennial? – 4 Steps Into Simple Financial Planning

Jul 14 2014

Published by under Investments

Who likes budgeting? Who am I kidding, no one does!

Who likes living for today? Yeah!

Who wants to work the rest of your life? Buzzkill man…

Budgeting and financial planning is unfortunately a necessary evil in our lives if we ever want to get ahead of the grind at some point. However, there is a bright spot because the process doesn’t have to be a pain in your tookus.

Regardless of the amount of income you earn (everything’s relative ya know), we can all get control of our financial situations and start winning at the money game.

This is your starting point. Use this foundation to build upon. Every journey begins with the first step so put those noses to the grind stone…buck it up…rub some dirt on it…and let’s get started. You can do this.

1. Determine Where You Are Now.

If you don’t measure, you don’t know where you are and whether you are making any headway. Don’t make this difficult on yourself. These can be ballpark. You don’t have to count to the penny.

  • First, write down your income.
  • Second, identify your fixed expenses. These are things you can’t control. The costs are fixed like rent, mortgage, insurances, and utilities—all payments where you know you owe X-amount every month whether you like it or not. Not credit or loan payments, yet.
  • Third, identify your variable expenses. These are items where amounts fluctuate from month to month or they’re amounts you can control. Examples are food, clothes, your vehicle, home improvement, entertainment. Not credit or loan payments, yet.
  • Fourth, now credit and loans. We want these separate from the other expenses because we want to call these out for special attention. You want to see these amounts hitting you in the face and focus your efforts to annihilate these entries.
  • Finally, your savings and investments. This is an area that may not exist now or is in short supply but over time it will assume the space left vacant by credit and loans.

Here’s an illustration of what living paycheck to paycheck may look like for you:

paychecktopaycheck

Everything coming in goes out. There is nothing left for savings or investments. You don’t have the flexibility to help your primary causes. Note how the variable expenses are squeezed to make room for the expenses you have to pay and your debts.

If you are living on credit cards, the outflow may be more than your inflows and the green part of this pie chart is smaller than the other parts combined. Stop spending and living off credit. You cannot live on credit without making big trouble for yourself.

Paycheck to paycheck is not a fun life because you are under the thumb of others. Think of the debt as a huge hole that you have to fill up with your income. As long as that hole exists, your income does not belong to you. You can’t use your income for your higher purposes like your major causes or for building your assets that create wealth. Vow to take back control over your life!

If your financial life isn’t to your liking, put yourself on a track to change it. Realize you hold the power to control both income and expenses.

For better income you can:

  • market yourself better and get a new job
  • do the things necessary to make you more marketable to get a better paying job
  • create your own job

For most of us, doing the things necessary to be more valuable to employers meant that we gave up other expenses to afford more education or training—you live cheaper now to have a better life later. You can take a class or two at a time while you work.

If you are short of money, there are financial aid programs to help with education costs or ask your employer about training assistance or pick a less expensive school. Your main commodity is time. Fill up your waking hours with activities that help you increase your value or teach you the skills to start your own business. Try to minimize education debt, but if managed well, education debt is actually an investment in your future and higher lifelong income.

We all make choices about our living expenses. Find places in your budget to cut the fat. Prioritize your spending. What are spending requirements and what are the nice to haves?

We have one life to get this right. The price to pay for not getting this budget thing right is a life of work or a retirement of just getting by on Social Security.

Start visualizing what you want your pie chart to look like in the near future then plan and work to make it happen.

2. Where You Should Be Now—Or In The Near Future.

If things are going well, your income covers all your expenses, allows you to have a life, and you are saving for the future. How does this happen?

whereyouwanttobePeople on the right track live within their means. They pay themselves first (savings and investments) and live off the rest. If you don’t pay yourself first, there is never enough money left over for savings after all the “necessary” spending. You can’t use credit as a substitute for an income.

It’s about making the right choices when faced with a financial decision and not defaulting to the easiest or pleasurable choice. You have to be disciplined in controlling your outflows. It’s hard; we’ve all been there.

Outflows come in two forms, liabilities and assets. Liabilities are expenses where you never see your money again. You own your assets and they grow over time to create wealth. You have to minimize the liabilities and maximize your assets. That’s how the money game is played successfully. Assets allow you choices and freedom.

3. Where You Should Be In The Future.

People who think about and plan their future financial situations tend to be successful. They envision a future like this:

whatsyourvisionTo achieve this pie chart requires a plan. The sooner you plan, the better your chance of success. This plan would require actions to:

  • Reduce your fixed expenses over time
  • Increase your savings and investment amounts
  • Eliminate your loans and credit
  • Keep your variable expenses under control
  • Increase your income over the years to help accomplish the above points

You have to start paying yourself first and living off the remainder. Constantly increase your savings and investments as you change jobs, get promoted, and get pay raises.

Have a plan to decrease your “financial footprint” over time. Your financial footprint is how much you owe anyone and everyone. Going into retirement you want the smallest financial footprint possible. Having a small financial footprint means you either require a lot less income to live comfortably or you will have more income to live a fun life. Win-win!

4. Mission Accomplished.

allittakesisplanning

 

Interested in learning more about how to square away your future?  Check out MOAA’s Financial Planning Guide, available for PREMIUM and LIFE members.  MOAA’s Financial Planning Guide provides more in-depth information and guidance on financial decisions most service members encounter. You can also talk to one of our certified financial planners for personalized advice about your situation.

Not a Premium or Life member? Join or upgrade your membership now.

No responses yet

Wealth Creation and Real Estate Investment

Jul 10 2014

There are three ways to build wealth:

  1. Investing in the markets
  2. Starting a business
  3. Owning real estate

For many of us, numbers 1 & 3 are the most likely ways for us to achieve our financial dreams of freedom. For military personnel, we can invest in TSP (which is a good, tax deferred way to save or post-tax way to save). Personally, I recommend any investment portfolio include the use of a financial professional to ensure proper diversification.

Owning real estate is a good option, especially to those who move frequently (as military do). Take this scenario, if a military member moves on average every 3 years (as was the case, when I was in and when my father was in), one could accumulate 5 houses in 15 years (assuming that for the first 5 years, the military member does not purchase a home). If the average home costs $150,000 (around $100,000 in the beginning and up to $300,000 in the end of a career), it is possible to control $750,000 of real estate after a 20 year career in the military.

Why is property ownership such a good thing? First of all, there is the tax advantage. There are ways to pay capital tax rates (0-15%)[1], whereas TSP earnings are subject to ordinary income upon withdrawal from the TSP account (with a tax deferred account) or taxed at ordinary rates (10-39.6%) upon contribution to a Roth-style TSP account. The second advantage, regardless of the crashes which have taken place (2008 and late 1980s for example), the real estate market has grown over the long run.[2] While there are many short term loss possibilities, over the long term, real estate tends to hold its value, in the aggregate. Third, real estate taxes are deductible, whereas only certain taxes are deductible on investments. Fourth, it is easier to obtain financing for real estate vice investments. Have you ever gone to the bank and said that you wanted to borrow money to buy stock on the open market. Give it a try and let me know how it goes!

HouseForRentOwning property is good, but what about renting property out? The first thing on your mind is likely “I don’t want to deal with the hassle!” Setting this aside for a moment, let’s look at the benefits of renting out real estate.

  • When renting out property, you move the property from an investment property to a “production of income” property. What is “production of income?” It is like running a business, but is treated under the IRS codes differently. For the sake of simplicity, treat it as running a business (unless I state otherwise). In this case, you can take deductions against your rental income, which you receive, which are “ordinary and necessary.”[3] Permitted expenses include:

* Real estate taxes
* Interest payments (on the home loan or equity loan)
* Management fees[4]
* Other ordinary and necessary expenses (cleaning, repairs, advertisement, etc).[5]
* Depreciation[6]

  • Someone else is paying off your mortgage in your other home, while you still retain ownership! This is provided you can rent out the home for at or more than the interest and escrow costs of your home. Why interest and escrow costs? Principal is more about paying yourself (which acts like a savings account over time). This is why even if you are not able to rent out for more than your payment, you might still make out profitable because of the amount of principal and the tax advantage of owning the home.
  • If you own a vacation home and use it for less than 14 days[7] out of the year (or 10% of the days rented out if rented out for less than 140 days[8]), it still counts as 100% rented out for the year. Imagine owning a nice home in North Carolina (or Oregon for those on the West Coast) near the beach and vacationing there for a week each year. If it is rented out for more than 140 days, you can treat it as 100% rented out for the year (but personal expenses directly attributable to the time you use it are not deductible, for example cleaning or food expenses)
  • Home values (generally) go up over time.[9] While the increase is not equal to that of the stock market, real estate is an investment, which tends to hold its value. When including the amount of rent received, minus the cost of maintenance and adding the tax advantage, if can be a good investment.

This is something to consider along with a balanced portfolio. In order to achieve the balanced portfolio, it is recommended you discuss your financial plans with a certified financial planner (CFP®), CPA or EA. In future blogs, I will discuss in further detail how this works with dealing with the IRS and state tax agencies.

[1] §1221 of the IRC
[2] http://www.census.gov/hhes/www/housing/census/historic/values.html
[3] §212
[4] §212-1(h)
[5] IRS Schedule E
[6] §167(a)(2)
[7] §280A(d)(1)(A)
[8] §280A(d)(1)(B)
[9] http://www.census.gov/hhes/www/housing/census/historic/values.html

No responses yet

Next »