3 Mistakes Military Members Make When Buying a Home
Buying a home can be a stressful, complicated process, whether its your first or tenth time. Military families especially can have trouble, between choosing a VA loan over a traditional one, deciding if new construction makes more sense than an existing home in an established neighborhood, and navigating the inspections, contracts, and legal proceedings… it can all be overwhelming.
I spoke with Andy May, the COO for AAFMAA Mortgage Services, who has worked in finance for over 30 years. He outlined for me the three biggest pitfalls and scams that military families experience when buying a home.
1.) Due Diligence: Be very careful with your hard-earned money
The balance of power in home buying has shifted dramatically in just the last few years. Before, buyers could walk at any time and not be penalized if something went wrong in the process. Now, however, sellers are able to claim a certain amount of “due diligence” and “earnest” funds that they can walk away with, should the deal go south.
Andy told me that, while it is rare, to be especially wary of new construction projects for this, as they could literally walk away with your life savings.
“They just keep it. They say, ‘You didn’t qualify, sorry.’ And then they keep your money,” he said. “People will call me and say, ‘Andy, my wife is about to divorce me – I lost 170 thousand, 220 thousand dollars of my hard-earned money, because I walked into a development, handed a check to a developer, and he kept it.”
It’s not just new construction that could cause problems, however. Without the proper guidance,”You could very easily be out several thousand dollars on every property that you’re looking at, that you’re serious about, and that you put an offer in on,” Andy told me.
2.) Beware of the “One Stop Shopping” Mortgage
Banks, credit unions, and loan officers that offer mortgages may advertise the “one stop shopping” approach, where the consumer can walk in and take care of the whole process through one entity. They won’t have to find a realtor, an attorney, or any outside businesses by themselves. It sounds convenient, but it’s set up that way because the financial institution has set up a CBA – Controlled Business Arrangement – with the realtors, attorneys and other participants in this mortgage.
What does this mean for the buyer? Frankly, it means you will have very little independence in the home-buying process. It also means the bank or credit union you are working with will be taking a portion of the commissions of all of these businesses. Simply put, these companies now have an increased financial interest in getting you to close quickly, and that interest can cause impaired judgement. Their fiduciary responsibility, their ability to look out for the customer’s best interest, becomes compromised. Consumers are rarely informed of this.
First, your loan officer should get a second look. Make sure that they are state licensed, and look at their credentials. Any licensed loan officer will have an ID number that you can access through NMLS Consumer Access. You will be able to see how long they’ve been in business, where their license is valid, if there have been any complaints filed against them, et cetera.
“We’re licensed by every state that we operate in,” Andy said. “We have to keep up our licensing requirements, which are onerous, and at times bureaucratic, but [they] result in a much higher level of fiduciary responsibility to the consumer than you would find at an unlicensed, unregulated bank.”
Next, make sure you talk to a trustworthy loan officer before consulting a realtor. “A realtor’s fiduciary responsibility stops… when you sign the broker agreement with the realtor. Then, it goes to contract law,” Andy said. He also told me about one realtor that he spoke with when a family came to him seeking help.
“[I asked her]Why did you charge the consumer $8,500 in due diligence and earnest money? I mean, that’s a lot of money, $8,500. Her response was ‘I wanted to get paid.'”
It’s not just realtors, either. Attorneys can also turn a blind eye when it comes to zoning and permit issues that could end up costing you thousands of dollars later on. Do your research, and protect your money.
3.) Just because you qualify for a VA loan doesn’t mean you should get one
The VA loan can be a great option for military families, under the right circumstances. But if you have your affairs in order, a traditional loan might actually give you a better overall mortgage.
In general, the VA loans works best for people who:
- Don’t have the money for a down payment
- Don’t have great credit
- Are receiving disability benefits from the VA
If you do have the money to make a down payment and you have good credit, you might actually get more out of a traditional loan. Andy told me that out of all the military families he services at AAFMAA, only 1 out of 3 opt for VA, and 2 out of 3 find a traditional loan that works better for them.
Keep in mind that some financial institutions will only offer a VA loan to military families, and may not show you other options. Additionally, realtors can and do advise sellers not to accept VA loan offers, as they require additional underwriting during the closing process, which takes more time to get through.
Ultimately, you should never walk into any major purchase lightly. Ensure that the people you work with have your best interest at heart, in order to ensure that your money is protected.