Veterans aren’t strangers to the concept of assets and liabilities. One of the first things anyone does when thinking about personal finance is to map out their assets and liabilities into a personal balance sheet. The result is personal net worth.

But how accurate is your balance sheet? What common liabilities are often left off the balance sheet because they aren’t considered financial liabilities? And how can an improved understanding of liabilities give you better understanding of financial risk?

Your Home: Asset or Liability?

Perhaps, you have accomplished one of the milestones of the American Dream: home ownership. Your real estate agent, like many others, probably lauded your new home as an ‘asset,’ even if you have a mortgage. Yes, a home can offer some stability and a place to build memories. It can also appreciate in value as time passes. But, beyond the mortgage, what liabilities does the home create?

Defining Assets and Liabilities

Before we delve deeper, let’s reacquaint ourselves with the definitions:

• Asset: It’s something you own that has value.
• Liability: It’s a debt you owe now or in the future, including costs associated with the upkeep of your assets.

The Ongoing Costs of Ownership

Your home sits in the asset column, however, it comes with a list of liabilities when you consider all the ongoing investment and maintenance it demands. Let’s look at a short list of some ongoing costs of the home:

• Property Insurance
• Property Tax
• Lawn Care & Landscaping
• Appliance Repair
• Appliance Replacement
• Termite/Insect Prevention
• Exterior Repairs (Roof, Siding, Tuck Pointing)

Many of the items on this list aren’t optional. You could cut corners occasionally, but proper home maintenance is necessary to maintain the home’s value. Some or all of those costs are shifted away from you when you rent the home you live in.

The Hidden Liability

Let’s use some numbers to consider the impact of home ownership costs on your balance sheet. Imagine you purchase a $400,000 home using the VA loan benefit to finance the purchase with no down payment. 

Normally, your net worth wouldn’t change. You have a $400,000 asset with a corresponding $400,000 liability. As you pay off the mortgage each month, your net worth increases as the mortgage balance decreases, assuming there are no changes to the market value. 

With that in mind, let’s consider those “hidden” liabilities of home ownership. We could make detailed estimates of all the ownership costs associated with the home over the time of ownership, let’s say 10 years. 

We add up all of those costs and make some adjustments for inflation—for this hypothetical scenario, let’s say the present value of the home ownership costs about $100,000. By the way, financial planning software or a spreadsheet can help with this analysis.

As a result, the moment you signed the title for this new home, you decreased your net worth by $100,000. 

You bought yourself a $100,000 liability along with your asset.

Other Examples

The scenario with a home isn’t so different than a car, another commonly misunderstood asset. We know a vehicle loses value almost immediately after being driven off the lot. Maintenance, insurance, and depreciation all add up, increasing the actual cost of the car far beyond the original purchase price.

An example that hits close to home with your author is racehorse ownership. In the racing business, yours truly often states that a “racehorse is a liability until it proves itself to be an asset.” For those unfamiliar, training costs for a racehorse tend to run $3,000 to $4,000 per month. That horse is just a cost (from a financial perspective) until it starts winning races.

Making Informed Financial Decisions

The key takeaway is that assets come with liabilities. It’s up to you to understand and quantify these obligations. Then, you can decide whether maintaining or purchasing the asset makes sense.

Ultimately, the question isn’t just whether your assets have liabilities attached—it’s about having a handle on the true financial picture. Here’s where a strategic approach can make all the difference and safeguard the financial health you’ve worked so hard to achieve.

Understanding Your Total Cost

The actual cost of ownership is rarely the sticker price—you need to consider the overall investment, including ongoing maintenance, repairs, and insurance. By mapping out these costs, you’ll have a clearer sense of how your assets impact your liabilities and whether or not you can afford those assets.

The Takeaway

As you navigate the major purchases or financial planning in general, be deliberate about understanding the nuances of what you own and how it impacts your wealth. Your home and your car can indeed be assets, but they also comes with liabilities. By understanding the true cost of ownership and assessing potential appreciation, you’ll move one step closer to financial freedom.

In the grand calculus of your finances, the hidden details of the big decisions can make or break your financial health and financial future. So as you consider the investments in your life, don’t blindly accept assets as such—always question whether they bring you closer to your financial goals. 

Veterans Affairs (VA) Loan Assumption, Good Deal for Me?

Mortgage interest rates have hit a 20-year high with average new mortgage rates over 6%. Higher rates (and payments) can make it hard for new home buyers to stay on budget. Before the spike, many people got new or refinanced mortgages for under 3% interest. For a seller with a low-interest rate, allowing a buyer to assume your VA loan could be a win-win scenario for both of you.

What is VA loan assumption?

A VA loan assumption is when one person takes over an existing VA mortgage loan from another.  The home buyer takes on (assumes) the terms, payments, interest rate, and loan balance from the original borrower as part of the buying process.

All VA mortgages loans are assumable. And anyone is eligible to assume an existing VA mortgage, not just veterans. Buyers must still meet the lender’s creditworthiness, income, and debt-to-income ratio criteria.

I’m a buyer, why consider a VA loan assumption?

Buyer Pros:

Lower interest rates: You could save a lot of money on interest over the long term if the assumable VA loan has a lower rate.

Lower VA loan closing costs: A VA home inspection is not required. You only pay the 0.5% funding fee to assume an existing VA mortgage. There’s no funding fee if you are a veteran with a VA disability, Purple Heart recipient, or surviving spouse receiving Dependency and Indemnity Compensation.

Buyer Cons:

Limited property options: Only shopping for homes with an assumable VA loan will narrow your choices.

Seller’s loan terms: Assuming a VA loan means accepting the existing loan’s terms as is, such as interest rate, loan balance, and repayment period. This may not align with your needs.

Cash on Hand: If the existing VA mortgage is less than the home sale price, you must make up the difference. That means a down payment from savings or taking out a second mortgage. Taking out a second mortgage may be possible but has extra costs and makes the sale more complicated.

Time: Loan assumption is more streamlined than a new VA loan, but assumptions can take longer. Up to 6 months is not unusual. In the meantime, you can’t move in and the seller is waiting to receive money from the sale.

Possible Loss of Entitlement: The buyer may need you to substitute your own VA loan entitlement. This will reduce the amount you could borrow again until you pay off the assumed loan or refinance.

I’m a seller, why consider a VA loan assumption?

Seller Pros:

Increased buyer pool: VA loan assumption benefits may make the property more appealing to buyers. VA loan assumptions are also available to both veterans and non-veterans.

Competitive advantage: Buyers may offer a higher price for a home with a low rate, assumable VA loan.

Lower closing costs: The assuming buyer typically pays the assumption fees and charges.

Seller Cons:

Reduced cash flow: Money from the sale may be delayed until the loan assumption process is complete. You still have to make mortgage payments during that time.

Possible Loss of Entitlement: If the buyer qualifies, they can substitute their VA loan entitlement. Then your entitlement is reinstated. If the buyer doesn’t substitute (or can’t if not a veteran),  entitlement goes with the property. It is tied up until the new buyer pays off the mortgage. This would limit your ability to get another VA loan.

Release of Liability: Anytime you sell a home secured with a VA loan, YOU will still be liable to the government for payment unless:

-Your loan is paid in full.

-The VA releases you in writing from liability on the loan.

-You sell the property to an eligible veteran that assumes your loan AND substitutes their loan entitlement for yours.

Remember: Release from liability and VA entitlement restoration are two separate actions. Contact the VA office that guaranteed your loan and ask for the necessary forms and instructions.

Is VA Loan Assumption a Good Fit for Me?

A VA loan assumption can be a good fit for both buyer and seller when:

• The existing VA loan interest rate is below the new mortgage interest rates.
• You both (buyer and seller) can wait to complete a longer closing process.
• The buyer offers a higher price or concessions in exchange for interest savings.
• The buyer accepts the terms (years, payments, and interest) of the assumable mortgage.
• The buyer can pay the difference between the home sale price and the assumable mortgage balance (downpayment).
• The seller does’t need their VA loan entitlement restored. This allows non-veterans to make offers and assume the loan.

If you think a VA loan assumption might be a good fit for you as a buyer or seller, let your realtor know. They can get the word out and make inquiries for you and help negotiate a sale to benefit you both.

For more information on VA loans, including loan assumption, download the VA Home Loan Guaranty Buyer’s Guide at https://www.benefits.va.gov/HOMELOANS/documents/docs/VA_Buyers_Guide.pdf

If you’ve got questions about VA loans or other military financial topics, MFAA advisors can help.  You can find them here.

Recently, I’ve had several discussions with clients who are in the middle of a PCS (permanent change of station) or preparing for one. No tears so far, but lots of frustration every time the Federal Reserve raises the benchmark interest rate. Purchasing a home in the current seller’s market presents unique challenges for military families. In this post, I will explore key factors to consider when buying a home, empowering you to make well-informed choices and navigate the complexities of the market.

First of all, should you buy a home? No, really. Should you? We’ve all heard of that family that was able to sell their home in 3 years and make $100,000! Amazing! But that is 100% not the most likely outcome. Being well-informed about the implications of this property turning into a rental is important, as there is a high probability of it becoming one. I recommend you check out this MFAA blog post if you’re on the fence. Go on, I’ll wait. Welcome back! Now that you’ve familiarized yourself with some of the nuances of military real estate investing, you are well-informed and ready to proceed. Huzzah!

You’re moving soon. Where do you start?

1. Check Your Credit: There are several ways to check your credit score that won’t result in a hard inquiry on your credit. You’ll want to know where you stand before you apply for a loan. I’m a big fan of using annualcreditreport.com, the official website authorized by the Federal Trade Commission, to request your credit reports. Most credit card companies provide their clients with the option to access their credit score at no cost, without it causing a hard inquiry on their credit report.

Did you know that mortgage lenders use a different scoring model when you apply for a loan? The score you receive from your credit card company will probably be different/lower than what your lenders pulls. Ah lovely, another edition of the points are made up and the rules don’t matter.

2. Do the Math: The full cost of owning a home doesn’t just include the amount that the lender is going to show you. The lender will typically include the principal, interest, property taxes and insurance in their quote. Amounts that they don’t include but that could make a significant difference for you as the buyer include the monthly maintenance, monthly/annual homeowners association fees (up to $1,500/month in some areas!) and improvements you need to make to the home before you move in (that 70s green shag carpet has got to go).

The lender will also show you the closing costs but those are typically not included in your monthly mortgage amount. Closing costs are fees and expenses associated with finalizing the purchase of a property. They usually include charges for services such as appraisals, title searches, loan origination fees, attorney fees, insurance premiums, and government taxes or recording fees. You’ll need to decide if you’re going to add these fees to your home loan or if you’re going to pay for them at closing. I tried to show up at our last closing with a stack of cash like Scrooge McDuck, but my husband said no. So boring.

3. Explore Your Mortgage Options and Find a Lender: If you’ve already engaged a real estate agent, they likely have a list of reliable lenders they can recommend to you. If you are searching for a lender independently, begin by considering your bank or credit union, as well as local mortgage brokers in the area where you plan to move. Additionally, fellow military members can also serve as a valuable resource for lender recommendations. Online lenders can also be a good option but not all of them are approved to do VA loans. If you’re going to use a loan from the Department of Veterans Affairs (VA loan), then you must make sure the lender is VA approved. Once you’ve made a list of lenders, explore their websites, read reviews, and gather information about their loan products, interest rates, fees, and customer satisfaction ratings.
4. Get Pre-Qualified or Pre-Approved: What is the difference between getting pre-qualified or getting pre-approved? Think of being pre-qualified like your cousin telling you they can sing “Somewhere Over the Rainbow” just like Judy Garland. But getting pre-approved is having your cousin sing the song and record it to prove that they can do it. (I like to take any opportunity I can to use a theater reference. You’re welcome.)

The lender will likely pre-qualify you quickly (with a phone call or an online form) and this is based on the overall financial picture you share with the lender. To get pre-approved, a borrower will submit an official application along with necessary documentation. The lender will then evaluate your financial situation and history to determine how much mortgage you can reasonably afford. Which one should you do? It depends. Pre-qualification doesn’t generally involve anyone pulling your credit but the advantage of being pre-approved for a mortgage can vary based on your timeline and the specific market you are entering. In a highly competitive market, having pre-approval could provide a significant edge.

5. Work with a Knowledgeable Real Estate Agent: This is usually where people start but it’s ok if it’s at the bottom of your to-do list. Your agent will be able to do a better job of finding an appropriate home for you if you have a realistic range in mind and you will be less tempted to buy a home that you can’t afford. As financial planners, our interactions with real estate agents are frequent, and I’ve observed that the agents who possess in-depth knowledge of the area and maintain strong connections with fellow agents tend to achieve the highest levels of success. When searching for a real estate agent, don’t hesitate to interview multiple agents. It’s also beneficial to ask for recommendations from friends and colleagues who have had positive experiences with agents.

Additional Tips for Military Families Buying a Home

• Select a Home in Good School Zone: You may not have children of your own, but it’s important to consider that your future renters will likely have families that will be prioritizing rentals in reputable school districts.
• Consider Proximity to Military Bases: If you have a home that’s close to a military base, you’ll have a better chance of the home renting quickly.
• Select a Well-Maintained Property: By prioritizing homes in excellent condition, you increase the likelihood of finding a property that not only saves you money but also requires minimal repairs.
• Don’t Skip the Home Inspection! Just Don’t. When we bought our home, our realtor knew the seller would want an offer without a home inspection. So, we brought a home inspector with us to the open house. It was a little bit of a Bugs Bunny situation and the seller’s agent was ok with it but that was mega stressful for this rule follower. The market has calmed down some since then so you should be able to arrange for a professional home inspection as part of the offer you make on the home. Home inspections ensure any potential issues are identified and addressed before committing to the property.

Remember to prioritize your long-term goals and maintain flexibility and patience throughout the process. Feeling overwhelmed by all the information on the Internet? Reach out to one of our planners to help you navigate the process and make your next move a smooth transition.