How to Get a No Money Down VA Loan

Is a No Money Down VA Loan even possible?

 

Is such a thing even possible? Well, I’m glad you asked. Such a thing is possible, and in this article we’re going to explain how. There are factors that can combine to make any new purchase loan a no-money-down loan, and there is also an easy way to do a VA refinance with no money down as well. We’ll cover both scenarios here.

 

Yes its possibleNo Money Down on a New Purchase Loan

This is possible due to a combination of a number of factors. The first thing that makes this possible is that VA loans do not require a down payment of any kind. You can obviously make a down payment, and if you do you can expect a better offering from the lender, but you do not have to and there is no penalty for not doing so. Since the down payment is often the single largest piece of money down on a new purchase loan, having this removed makes a VA loan far more affordable than it would otherwise be. This leaves two other things that cost money right at closing: the VA Funding Fee, and closing costs on the loan. The VA Funding Fee is usually around 2.15% of the loan amount and is normally due at closing. However, the VA allows the borrower to roll the Funding Fee into the loan amount so that the borrower does not need to pay it upfront. Considering that on a $200k home, the Funding Fee would be around $4,300, that takes a significant chunk out of the out-of-pocket costs as well.

 

So of all the normal upfront costs of purchasing a home, all that is left is closing costs charged by the lender. Much of closing costs are paying for services the lender has provided in regards to originating the loan, but other things such as the appraisal are also included. For origination, lenders are only allowed to charge a maximum of 1% of the loan amount. Combined with the other charges that aren’t considered origination, you’re probably looking at 1.5 – 2% of the loan amount in these closing costs. Considering that your down payment (if you were making one) would probably be at least 5%, which would be $10,000 on a $200k home, plus the $4,300 from the Funding Fee on that home, plus the 2% of closing costs ($4,000 on a $200k home), you could be looking at an upfront cost of $18,300, so even if the only thing you’re stuck with is closing costs, a $4,000 tab is much better than an $18,300 tab.

 

You can, however, also have that $4,000 taken care of in some instances. The VA loan program allows the seller to pay the borrower’s closing costs up to a certain point. Especially if you’re buying without a real estate agent, most sellers will be willing to pay up to 2% of the loan amount in closing costs for you as part of the deal, and it’s not usually too difficult to convince the lender to do so. Obviously, this depends on the market and the home you’re buying (if the seller has three other offers on the house then they may not be as motivated to help you buy it), but it’s often very possible.

 

No Money Down on a VA Refinance

Obviously, the same ability to roll the Funding Fee into the loan applies to refinances, and no down payment is required on refinances period, the only question that remains is how to address the remaining closing costs. The way to do a VA refinance with no money down is by using the VA’s streamline refinance option, called the Interest Rate Reduction Refinance Loan, or IRRRL. This streamline refinance option is what allows you to do a no-money-down refinance. The VA allows IRRRL borrowers to roll every penny of closing costs into the loan amount along with the Funding Fee (which is actually quite small on the IRRRL compared with a new purchase or a normal refinance). This means that you don’t need to rely on anyone else’s generosity in order to do your refinance with no money down. The VA makes this option possible to help out borrowers that need to refinance their homes but don’t have a whole lot of cash saved up.

 

Why Does the VA Loan Program Not Require Down Payments?

Why the VA Does Not Require a Down Payment

VA Loans Dont Require Down Payments

This is a common question about the VA loan program because it seems too good to be true – “I can get a home loan without making any down payment when normally you have to make a 20% down payment? Yeah, right…” If you don’t know much about the VA loan program, that might even sound like a scam. It’s not. You really don’t have to make a down payment if you get a VA loan. However, that doesn’t mean that no money will be due at the time of closing on a VA loan. We’ll go into that as well as explaining the numbers behind why the VA loan program doesn’t require any down payments.

 

You’ll Still Have Money Due at Closing

“No down payment” is often confused with “No money down”, which is something different. While you can have a true no-money-down VA loan, that’s usually only available as a refinance by using the VA streamline option. The only other way to get a no-money-down VA loan is if the lender chooses to offer one, which will only be done if the money is being made up in some other way such as a higher interest rate. The down payment goes towards paying down the principal balance on the home, and it’s important to lenders because they want the object securing the loan to be worth more than the loan is being made for. Closing costs are different; closing costs are the fees and charges associated with getting a home loan. The VA does not allow closing costs to be rolled into the loan amount unless it’s a streamline refinance, so you’ll be looking at paying a few thousand dollars upfront on a VA loan even if you’re not making a down payment. Part of closing costs is the VA Funding Fee, which can be rolled into the loan amount if you would like, or you can pay it upfront as well. Many veterans are exempt from the Funding Fee, so it’s worth checking to see if you might be as well.

 

So Why No Down Payment?

As we touched on above, the lender needs to have a reasonable assurance that they will get their money back, and preferably a healthy return on their investment. One of the most important ways they do that is by requiring at least a 20% down payment on the house or the borrower purchase mortgage insurance. The reason why is because the house is the security for the loan; in other words, if you default on your loan, the lender takes the house as compensation. In a scenario where 20% of the value of the house has been paid off, the lender needing to sell the home at 85% of its fair market value in order to get rid of it quickly is not a big deal; they still get a small return on their investment. The last thing a lender wants is to make a loan for $100,000, only get $5,000 back from the borrower before they default, and then only be able to sell the home for $80,000, because that means the lender loses $15,000 on the transaction. In that same scenario, if the borrower had made a 20% down payment ($20,000), then paid $5,000 before defaulting, and the lender could only sell the house for $80,000, the lender gains the $5,000 that the borrower paid.

 

It may seem odd that the VA loan program lacks this protection, and if it really did it would be odd indeed. However, the VA loan program has its own protection called the VA Guarantee, and it is designed to eliminate the need for the borrower to make a down payment. Borrowers are still able to make a down payment if they wish and are encouraged to do so if they can afford it, but the Guarantee takes care of the minimum requirements that lenders need in order to be willing to make loans. The VA guarantees 25% of the loan amount to the lender when the loan is made. In other words, if the borrower defaults on the loan, the VA will pay up to 25% of the loan amount to the lender on their behalf. This puts the lender on even better ground than a 20% down payment and makes it even more likely that they’ll be able to at least break even and even turn a small profit on the transaction. Obviously not nearly as much as they would if the borrower had not defaulted, but enough that the risk is sufficiently mitigated.

 

Even though the Guarantee is paid to the lender when it’s used, it’s in place to help borrowers by eliminating the need for a down payment and opening up homeownership to more veterans sooner.

 

How Much Money Should I Plan on Putting Down?

One of the first things a home buyer thinks of or plans on when preparing to purchase a home is, how much money will need to be put down to buy the home.  From about 2003-2006, no money down loans were a dime a dozen and very few home buyers were putting money down even if they had substantial money saved up.  Well after the mortgage meltdown of 2007-2008, the 100% financing or no-money-down loans are a thing of the past; for most home buyers.

Veterans and those using a VA home loan for the purchase of their house, still do not have to put any money down when purchasing or buying a home whether getting a Texas VA loan, Florida VA loan, or any other VA loan type.  Just because veterans are not required to have money to put down and are able to borrow the full sales price of the home, doesn’t mean it is always in the veteran’s best interest.  There are reasons to consider for making a down payment on a VA loan.

VA loans do not require mortgage insurance (PMI) and this is the main reason people would be interested in putting money down on a home purchase; by putting money down you can in many cases avoid paying mortgage insurance.  So if VA loans do not require the payment of a monthly mortgage insurance, then why would a veteran want to put money down?  Below is a list of some reason or options to consider for making a down payment on a VA loan.

Reasons to consider for making a down payment on a VA loan or VA home purchase:

Make your monthly payments on your mortgage smaller.  (budgeting) By putting money down, a veteran is able to control more of the monthly mortgage payment that will be due each month.  Suppose you are buying a home for $250,000 and your rate is 6.5%.  Your monthly payment, if you did not put any money down, would be $1580.00 (PI only).  Putting down 20% or $50,000 would lower your monthly PI to $1264 and save you $316 a month.  These examples do not take into account your VA funding fee.
Pay a lower % on your VA funding fee. (lower your closing costs) The amount of money a veteran puts down on a VA purchase, will affect the amount of the VA funding fee charged by the department of veterans affairs and also has an impact on the monthly payments for the VA loan.  To fully understand how your VA funding fee will affect your VA loan please click here.  Just like a down payment will lower your monthly payment purely mathematically, a VA funding fee will also affect the final loan amount and thus have an impact on your overall monthly payment.
Emotional satisfactions of having some instant equity in your home. When a veteran doesn’t put any money down on the purchase of a home, the veteran will not have any equity in the house.  Knowing you have skin in the game and that you owe less on your home than what it is worth goes a long way in making you feel good, responsible and you also have given yourself more peace of mind.
Possible lower interest rate. Though most lenders or mortgage companies that work with veterans and do VA loans will not give lower rates or incentives for veterans that put money down, it has happened in the mortgage industry that a lender may be more willing to give a lower rate to a veteran that has shown responsibility in saving money and putting it down on the home.

VA Loans vs. Conventional Loans – Which is better?

What should you choose?  VA or Conventional?

At some point Veterans will come to a dilemma when deciding what type of loan to use when buying a home.  This is a very valid question or concern as both have their place in the home buying process.  Having worked with Veterans for the past 7 years I can shed some light on this subject.  First let me start by saying that owning your own home is still one of the best financial decisions an individual can make if its done right.  What I mean by that is simply don’t bite off more than you can chew.  Once you sign on that dotted line you are now responsible for making payments for the next 15 to 30 yrs.  BE SMART ABOUT IT.  OK, lets analyze the VA loan and Conventional loan.

VA loans allow NO MONEY DOWN 100% financing

VA loans  allow for a Veteran to borrow 100% of the purchase price.  This now is one of the only loan programs that allow for 100% financing.  Unlike Conventional loans, you don’t have to pay any mortgage insurance premium (MIP) on Veteran Home Loans.  MIP is a separate insurance that covers the lender in case of loan default.  The amount of MIP is paid on a monthly basis and is completely risk based and can be very expensive.  The reason why a Veteran does not have to pay this is simple.  The Department of Veteran Affairs is guaranteeing a portion of the loan to the lender.  This is what is commonly known as your VA entitlement.  For the Dept of Veteran Affairs to guarantee a VA loan to the lender there is a fee assessed by the VA.  This is called a VA Funding Fee (VAFF).  The amount of this fee is usually 2.15% of the loan amount and it CAN BE financed into the loan.  This fee can be decreased if the Veteran puts money down and will also be waived is the Veteran is receiving 10% or more VA disability.  In this day and age, who has $20,000 just laying around to put down on home.  This is just my opinion, but if you have that much money saved its better left in an interest bearing account.  Besides, all the interest on home loans is tax deductible so on that $20k you will will gain interest and be able to deduct more interest on your home.

Do I need to have great credit?

Credit Qualifications on VA loans are much different than conventional loans.  With VA loans its based on timely payments within the last 12 months whereas Conventional loans are score driven.  A Veteran who has a credit score of 620 can get them same rate as someone with an 800 credit score.

How much money do I have to make?

There is an additional step with VA loans.  VA is not so concerned about Debt to Income (DTI) but rather Residual Income (RI).  The Department of Veteran Affairs has established a calculation based on family size, loan size and location and takes into account net income (after taxes).  Conventional calculates DTI on gross income (before taxes).

These are the main differences between VA loans and Conventional Loans.  If a Veteran has served his country and helped the cause of Freedom and is given the ability to use a VA loan, there is no reason why he/she should not use it.  I’ve done both VA and Conventional loans.  VA LOANS provide lower monthly payments.  This industry is changing so much. It isn’t what it used to be but the VA loan has remained constant.  Good luck and happy house hunting.

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*Annual savings calculator based on 2015 monthly average savings extrapolated year-to-date.