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.
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.