Can the VA Home Loan's 0% down-payment end up causing financial harm?

2018-06-12T03:57:25-04:00

My wife and I are looking to buy our first home. It looks like the VA Home Loan offers a few great advantages like free inspections, low interest rates, no mortgage insurance, and requiring 0% down. I am concerned with the last one- if you put 0% down on a home, this would increase the amount of money being loaned to you, thus increasing the amount of money on which you are charged interest. Does the VA loan protect against this by not charging interest on a certain percentage of the borrowed amount? It feels like a trap encouraging buyers to borrow more money.

Response by CPT Zachary Brooks made Jun 12 at 2018 10:29 AM

2018-06-12T10:29:35-04:00

The ideal part of the 0% down is that it will not be required in order to purchase a home, something that is great for someone that can afford the slightly higher month to month payments coming from a larger total, but cannot afford to scrap together 10k or 20k for a down payment.

The more you can put on a down payment (and the more principle only payments you make) helps you to pay less over the long run.

It's not really a trap or a predatory loan practice as it allows more flex in the ability and options when buying a home. The traps come from the 20% interest loans with no money down required. This at least gives you a lower rate and gives you more flexibility in being able to obtain the loan or not.

Response by SGT Private RallyPoint Member made Jun 12 at 2018 1:30 PM

2018-06-12T13:30:05-04:00

On a traditional loan, if you don’t put down 20%, you also pay PMI, mortgage insurance. You pay that until you reach 20% of the loan repaid.

The VA loan is good because even though you can do no money down, you don’t have to pay PMI.

It’s still a good idea to put some money down, start with some equity. But it’s definitely not a trap. Just because they’ll loan you money doesn’t mean you have to take it. Be fiscally responsible, look at your debt to income ratio, how much house you need, etc.

I bought a house on active duty with a traditional 30 yr fixed. I bought houses in retirement with a VA loan and a traditional 30 yr fixed. It all just depends on the current situation, and your current needs, wants, and financial abilities.

The VA loan is very straightforward, and it’s definitely not a trap. If you get in over your head, it’ll likely be your own fault.

Response by SP5 Private RallyPoint Member made Jun 14 at 2018 7:42 AM

2018-06-14T07:42:42-04:00

CPT Private RallyPoint Member VA loan approval places a high bar for the seller - the inspections required make certain that the property you are buying meets a good construction standard. Some sellers are not willing to sell VA, so be certain that the seller is one of those willing to go VA.

To determine how much the loan will cost you over its life, download an app that has amortization table capability. With that app you can view from payment 1 to the end of the loan. You can also change your down payment amounts and other variables within the loan to get a better picture of your situation. One respondent has mentioned PMI (Private Mortgage Insurance) which protects the lender in case of borrower default - the 20% down payment on conventional loans eliminates that. The VA loans have a "funding fee" up front, so be certain to include that in your process.

In any case, you are renting money from a lender, so shop around for the best deal in terms of interest rates, points and other terms. Good luck.

Response by CPT Vance Walden made Aug 6 at 2018 4:59 PM

2018-08-06T16:59:55-04:00

I guess I have come late to the discussion, but I can shed lots of light on this subject. The VA home loan is a benefit that you earned as a result of your service and sacrifice to our nation. There is absolutely no "catch" to this incredible benefit. The VA appraisal process is also another layer of protection for the home buyer as the home must meet what is called minimum property requirements of standards not necessarily required on conventional home loans. On conventional loans, you must put down a minimum payment of 20% in order to avoid mortgage insurance on the home you are purchasing. VA home loans require no down payment and your interest rate will average .50% lower than the conventional counterpart. Of course, you can always opt to put money down on a VA home loan to lower your mortgage payment, but that is entirely your call based upon your circumstance. Many of my VA home loan clients also accelerate their principal pay down by arranging for accelerated pay off schedules, thus saving thousands in interest payments over the life of their loan. VA home loans are not complicated as some might suggest and can close like any conventional home loan in 30 days or less.

Response by SGM Bill Frazer made Aug 6 at 2018 9:30 PM

2018-08-06T21:30:28-04:00

You need to research Sir, you do know that many institutions require up to 20% down payment.

Response by SSgt David Dion made Aug 13 at 2018 11:20 AM

2018-08-13T11:20:46-04:00

Your VA Home Loan benefit is something you have earned, allowing you to purchase a home with no money down. Think about it this way. Many people who buy a home with no money down actually have money to put down. They just choose to put no money down because the terms of the program are so good. It is also important to understand, you still must qualify and show the ability to pay the loan, so I don't think it is encouraging overspending. The basis of the program is to promote home ownership withing the military and veteran communities. Also, there is no requirement to put no money down, you can always put money down.

Response by John Burke made May 23 at 2019 3:04 PM

2019-05-23T15:04:01-04:00

There is a scenario where buying a home with no money down (VA is not the only option for this) could cause financial harm.

If you need to sell your home in the first couple of years, you likely will not have enough equity to cover the costs (6% real estate agent commissions) & other closing costs. If you're in a market that averages 3% appreciation per year, it will probably be year 3 before you have enough equity to sell. It could be longer if you're not funding fee (FF) exempt because your FF is rolled into the loan which means you are borrowing over 100% of the homes value.

I advise all of my clients to look at the break even point before they make a decision on putting money down. Here's why.
On VA loan, a $40,000 down payment will only lower your monthly payment by $190.97! It will take you 209 months or 17.45 years to recoup that $40,000 by saving the $190.97 per month! You would be better off paying off your car instead!

Response by SPC David S. made Jul 22 at 2019 2:29 PM

2019-07-22T14:29:58-04:00

The cost of the loan might be more however no PMI (insurance) and a lower rate could offset the variance in interest. A lot depends on the terms - 10, 15, 20 years. As well in some cases if you do put down a down payment you can actually get a loan for more than the sell price. A great way to pay off some high interest credit cards. It varies on amount. If I were you I'd work up some amortization tables in excel to see what's best for you.

Response by SGT Richard Garza made Aug 18 at 2019 11:08 AM

2019-08-18T11:08:07-04:00

VA loans are the safest, and lowest rate of foreclosure for the last 9 nine years, according to MBA. A VA-backed home loan is the best option for our veteran, whether it's a purchase or a refinance. Rich Garza, Veteran, and serving Active Duty, Guard and Veterans nationwide. You earned it! Message me or text [login to see]

Response by Sgt Kelli Mays made Sep 4 at 2019 7:30 PM

2019-09-04T19:30:08-04:00

CPT Private RallyPoint Member NO...The VA loan is actually the best loan you can get...or USDA is good too, however VA loans are easier to qualify for than USDA. VA loans are 100% financing, so NO money out of your pocket and the VA interest rates are always lower than other types of financing. VA loans do not have PMI or MIP...this is private mortgage insurance for Conventional financing i.e., Fannie Mae or Freddie mac .....or Mortgage insurance premium with FHA loans....this means your payment will be much lower. VA loans do have what's called a "FUNDING FEE" but, if you are a disabled Vet of at least 10%, the funding fee is waived. In Texas, there is the TEXAS VET loan, which offers even a lower interest rate and for disabled VETS...you cannot get a lower interest rate than Tex Vet. The funding fee is ROLLED into your note and will not affect your monthly payment....just as FHA has an up front fee for MIP which is rolled into your note and Conventional loans has upfront PMI which is rolled into your note....so NO....VA loans do not cost more than any other type of loan...and your payment will always be lower than other loan products because other products have PMI or MIP which is about 8% per thousand...added to your monthly payments... i.e., $150000 purchase....FHA would be an extra $120 per month added to your monthly payment...same as conventional, but PMI is based on your credit score and how much money you put down...but it'll be around $80-120 per month extra in your monthly payment as opposed to VA loans that do not have this added into your payment...so VA loans have lower interest and way lower monthly payments. You cannot go wrong with a VA loan. SPC David S.

Response by SFC Pamela Williams made Sep 10 at 2019 10:39 AM

2019-09-10T10:39:40-04:00

From my stand point and purchasing 3 homes using VA loan. better than others in long run.

Response by SFC Harrice Moore made Oct 9 at 2019 9:07 PM

2019-10-09T21:07:27-04:00

It really about the type of mortgage that’s used. The VA Loan save you money if you put down less than 20%. Otherwise, you can end up with Private Mortgage Insurance which raises your monthly payment. The VA Loan is the best loan package available. They’re not difficult, however there are loan officers and agents that will shy away from them for lack of knowledge.

Response by SFC Pamela Williams made Oct 10 at 2019 12:04 AM

2019-10-10T00:04:24-04:00

I have used the VA loan several times on different home and have never had a problem with higher borrowing power. My interest rate were lower than others I knew that use other than VA loan

Response by SPC Jonathan Mullins made Jan 30 at 2020 11:38 PM

2020-01-30T23:38:27-05:00

What state are you located?