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One of the biggest perks of a VA loan may also be a huge drawback. Read on to learn what to consider with this kind of mortgage. [[{“value”:”
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In February, the median existing home sale price was $384,500, according to the National Association of Realtors. That’s a 5.7% gain from a year prior.
Now most conventional mortgage lenders require at least a 5% down payment at closing. But for a home costing $384,500, that means having to come up with $19,225.
Even if you have, say, $20,000 in your savings account, that isn’t enough to purchase a home whose down payment comes to $19,225. In that case, you’re basically wiping out your cash reserves to buy a home, leaving yourself with almost no money left over for moving expenses, initial repairs, and general financial emergencies.
But what if there were a way to buy a home with no money down? If you’re a U.S. veteran, there may be. It’s called a VA loan, and not having to put money down at closing is one of the biggest perks. But while that might seem like a huge benefit, it can also be a major drawback.
When you put your finances at risk without even realizing it
If you earn a decent wage but don’t happen to have a lot of money in savings, then a VA loan could potentially be a good choice for you. In a nutshell, not having to put money down could get you into a home and allow you to start building equity in it. As long as you’re confident you can afford the ongoing monthly payments, you’ve got a pretty good opportunity to dive into homeownership without having to potentially wait years to save up a down payment.
But there’s a problem with putting no money down on a home — you’re starting off with zero equity. And if your financial situation changes for the worse and home values start to decline (in general or in your area), you could be in for a world of upheaval.
Let’s say you buy a $300,000 home with $0 down via a VA loan. Let’s also say that in a year from now, your income takes a hit so you can no longer afford your home. If your home’s value is up to, say, $330,000, you’re okay. You might have to deal with the hassle of moving, but you could conceivably sell your home for a high enough price to pay off your mortgage in full.
But what if your home’s value doesn’t rise by $30,000, but rather, falls by $30,000? It can happen. At that point, you’re underwater on your mortgage if you took out a $300,000 loan a year ago and your home is now only worth $270,000 (although you’ll have made 12 payments into your mortgage, most of those initial payments go toward the interest portion of your loan, not its principal).
So imagine you can’t sell your home for a high enough price to repay your lender in full. You’ll either need to get your lender to agree to a short sale, which could negatively affect your credit score, or come up with the difference yourself. And chances are, if you didn’t have home down payment funds a year ago, making up that difference will be difficult to impossible.
Think twice before taking out a VA loan
There are certain benefits to signing a VA loan aside from the no down payment feature. You may, for example, be able to qualify for a more attractive mortgage rate with a VA loan than with a conventional mortgage.
However, if you’re going to sign a VA loan, consider making some sort of down payment if your finances allow you to. That way, you at least start off with a bit of equity and potentially reduce your chance of winding up underwater on your mortgage.
You should be especially mindful of the risks of a loan that doesn’t require a down payment when housing prices are so elevated. Today’s prices may not be sustainable once mortgage rates come down and more homes hit the market, which is expected to happen. So be very careful about buying a home with no money down at a time when home prices have the potential to fall.
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