If you could buy a home with no down payment and no money out of pocket while at the same time paying down or eliminating credit card debt, would you do it? Sometimes a potential first time home buyer will delay their home purchase until all credit card debts are paid off. This is smart. Owning a home will involve unexpected expenses and having credit card debt at the same time as an unexpected expense can result in your credit card debt spiraling out of control. For Veterans, there is a way to actually buy a home with no down payment or money out of pocket, while at the same time having their debts paid off using what I like to call the Ultimate VA No No home loan.
The “VA No No” Loan
The VA home loan program allows eligible Veterans to buy or refinance homes up to 100% of the VA loan county limits. In Orange County, CA the VA Loan limit for 100% financing is $687,500. A “VA No No” is a common term referring to a Veterans ability to have NO down payment and NO closing costs. But closing costs do exist. So who pays them if the Veteran doesn’t want to? It’s important to note that if a Veteran plans to do a VA No No, then a loan officer needs to be consulted prior to the offer being made or escrow being opened. Closing costs on VA loans do exist, so if the Veteran does not have the funds to pay them or intends not to pay them then it is important that the initial purchase offer is structured in a way so that that happens. This is not something that should come up after the offer is accepted, especially in the case of a Veteran who has debts (credit card, car etc) that he expects to payoff through the purchase of a home.
There are three basic ways to achieve the second “No” of a VA No No.
- The Seller can pay the buyers closing costs. In a “buyers” market this is fairly common. However, in a “Sellers” market it is not. And right now in Orange County, in 2014, we are in a sellers market. Home inventory levels are low and there are plenty of buyers trying to buy a home. Many homes for sale have multiple offers coming in. The offers that are negotiating for the seller to pay the buyers closing costs are at a big disadvantage. So while it is possible to have a seller pay the buyers closing costs, in many cases the buyer will have an uphill battle trying to get their offer accepted.
- The real estate agent can pay the buyers closing costs. This does happen sometimes. There are some “discount” real estate companies that will credit some of their sales commission back to the buyer. But in most cases, even if there is a credit coming from the agent for closing costs, it’s probably not enough to cover everything.
- The lender can pay the costs. This is actually a great way to do it. Depending on rates and loan pricing, it is possible to get a “credit” for closing costs from the lender. On any given day there is a “matrix” of rates that can be offered to the buyer. The lower the rate, the higher the cost. The higher the rate, the lower the cost. And if the rate is pushed higher enough, there could be enough lender credit to cover not only the closing costs, but also credit card debts (or other debts) of the buyer.
Seller Concession in VA Financing
The VA loan program is the only type of loan that allows for debts to be paid off on the Veterans behalf as part of the home buying process. In the case of the seller paying off debts, this is considered a “Seller Concession”. VA allows a Seller Concession of 4% of the appraised value. A concession includes:
- The Veterans VA Funding Fee
- The Veterans “prepaid” expenses – taxes and insurance impound account and prepaid interest
- Temporary interest rate buy down fees
- Gifts, such as a television, appliances, etc
- The Veterans debts.
An Orange County Veteran buying a home in Mission Viejo for $550,000 with $0 down, and assuming a typical first time use VA Funding Fee of 2.15% would end up with a total loan of $561,825. If we assume that typical closing costs and prepaid expenses on a home purchase are 2% of the purchase price, then by going with an interest rate of 4% (4.246% APR) at 0 points, the Veteran would need $11,000 to close and their Principal and Interest Payment (P&I, not including taxes and insurance) would be $2,682. The Veteran could instead choose to go with a rate of 4.25% (4.327% APR) because the lender is offering a 2% credit which will be enough to cover the closing costs and prepaid expenses. This achieves a VA NO NO and the P&I is $2,763. The Veteran has saved $11,000 out of pocket with the trade off having a payment that is $80 higher per month. But what if the Veteran has $5,500 in credit card debt? In this case the lender may be able to offer a rate of 4.5% (4.5% APR) with a 3% credit towards the closing costs, prepaid expenses, and credit card payoff. Since the closing costs are 2%, this would leave 1%, or $5,500 ($550,000 price * 1%) for credit card payoff. The P&I payment would be $2,846, or $80 higher than the payment at 4.25%.
For some home buyers this may make sense. And for others it may not. But knowing your options and how you want to structure your deal before you make an offer is important. Finding an Orange County VA home loan specialist who can prepare custom loan scenarios showing a detailed analysis of the payment, closing costs, and amount needed to close is critical if you want to have a smooth, hassle free transaction.
Authored by Tim Storm, a California Mortgage Loan Officer MLO 223456 – Please contact my office at the Emery Financial. Direct line at 949-640-3102. www.OrangeCountyVALoans.com