You might want to think twice before going this route.
- VA loans allow eligible borrowers to buy a home with no down payment.
- Although VA loans make home ownership accessible to people with limited incomes, they could be problematic for borrowers when home values drop.
If you are a member of the US military or an army veteran, you may be eligible for a VA loan. To be clear, you are not limited to applying for a VA loan. If your finances allow it, you can apply for a conventional mortgage.
The advantage of taking out a VA loan is that you don’t have to make a down payment. On the other hand, with a conventional mortgage, you will usually have to put down a large down payment (some lenders will only accept 5%, but many require at least 10%).
If you can afford to pay the mortgage on a home but don’t have savings for a down payment, a VA loan might seem like a good solution. But there’s a downside to not putting money on a home, and it’s important to be aware of it before you go ahead.
Could you find yourself underwater on your mortgage?
The danger of not putting down money at closing when buying a home is getting underwater on your mortgage. When you’re underwater, your loan balance is higher than what your home could sell for. It’s a problematic scenario where your finances deteriorate and you have to get out of your mortgage payments by selling – but you can’t.
The less money you put on your home when you buy it, the more likely you are to end up underwater on your mortgage. This especially applies in today’s housing market.
Right now, home values are on the rise nationally. That’s part of the reason you might be considering a VA loan in the first place — you can’t afford a down payment on a conventional loan.
But if you take out a no-down payment mortgage based on today’s home prices and then home values start to drop, you could end up with negative equity – where the market value of your house is less than your mortgage balance.
Imagine buying a house today with no down payment using a $300,000 VA loan, but that house would normally only sell for $260,000. If, in a year, home values drop, you may still owe $290,000 on your mortgage. But if the value of your home drops to $260,000, then you’re underwater.
Now, if you’re able to meet your mortgage payments and don’t want to move, that’s not so much of a problem. But if your financial situation changes, or your military orders change and you need to move, you will effectively be stuck.
If you sell your home for $260,000, you won’t get enough money from that sale to repay your lender, so you may have to dip into your savings to make your lender whole. Or, you might be stuck having to make a short sale, which could hurt your credit score (if your lender even agrees to one) there are many lenders with no credit checks loans.
This is why you need to be careful with a VA loan. While skipping the down payment may seem like a good thing, it can also backfire on you.
Make the right choice
Although many military and veterans turn to VA lenders when they need to borrow for a home, it’s not your only solution. It pays to explore different loan options before signing a VA loan.
Another thing to consider, however, is that even if you don’t have to make a down payment on a VA loan, you can deposit money if you have any. This is an option to consider if your situation allows it.
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