The 100% VA Home Loan is a tremendous benefit to our finest serving in uniform and their families. But will this mortgage help you execute your broader financial plan and achieve your goals?
The short answer: it depends on what you’re trying to achieve and your personal situation.
The VA (Veterans Affairs) Home Loan helps service members become homeowners. It’s a guaranty program that offers VA Home Loans through private lenders, mostly.
The VA guarantees part of the loan which allows mortgage lenders to offer more favorable terms. Features include up to 100% financing of the home value, plus some closing costs. VA home loans are also offered without private mortgage insurance (PMI), or early prepayment penalties.
Military service members sacrifice and give so much to all of us. There is also a significant financial sacrifice that is paid when serving.
Home ownership is a cornerstone of wealth creation. But with starting pay for both Officer and Enlisted being relatively low compared to the private sector, there’s little wiggle room in the budget to save the normal deposit of 20% for a home purchase.
Compounding this is the constant relocation throughout a military career. Tours of one, two, three, or four years are simply not long enough to build the equity needed for a successful home sale. A turnaround in less than seven years may see the home owner tearing up any possible equity in transaction fees and commissions.
The VA Home Loan addresses the financial struggles confronting our military community. There’s competitive mortgage products made exclusively available, no deposit required, and PMI is excluded along with prepayment penalties.
It all seems wonderful. Why wouldn’t all service members take advantage of this benefit?
Negative cash flow risk. Lowering the down payment means increasing the mortgage payment. In the the short term, when you are actually living in your new home that may be completely acceptable. The challenge comes when orders are cut and it’s time to relocate.
The elevated mortgage payment may be more than market rent. This negative cash flow is a drain on the household budget and further diminishes the potential savings for emergencies and retirement.
This also comes with the headache of managing a property remotely. Of course there property managers that are lined up to assist, but that fee will also reduce your return.
On the upside, the negative cash flow investment will reduce your tax obligation! All your expenses become business deductible which does help to take some of the sting out of the monthly drain.
Also, if you are planning on returning to live in the property then the equity gains will only accelerate with each mortgage payment.
VA Home Loans will finance some of your fees, and these can be considerable. It is definitely a good idea to shop around between lenders. Even comparing mortgage products and your preferred lender may identify better products available to borrowers with solid credit profiles and even a small deposit available.
The traditional 20% mortgage deposit provides reassurance to home loan providers and wiggle room for borrowers. With even a little deposit you are better positioned to generate positive returns from your investment when you are required to relocate.
Ask your Realtor® to present you with scenarios based on varying deposits, and different mortgage products. Then apply the terms and conditions available and see how that works with your plans. For example: a prepayment penalty for the first ten years of a mortgage might be perfectly acceptable if you plan on holding the property, especially if it secures a lower interest rate.
Don’t fall into the VA Home Loan trap. Just because it’s available and you are most certainly entitled, doesn’t mean it’s the best time to utilize the benefit. You could still find yourself trapped in a crippling negative cash flow situation which is just going to make life miserable.