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The VA "No-No"

Discussing business

It's possible that you've heard or used this term before but unless you're a veteran using your home loan benefit to buy a home; it's not a term you'll run across during your daily routine. The VA home loan benefit is a special government-backed mortgage used to finance a primary residence and does not require a down payment from the borrower along with reduced closing costs and relaxed approval guidelines compared to conventional loans. What is a VA no-no?

No Money Down

The first "no" represents no money down from the borrower. As part of the original G.I. bill crafted in 1944, this special entitlement was provided to returning service members to help them assimilate to civilian life once again and get a fresh start in the working world as a new homeowner.

Back then, home loans required a down payment. A sizable one in many instances with some banks offering mortgages only to those with a down payment of 20 to 30 percent or more. That left home ownership to those well off, leaving much of the working class out of the picture.

The G.I. bill recognized that while our soldiers were fighting and protecting our freedom, they didn't exactly have time to set up a savings plan. Even if they did pull some time off, there was little to save. Providing a veteran an opportunity of home ownership and waiving the down payment requirement is the shining feature of the VA mortgage program.

The Second No

The next part of our "no-no" equation refers to closing costs. As in, not having any. A VA no-no is the nickname given to a VA loan where the veteran doesn't have to pay any closing costs along with no down payment requirement.

Not a bad deal and only reserved for VA mortgages.

But the second "no" doesn't mean there are no closing costs, it's just that the veteran doesn't have to pay them. There certainly are closing costs including appraisals, a credit report and origination fees among a host of others.

The borrower also has to have homeowners insurance on the property and property taxes must be settled as well. So how does the veteran get away with no closing costs? There are a couple of ways.

The Seller Contribution

Seller contributions refer to amounts paid for on the buyer's behalf by others. These contributions, called "concessions" are limited to 4.00 percent of the sales price of the home. That means if a home is selling for $300,000 then the seller is allowed to contribute up to 4.00 percent of $300,000, or $12,000 in closing fees. Anything beyond that is prohibited.

Yet that's quite an amount. Closing costs on a traditional VA loan on a $300,000 home might be closer to $6,000, not $12,000.

How does the buyer get the seller to pay the closing costs? The buyer asks. When making an offer on a home, the sales contract can read: "Seller to pay closing costs on behalf of the buyer not to exceed 4.00 percent of the sales price."

The seller can agree or disagree. Or counter with a specific offer of "Seller will pay up to $3,000 of the buyer's closing costs." But what if the seller doesn't agree to cover certain fees or pay any of the buyer's costs whatsoever?

The Lender Credit

Another method of paying for closing costs comes from the VA lender directly. A VA lender can offer a lender credit that can be applied to the buyer's closing costs by adjusting the interest rate on the mortgage. How so?

It's common knowledge that borrowers can reduce the interest rate on their loan by paying a discount point to lower the rate. For instance, if a 30 year fixed rate is at 4.00 percent today without any points, the lender might also offer a lower rate of 3.75 percent with one point. On a $300,000 loan, that's $3,000.

Conversely, a lender can increase an interest rate and provide a credit to the borrower in exchange for the higher rate. Using this example, a lender might offer a 4.25 percent rate, one-quarter higher than the 4.00 rate with no points, and offer a one point credit to the borrower. In this example, applying $3,000 towards the borrowers costs.

That's a VA no-no. It takes some preparation as well as negotiation and the seller as well as the lender can both contribute to the cause. No money down and no closing costs is financial music to a veteran's ears.

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