VA Loans

[pcola]

Buying a 20% cheaper home does not magically put money in your bank account with which to make a down payment.

No, that's called "saving" to purchase what you need. An art lost to the latest generations of Americans.

Not picking a fight with you personally here, I have no knowledge of your personal financial priorities or strategies. But it is hard to argue that the VA loan isn't the worst of the three options, for precisely the reasons JS quoted. However, most Americans, military included, want the best house they can obtain financing for, hence the military's love affair with the VA loan. Buying the cheapest home that suits your needs (size, schools, location) while financing the least amount possible at the lowest cost possible is usually a more sound decision than obtaining the most money you can get for the best house available within your monthly budget.

[JS]

Buying a 20% cheaper home does not magically put money in your bank account with which to make a down payment.

True. Good point. But it will allow you to save up for the 20% equity faster, and ultimately get rid of the penalties of paying PMI (conventional) or the higher rate (FHA). But, Ramsey would strongly prescribe that you should simply rent until you had enough cash to put down the 20% before taking out any of the major three types of loans.

We all know that military people are of a higher quality people than everyone else , but that does not make us exempt from the laws of math and the stupidity of excessive debt that most American's get into.

[HossHarris]

There are so many assumptions in Ramsey's edicts that just don't fit ... Especially my situation. High school grad, new/single E-2 sure ....

And how does renting gain me down payment savings when I may minimum requirements that make a rental as much or more expensive than buying?? Requirements (needs, not wants).

People that follow Ramsey blindly in all situations appear weak-minded to me.

Edited November 17, 2013 by HossHarris

[Smokin]

Dave Ramsey had a short piece on VA loans not that long ago. He rates them as #3 out of the three types - conventional, FHA, and then VA, in that order.

His logic was (and I actually agree with him here) is that:

1. They are setting you up to do something you should not do - putting down no down payment and thus taking on 20% more debt than you would if you had a conventional on a home that was 20% less expensive. More debt is bad, according to Dave. And in this case, I sort of agree with him, because you will be paying interest on that extra 20% of debt for 30 years.

2. They charge very high origination fees and closing costs - by far the highest of the three major types of loan.

3. They don't offer better rates.

1. Why not? I am paying 3.25% interest on that 20% downpayment on my $220K house. Historical inflation is roughly 3% meaning that the actual cost in real dollars at the end of my mortgage is .25%. You would have to be crazy to turn down a loan that costs you a .25% above inflation. The VA loan buys me the ability to put that 20% in the market and get a roughly 6.75% inflation adjusted return. Following his advice would cost me a 6.75% return on that $44K down payment, which equates to a difference of $260K at the end of my mortgage in today's dollars. If I followed his advice, it would cost me more than the value of my house. Sounds like great advice to lose money.

2. I'm happy to pay a few thousand now for the opportunity for the above math.

3. 100% false. VA or FHA interest rates are multiple points lower conventional rates.

Edited November 17, 2013 by Smokin

[Jughead]

3. 100% false. VA or FHA interest rates are multiple points lower conventional rates.

Agreed on the rest of your math, but #3 is only sometimes true. VA/FHA rates fluctuate independently of conventional rates (though it's the same market forces ultimately driving all of them). It's typically the case (and has been for several years now) that VA/FHA rates are lower, so it's currently true--but not always. Anyone who doesn't shop around all of his options for a mortgage transaction deserves what he gets....

[JS]

True. One can't follow Ramsey blindly - he is for the masses and for those who are weak minded, bad at math,and in that 50% of the crowd that are of below average intelligence. If you look at the past posts on the investment thread, I was one of the main guys bashing him because of his bad math. But then I actually listened to a few of his podcasts.

I do cringe when he tells folks to pay off that 1% car loan or that 3% student loan instead of investing the extra cash at market rates, I have found that his overall point is to live beneath your means. He also repeatedly admits that his math is not optimal, but "studies have shown" that when you don't have debt, or focus on lowering your standard of living, you psychologically do better financially and have a higher standard of living. In other words, I would like to think I have more discipline than the average Joe and took out my 30 year loan with the lower payment so I could invest the rest, versus taking out a 15-year loan like he prescribes. The math is in my favor, but human nature and psychology is in his favor. He doesn't harp on the numbers too much, but in all of his conversations he reverts back to living beneath your means to get a net positive worth - drive an older car, don't eat out or go on vacation until the student loans are paid off, etc. But he does actually cut a lot of slack with regards to home loans, because he knows they are generally speaking an investment that will go up in value.

Along those lines - 1) You are right about borrowing at 3.5% and putting it in the market to make historically more - around 6-8%. That's where I disagree with Ramsey, but I will say that the money that I am saving from my smaller mortgage payment that is supposed to be invested tends to go toward "emergencies," which Ramsey addresses as things that can make your dream of home ownership turn into a nightmare. Again, you are right with this math, but just think about the average idiot who measures affordability by the size of the monthly payment instead of the actual cost of borrowing and paying interest over the lifetime of that loan. Don't forget to take into account the other costs of home ownership too.

2) You have to take into account how much money it is going to cost you to save that much money and then make more in the stock market. There is a breakeven point, and as long as you calculated it, the funding fees versus the spread between market returns and the cost of your loan should make you money in the end. Again, not for the faint of heart, for those bad at math, or for those of us who have lived through multiple "once in a century" crises where home prices don't rise and the stock market does not give you 6-8% in the long run.

3. The two mortgages I did, the VA was higher. It's lower than conventional now, but that is not really enough data points to come to a firm conclusion.

One more thing, by having 100% debt in the house, your margin for error is small in the case that the home value drops at all. If that happens, then you have to cough up cash in order to get out of the house when you sell.

If you really want to have a good discussion, look into why Ramsey thinks car loans are bad - because cars are consumable, will always go down in value, and are never an "investment." He changed the way I look at car loans.

[pcola]

1. Why not? I am paying 3.25% interest on that 20% downpayment on my $220K house. Historical inflation is roughly 3% meaning that the actual cost in real dollars at the end of my mortgage is .25%. You would have to be crazy to turn down a loan that costs you a .25% above inflation. The VA loan buys me the ability to put that 20% in the market and get a roughly 6.75% inflation adjusted return. Following his advice would cost me a 6.75% return on that $44K down payment, which equates to a difference of $260K at the end of my mortgage in today's dollars. If I followed his advice, it would cost me more than the value of my house. Sounds like great advice to lose money.

2. I'm happy to pay a few thousand now for the opportunity for the above math.

3. 100% false. VA or FHA interest rates are multiple points lower conventional rates.

The majority in this audience are AD military, and most will own their home for 5 years or less. Comparing the numbers through the first five years results in:

$220K, 3.25%, 30 years ($957/mo) = $33,922 interest paid through 5 years

$176K, 3.25%, 30 years ($766/mo) = $27,137 interest paid through 5 years

$140K, 2.5%, 15 years ($933/mo) = $15,035 interest paid through 5 years

1. Here's the philosophy:

Say you're the average Joe and your numbers say you can afford a VA loan of 220K with 0 down, you're going to pay the above in interest, plus an average of a couple thousand in higher VA fees, with no benefit of a lower rate (contrary to popular belief.)

Now, if you've saved diligently, and can afford to put 20% down and get a conventional loan at the same rate (in all likelihood you should be able to do a 16th or so better,) you'll save $7K in interest alone, plus the $2-3K in VA costs over the 5 years that you are likely to own the house. Also, if you invest the $200/mo difference in your payment and earn 3.25% compounded monthly for 5 years, you'll end up with a balance of $13K in your savings account. If instead you were to invest that $44K (no money down) and earn the same 3.25% compounded monthly over the same 5 year period, you'd earn $7700 in interest, essentially leaving you behind by the 2-3K extra that it costs for the VA loan plus the $5300 difference ($13K-$7.7K). So, unless my math is wrong, the no money down VA loan will cost you roughly $8K more assuming you resale in 5 years and reinvest at the same rate as your loan.

But, if instead you were to purchase a 20% cheaper house, AND put 20% down, you could afford to finance the house for 15 years at a much lower rate with a slightly cheaper monthly payment and save more than $20K in finance charges over the same 5 years. Hence my affinity for buying cheaper...

2. Your math and mine are obviously different

3. 100% false, you are. I'm not currently in the market, so I guess I could be out of touch, but In my 3 purchases and 1 refi, in every case a conventional w/20% down was cheaper than the lowest VA I could find.

[JS]

I don't think I follow you. First off, the funding fee is 2.15% for active duty, or 2.4% for reserve/guard right now. So on a $220K loan, that is about $5K if you average the active duty and guard/reserve rates. And let's just keep it straight - that is money that is purely pissed away, as a penalty for not having 20% equity, similar to PMI. It doesn't build you equity or anything like that, nor is it part of the regular closing costs, nor is it an "investment;" it's the cost of doing business this way.

I also agree with your 5-year outlook on the numbers being much more realistic than a 30-year outlook. Anytime a slimy mortgage salesman starts talking about the 10s or 100s of thousands you are going to save over the 30-year life of the loan, you know they are trying to deceive you with unrealistically large numbers.

But back to the numbers. I think Smokin's point was that if he borrowed at 3% and got 6% return in the market, he would be better off in the long run and in the short run after his break-even point of recouping the funding fee. Not to mention that his 3% loan is actually cheaper than 3% when you take into account the tax breaks. His assumption is he would make 6-8% in the stock market, which is the historical average. Not sure why you ran the numbers only making 3.25% return on a cash investment.

With regards to the 20% down-payment on your $220K loan example, with the 100% financing option:

3% interest paid on the $44K potential down payment that you didn't make, after 5 years = approximately $7K

6% market return on the $44K potential down payment that you didn't make, after 5 years = approximately $15K

So if you finance 100% with the VA loan and get 6% returns in the market over 5 years, your net return is about $8K, which will cost you the $5K in VA funding fees to take this route. So I guess you can say that your "net, net" return in this example is really only about $3K, after you take into account the funding fees. I think this is what smokin meant when he said he would be "happy to pay a few thousand extra for the above math."

[ARtoAFconvert]

Hey Folks,

I just wanted to thank you all for introducing me to NBKC. I've been a long-term lurker on this forum (non-rated guy) as several of the posts on here kept me entertained during my recent deployments. Thanks to Matt Hering from NBKC I got a great interest rate on a VA loan (3.75 percent) and was able to close 11 days earlier than planned. NBKC even gave me a pretty sizeable credit which offset most of the VA funding fee that I was able to combine with USAA's Movers Advantage Program rebate. Like a couple of people on this forum, my realtor was also reluctant to work with an out-of-state lender but Matt quickly changed her opinion on this issue. Hats off to NBKC...I'd recommend them in a heart beat! Again, thank you all for the great tip.

[FUSEPLUG]

Tax Question. I post it here because I figure there are a bunch of us in the same boat right now.

I received my 1098 from NBoKC and the VA Funding fee on the house I closed on this spring is listed as a Mortgage Insurance Premium (Box 4). According to the Googles, it appears that should be deductible on my 2013 taxes. Much of this fee was covered by a credit from NBoKC I received at closing, and I think the remainder was covered by the seller's closing costs. Is the entire amount still deductible?

[ThreeHoler]

The VA Funding Fee is considered the same as PMI when calculation your itemized deductions, if you paid it. If someone else pays it you do not get to deduct it.

[HossHarris]

So if it's on your side of the HUD-1, you paid it, correct?

(Regardless of how much cash you put into or took out of closing)

[Jughead]

I received my 1098 from NBoKC and the VA Funding fee on the house I closed on this spring is listed as a Mortgage Insurance Premium (Box 4). According to the Googles, it appears that should be deductible on my 2013 taxes. Much of this fee was covered by a credit from NBoKC I received at closing, and I think the remainder was covered by the seller's closing costs. Is the entire amount still deductible?

Look closely at your HUD-1; it probably labels the NBofKC credit as "lender credit" or other non-descript name. Point is, you paid the funding fee, not your lender; the VA collected the funding fee in connection with guaranteeing your loan; and your lender reduced their fees by $X, in a (technically) separate transaction between you & NBofKC (VA has no dog in the fight). The fact that the $X matches your funding fee is irrelevant. The amount of that lender credit is part of the loan pricing--it could be less than your fees; until the "mortgage meltdown" and subsequent regulations, it could have been more resulting in cash-out to the borrower.

The tax implications of the lender credit will be reflected in your cost basis (i.e., will lower it) when you ultimately sell your house; the funding fee is deductible in the amount indicated on the 1098.

DISCLAIMER: Not a tax lawyer, and the "some guy on the internet told me..." defense won't get you far with the IRS; rely on this to the extent it gives you a place to start... and at your own risk!

ETA: What Hoss said....

Edited January 29, 2014 by Jughead

[nsplayr]

General VA loan question:

Took out a VA loan IVO $219K for a house in FL on my first assignment. Now renting it out and likely will keep it as an investment property. Looking to potentially buy a house at assignment #3 (i.e. not right now but soon-ish) and I'm interested in potentially doing a VA loan again.

From what I understand, unless you're in a high-cost area, the max VA loan (driven by lender conventional wisdom) is ~$417K. When looking at "how much you have left" that the GOV will guarantee, would they look at how much my original VA loan #1 was for, i.e. $219K, or would they look at how much is still owed, which is obviously less?

Anyone done this before? Or bought a second house w/o VA? Pluses/minuses with that? I understand VA funding fee is much higher on a second loan but all it takes is 5% down to knock it down to 1.5% and that's NBD. Seems like I'm not getting a better enough rate on a conventional loan vice VA to be a better deal than paying the fee up front. Especially with PMI since I'm gonna put down more than 5% but not 20%.

Thanks in advance for any advice/wisdom

Edited January 29, 2014 by nsplayr

[Muscle2002]

General VA loan question:

Took out a VA loan IVO $219K for a house in FL on my first assignment. Now renting it out and likely will keep it as an investment property. Looking to potentially buy a house at assignment #3 (i.e. not right now but soon-ish) and I'm interested in potentially doing a VA loan again.

From what I understand, unless you're in a high-cost area, the max VA loan (driven by lender conventional wisdom) is ~$417K. When looking at "how much you have left" that the GOV will guarantee, would they look at how much my original VA loan #1 was for, i.e. $219K, or would they look at how much is still owed, which is obviously less?

Anyone done this before? Or bought a second house w/o VA? Pluses/minuses with that? I understand VA funding fee is much higher on a second loan but all it takes is 5% down to knock it down to 1.5% and that's NBD. Seems like I'm not getting a better enough rate on a conventional loan vice VA to be a better deal than paying the fee up front. Especially with PMI since I'm gonna put down more than 5% but not 20%.

Thanks in advance for any advice/wisdom

They look at how much entitlement you already used based on the purchase price of home #1 and then follow the guidelines as spelled out here: https://benefits.va.gov/homeloans/purchaseco_loan_limits.asp

I was in your situation last year and opted for another VA loan. Depending on the price of the home you're looking at, you may have to make a down payment anyway (the VA only guarantees up to $417K, so if you have a higher priced home, or your first home ate a considerable amount of your entitlement, then you will have to cover part of the difference). I don't know what the tax law will be next year, but we were able to deduct the VA funding fee, which was beneficial.

[nsplayr]

Thanks muscle. When you did yours, did they look at the original amount of loan #1 or how much was still owed? That would make a possibly consequential difference in my case since we've paid off a decent amount of that mortgage.

[Muscle2002]

Thanks muscle. When you did yours, did they look at the original amount of loan #1 or how much was still owed? That would make a possibly consequential difference in my case since we've paid off a decent amount of that mortgage.

The original amount.

[danielstevens]

Hello all, since it's getting close to the spring buying season (although it's anything but feeling like spring in Kansas City lately!) I wanted to drop a note here. If anyone has any fresh questions on buying a home with a VA loan, feel free to post here or you can email me at dstevens@nbofkc.com.

If you are looking to get pre-qualified, etc, that usually is a good first step.

It's been a pleasure talking to many of you over the last couple years since this thread started, I hope to continue to be of value for your group!

[flynutt]

My $0.02...I am in the midst of a home purchase using NBofKC for my VA loan. Best rates of anyone with good service so far. Thumbs up in my book.

[danielstevens]

In the last week I had two people ask about how they can tell if they are eligible for a 2nd VA loan (while the first one has not been paid off). I thought I'd quick post about that, since other people may be thinking about the same thing.

The quick answer is you MAY be eligible for a 2nd VA loan while your first is still active. The fool proof way of finding out is to get a copy of your current "Certificate of Eligibility". On there it will tell you how much of your eligibility you have remaining. And using that number, a VA lender can calculate the range of loan size (if any) that you can get while that loan still exists. Quite often, people are surprised at the amount of VA loan they can still obtain.

If you have trouble obtaining your current Certificate of Eligibility any qualified VA lender can help you obtain that (including NBKC). Some of the less experienced VA lenders are not aware that you can sometimes have two simultaneous VA loans, so be careful if you are told a flat no.

[C212135]

All, great folks and awesome service at NBOKC, very friendly and work to get all your questions answered fast. This is my 3rd VA loan and by far the easiest process so far...I was able to lock in at 3.75% no points for 60 days and will put 5% down to reduce the funding fee from 3.3% to 1.5%. Ask to work with Sharon Farnsworth, best customer service experience and very knowledgeable of the process. Look forward to closing!

[Azimuth]

Since it's PCS season (and I'm PCSing) just bumping this thread so folks can see it.

[Bayou_Eagle_Driver]

Can anyone offer any advice if I'm looking at a VA purchase of a home that could use some updating? My wife and I are looking at a place, and there's a lot of great character to it, but to get it up to 'standards' we're looking at about an additional 20k investment.

From what we've been told by our lender, VA home loans can only be for the purchase price of the home; so does anyone have any advice on if there are any alternative methods to doing this?

[FBomb]

Can anyone offer any advice if I'm looking at a VA purchase of a home that could use some updating? My wife and I are looking at a place, and there's a lot of great character to it, but to get it up to 'standards' we're looking at about an additional 20k investment.

From what we've been told by our lender, VA home loans can only be for the purchase price of the home; so does anyone have any advice on if there are any alternative methods to doing this?

https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203k--df

HUD home improvement loan.

[danielstevens]

Can anyone offer any advice if I'm looking at a VA purchase of a home that could use some updating? My wife and I are looking at a place, and there's a lot of great character to it, but to get it up to 'standards' we're looking at about an additional 20k investment.

From what we've been told by our lender, VA home loans can only be for the purchase price of the home; so does anyone have any advice on if there are any alternative methods to doing this?

The VA doesn't have any home equity loan programs specifically, but they do have a program where you can get up to $6000 added on top of the regular loan amount if there are energy efficient improvements to the house being made. This can be done when you are purchasing the house or refinancing.

The VA put together this power point presentation on the topic here:

https://www.benefits.va.gov/rodenver/training/energy_efficient_mortgages.pps