A war veteran meets with a loan officer in the office.

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Making a down payment on a home has its advantages.

Key points

  • VA loans can make it easier for qualified applicants to purchase a home.
  • While not having to deposit money at the close may seem like a good thing, it can also backfire.

Those who serve in the US military tend to sacrifice a lot. For some people, this means moving frequently and moving their families out in the process. For others, it means giving up higher wages.

So it’s good that there is a Veterans Affairs (VA) loan program. VA loans allow borrowers to get a mortgage with no money down. Most other mortgage programs require some type of down payment, so VA loans are a good option for applicants who can afford their monthly housing expenses but don’t have large savings.

But while avoiding the down payment may seem like a good thing, there are dangers along the way. So if you are considering taking out a VA loan to buy a home, you may want to keep these points in mind.

mixed bag

VA loans offer homebuyers more flexibility than conventional mortgages. But not having to come up with funds for a down payment is not necessarily a good thing, as you might think.

First, the less money you invest when buying a house, the more of the mortgage you will have to take out. And that means not only fighting higher monthly payments, but spending more money on interest as you pay off your home.

This is especially true today. While VA lenders tend to offer competitive interest rates, right now borrowing rates have gone up across the board. If you take out a larger mortgage, this will mean that you will pay more interest on the loan, and you could use this money for other purposes.

Also, the less money you invest when buying a home, the less equity you have in that property. Net worth is measured as the value of your home minus your mortgage balance.

Having less capital can be especially problematic these days, given that home prices are sky-high. If those prices then drop in the coming years (which is likely given how overpriced they are at the moment) and you find yourself needing to sell your house at a time when its market value has declined, you could find yourself under water with your mortgage. – this means that you may not be able to sell your house for enough money to pay off the creditor in full.

Let’s say you buy a house for $400,000 this month with no down payment. You may have to sell it after two years. But if your home is only worth $350,000 at the time, you may be in trouble. Even if you get rid of some of the principal on your mortgage by then, you could still be pretty much underwater.

Be Careful When Getting a VA Loan

If you are in a good financial position but don’t have the money to save for a house, a VA loan can be tempting if you qualify. But before you rush to sign a VA loan, consider the downsides of buying a home with no down payment.

And to be clear, you are absolutely allowed to take out a VA loan and make a down payment on it. So don’t feel like you have to look for another type of loan if you want to invest some money at closing.

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