Most Veterans already know that the VA loan program allows for Zero down financing. But what many Veterans don't realize is that they still need to deal with closing costs and prepaid expenses. Depending on the purchase price and date of closing, this could easily add up to 2% of the purchase price. With a little planning it is possible to close a transaction where the Veteran does not need any money for closing. This is commonly known as a VA No No. The first "No" is for No Down Payment. The second "No" is for no closing costs or prepaid expenses paid out of pocket.
Zero Down Loan Limit
The Zero Down limit for the VA loan program varies in each county. California, which has higher priced homes than most of the country, has fairly high loan limits in many of its counties. In Orange County the VA Zero Down loan limit is $625,500 (in 2016), meaning a Veteran purchasing a home in Orange County will not need a down payment if the purchase price is $625,500 or less. It's important to know that some VA lenders will allow for loan amounts higher than the county loan limit as long as the Veteran has a down payment equal to 25% of the difference between the Zero Down loan limit and the higher purchase price. This is known as a Jumbo VA Loan. Some lenders will actually close VA loans up to a $1,500,000 loan amount. Los Angeles county has the same $625,500 Zero Down loan limit.
Who Can Pay a Veteran's Closing Costs
To achieve a VA No No, there are a few possibilities in how the closing costs can be paid for the Veteran. The first option is to negotiate for the seller to pay some or all of the closing costs and prepaid expenses. And while this may sound like an easy option, getting a seller who is willing to pay closing costs can be tricky, especially in the current real estate market. 2015 has been a sellers market in Orange County, with low inventories resulting in multiple offers on homes for sale. If a seller has two or more offers to purchase their home on the table, the offer from a Veteran asking for closing costs to be paid will be at a severe disadvantage. (Related: Why Orange County Sellers should accept offers from Veterans.)
What may be the best option is to adjust the interest rate of the VA loan in order to get a "lender credit" for the closing costs and prepaid expenses. In most cases this may result in only a slightly higher monthly payment, but saves the Veteran from emptying their savings account. And with any drop in interest rates, it may be possible to lower the rate 6 months later by taking advantage if the VA IRRRL (Interest Rate Reduction Refinance Loan).
What Happens with the Initial Escrow Deposit?
The Veteran will still need an initial Good Faith Escrow deposit to open escrow. But with a VA No No, the Veteran will get a refund of the the initial deposit since they didn't need any money to close.
The most important thing in setting up a VA No No is the inital consultation and planning with an experienced Orange County, CA VA loan officer. The loan officer should be able to prepare custom VA loan scenarios showing several options. The scenarios should also give a complete breakdown of the loan amount, payment, closing costs, prepaid expenses, and lender (or other) credits.
Authored by Tim Storm, a Orange County Mortgage Loan Officer MLO 223456 – Please contact my office at the Home Point Financial. Direct line at 949-640-3102. www.OrangeCountyVALoans.com