A VA No-No is kind of a funny name and it’s possible you’ve heard the term but unless you’re in the mortgage business or in real estate, but most likely you haven’t. The term has been used for decades and applies to a certain type of purchase transaction when someone is using their VA eligibility to buy and finance a home. In fact, if you’ve applied for a VA loan you might very well be taking out a “no-no” without your knowing what the phrase actually means.
The term applies to no down payment and no closing costs. That makes sense, right? VA loans do not require a down payment but there are closing costs with any purchase or refinance transaction, including those for VA loans. Even though the VA borrowers are limited to paying certain types of closing costs, there will be costs nonetheless. Other closing costs the borrower is not allowed to pay must be paid for by third parties such as through seller contributions or a lender credit. And here’s where the second “no” comes into play.
When you first speak to your loan officer about VA rates, you’ll be given several choices. You’ll first need to decide which type of loan you want to use such as a 15 year fixed rate term or a 30 year, for example. Let’s say you decide on the 30 year and the loan officer will provide you with a list of rates currently available for your 30 year VA fixed rate loan. There will be a range of rates from lower to higher and you have your choice. But who wouldn’t automatically choose the lower rate? Points.
Points, or more correctly discount points, are expressed as a percentage of the loan amount and are a form of prepaid interest. And, since points are in fact interest, they may be tax deductible when it’s time to file your taxes. You’ll need to speak to your tax professional about deductibility in your situation. The more points you pay, the lower rate you will get.
For example, you’re looking at a 30 year rate to finance a zero down VA loan amount of $450,000. We’ll use a sample rate of say 4.50 percent with no points required but by paying one point, or one percent of $450,000, you might be able to lower your rate by about 0.25 percent. You just paid $4,500 for the lower rate. You can work with your loan officer to determine if paying points is beneficial in your situation, but the decision is completely up to you.
Okay, here’s the second “no.” There are closing costs on all loans, but you can obtain a lender credit by raising your rate. Let’s say you can get a 30 year rate at 4.50 percent with no points but by increasing your rate from 4.50 percent to 4.75 percent, the lender can provide a credit to be used to offset some or all of your costs. Your monthly payment will go up, but you got a lender credit of $4,500. A no closing cost loan is a matter of the loan amount and the rate you select. Remember, rates can change daily so it’s important to speak with your loan officer regularly to get updated rate information. But if you want a no down payment loan and you don’t want to pay closing costs on your VA mortgage, you’re getting a VA no-no.