If able to put 20 percent down, should I use VA or conventional?

Question

I'm currently active duty, and I am a first-time home buyer with excellent credit and no debt. I have a number of options regarding putting a percentage of the payment down, and I can easily afford to cover closing costs and whatever points may be included. With the variety of options I have, I am tentatively set on putting 20% down on a 350k condo and will cover all closing costs and miscellaneous fees/points, as well, namely to have a comfortable monthly payment. Additionally, I do not have the option of paying in all cash, so of the variety of options I do have, that is not one of them.

The biggest lure with the VA loan is the no down payment option. With that being a moot point in my situation, where I have already decided to put 20% down, is there an advantage to using a conventional loan over a VA loan? And if I come across a property I want to put an offer on, and VA isn't an option, should I forgo buying the property or consider using a conventional loan still? In that situation, is it possible to convince the seller to accept a VA loan? And if not, would using a conventional loan still be a "success" for me as the buyer?

Thanks for any and all input!

Ij O. · Answer

I agree with Todd.  I am also active duty military. A better strategy IMO is using your VA for a multifamily where you can live rent free or almost rest free.  A condo (which also comes with increasing condo fees) for that amount maybe too much; and a waste of investment potential for a first time investor as you said you are.  Use your VA for multifamily unit to leverage your retirement.  Live like no one else now and later you can (live bigger) live like no one else (Think Dave Ramsey).

John Malahay · Answer

Chelsea & Kenneth (all BP veterans included): thanks for your service!

I still haven't used my VA loan yet since we decided to buy our home with a conventional loan during those long-gone days of the 80-20/no down ARM era that toppled the mortgage industry.  But if I had to use it, with an REI mindset, I would use it on a multi-family (1-4 units).  Live in one of the units & have the three tenants pay the mortgage.  If it's in CA, you might only need the rental from two units & the third would be your cashflow.

Going forward after living about 24-36 months in the VA fourplex, I would acquire another 4-plex & live in it but using FHA 3% down.  Then & so on... living happily ever after...  Wait!  I might have to re-think the order.  I might be wrong about the 1st-timer FHA 3%.  Maybe that should be used 1st since the VA will always be there (unless congress... we won't go there, now)....  But I hope you get my drift in availing yourself to the opportunities, right?

God bless...

-john

Ed Wood · Answer

VA will have a much better interest rate than conventional and keep the 20% for something else.

Michael S. · Answer

@Chelsea Ricketson,

I would most definitely use the VA loan, and only put something like 5 or 10% down.  Here's why:

-The VA can only be used on owner occupied.  Save the rest of your money to put on an investment property, because that property you will HAVE to put at least 20% down if you try to get traditional bank financing.

-The max for the VA loan is 416k (or up to about 620k if you are in certain expensive areas).  If you were buying a home for only 100k I would say save the VA eligibility in case you want a more expensive home later.  But that isn't the case here.

-I would only put 5% or 10% down because those are the benchmarks where you have a lover VA funding fee.  I would not personally go over 10% down.  Interest rates are slightly off their bottom, but still incredibly low compared to all of human history.  I would finance as much of the property as you can, locking in great rates, and use the rest of your money as a down payment on a rental that will have positive cash flow where you can also lock in a low rate.

-I am not a VA loan expert, but I don't think the seller is likely to decline an offer because it is VA financing.  To them, one loan is the same as another-- though cash is king.

-The VA can decline to loan on certain properties, for instance if its on a barrier island that sucks up lots of hurricanes, so have your agent do the legwork and check that the property is VA eligible.  As long as it is, I say use the VA.

Background: I am also active duty military, and am a bit of a newby at real estate investing but have 2 rentals.

Basically, the VA is guaranteeing your loan, without you having to put in lots of equity.  Putting a down payment of 20% defeats the purpose of the VA loan.  Its like shopping at the grocery store with coupons, but leaving without taking your change.

Marcus Johnson · Answer

You mentioned having a comfortable monthly payment if you put 20% down.  So doesn't that mean you'll be stretching yourself if you go with a VA loan and then on top of that possibly adding an investment property.  I see to much risk from the little information I got from your post.

Elizabeth Colegrove · Answer

Personally I would do conventional 5% and save the VA. My husband is active duty and we have used the VA loan twice. I wish we had saved it. Both times we bought we could have done conventional saving us the funding fee. Many houses were  bought at the lowest part of the market with VA loans. VA loans are assumable. If you save it, you *might* have the option later to assume a low interest VA loan.

Todd J. · Answer

Chelsea,

I am going to agree with John M. I just retired and would recommend a Small multi family over a condo. Rates are low now and I would look for a nice 4plex that will cashflow with you living in one of the units. If you choose well this will be a great addition to your retirement down the road. You will live rent free ish,, and you can use your Housing allowance to save for your next rental property at your next duty station.

Chose a good property manager at each of your duty stations first and search for your property with their advice.. I do not like landlording because of the crazy work schedule and deployments. If you use a property manager while you are living in one of the units you can evaluate them and work out any bugs before you are PCSed to your next duty station.

The Condo may be perfect for you.... just giving you options to think about before you pull the trigger.

Best of luck

Todd

Chelsea Ricketson · Answer

@Michael Stroup Biggest issue with the owner-occupied aspect of the VA loan is that I intend to live in this condo for at least 6 months, but there's a good chance that I may get stationed elsewhere in several months. Thinking longer term, whether or not I do get stationed overseas next, I'd like to get the RE investment vehicle moving forward one way or another. That might mean me living in the condo myself, or renting it out to others while I'm gone, but either way, I'm already set on buying a place here in San Diego to start investing. I'm looking for flexibility to convert the condo into a rental in the event that I'd rather live elsewhere, and I'm getting the impression that a conventional loan would offer more leniency there. 
	
	Your (amusing) analogy with the coupons helps me to solidify the two options I'm really considering: 20% down with a conventional loan or 10% down with a VA loan (to lower funding fee). Considering a comfortable monthly payment (while maximizing the value of the property I can afford) is my main determination in the home-buying process, you may have helped me settle on 20% down with a conventional.  
	 
	 @Mathew Wray is echoing a lot of my own thoughts. Talking to my realtor, there's that shared thought to put 20% down on a conventional loan in a situation where I can, and use the VA loan for another property that I have a bigger stake in (ie. I see myself living in it for some time to come). 
	 
	 @Kenneth Hynes With this condo I'm looking at now, I do plan to live in it for some time, but definitely not for the long run. I plan on putting in an estimated $15-20k to do some needed, however superficial, cosmetic improvements to the place that in turn will hopefully add to its value when I choose to resell it. If I do choose to leave San Diego in several months from now, I'll choose to go overseas, so buying a new home there won't be feasible for me.

Mathew Wray · Answer

I'm going to throw another point of view out there. Other than all the options for what to do with the 20% (out of state investing, buying an owner occupied plex, etc.) and assuming you're dead set on the condo I'd do the conventional loan. Buy the condo in San Diego, live in it until you PCS and then rent it out. When you get to your new duty station or retire then use your VA to get another property there. That VA loan isn't going anywhere...wait to use it for your dream home or where you can get a lot of bang for your buck in a different duty station.

Or, use a FHA loan for the condo and put down 3.5% THEN save the VA for the second property and save the 20% for a third?

Kenneth Hynes · Answer

@Chelsea Ricketson  First Welcome to BP, it is an excellent resource .  I am AD as well and have bought several SFH during my service time.

I think the key question to answer is what are your long term plans for this property ?  Do you plan to hold onto when you PCS and rent it out?  Sell it ?   Do you plan to buy again at your next duty station ?  The VA loan is an excellent tool , but there are guidelines and when you can use it and re-use it (and I think you would use up your limit with a 350K condo ) , so if you plan on holding onto this property for now and can put down 20% , that will give you more flexibility later on to use the VA loan at your next duty station. The primary benefits of the VA loan (Low down payment , no PMI)  don't come into play if you can put down 20%.   Check the VA website for more details

VA loan bebefits

• No down payment as long as the sales price doesn't exceed the appraised value.
• No private mortgage insurance premium requirement.
• VA rules limit the amount you can be charged for closing costs.
• Closing costs may be paid by the seller.
• The lender can't charge you a penalty fee if you pay the loan off early.
• VA may be able to provide you some assistance if you run into difficulty making payments.

You should also know that:

• You don't have to be a first-time homebuyer.
• You can reuse the benefit.
• VA-backed loans are assumable, as long as the person assuming the loan qualifies.

http://www.benefits.va.gov/

Ken

If able to put 20 percent down, should I use VA or conventional?

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