Is a 20% down payment on my first owner occupied duplex worth it?

Question

I am currently in the process of getting pre-approved for a loan, and looking to get into what many people are calling house hacking now.

I have saved enough money to be able to comfortably put down 20% on a 200k house. Unfortunately, that doesn't get you much it seems in CT. Either the neighborhoods aren't good or it needs a ton of work (Which I am not opposed to, but I don't want to be overwhelmed) I am VA loan eligible, so whether I hit the 20% or not it doesn't matter, I won't pay PMI, it will only affect my monthly cash flow by lowering my monthly payments, correct? My friend, who is a real estate agent, says that hitting 20% on a conventional loan will get me a lower interest rate than the VA loan would. Either way, should i consider 250k+ houses since I don't have to hit 20% down due to the VA loan? Some people say put as little down as you can to cash flow, but I have this money now, I want to invest it wisely. Wouldn't my best option be to put the money towards the down payment?

Chris Mason · Answer

Your friend is mistaken. 0% down VA 680 FICO will get a better rate than 40% down conventional 800 FICO. Assuming no one is manipulating the VA profit margin to stick it to vets while publicly saying they "support the veterans," which banks like to do all the time (I wish they were required to publicly disclose when they set their VA loan profit margins higher than conventional, in many cases it's a whopping 2x). Nearly all the big "VA specialist" loan providers have those juiced up VA profit margins (relative to conventional), and the only reason I'm saying "nearly" all is because I've not surveyed 100% of all mortgage outfits in the United States. Of those I have looked into, it is indeed 100%. Just like the used car dealership right outside the base gates. Pre-COVID, I could make the above claim all the way down to 640 FICO, still with 0% down. Non-veterans that are jealous: No problem! Call 1-800-Marines, do what the nice man tells you, post back in 4 years, and you too can get that sexy VA loan. :) Proof is in the pudding. From last summer's home buying season, one of the 1 in 50ish people that leave online reviews happened to be someone that used a VA loan. Customer review. My only "secret" is that we broker VA loans to places that do not have juiced up VA profit margins. The veteran below feels that I got him some amazing deal or whatever, the truth is that I was the only person he spoke to who was NOT trying to screw him because he's a veteran using a VA loan (85% sure he's a biggerpockets member too). That's it, no secret sauce there. Look at that crazy rate spread, and that spread is ALSO why your Realtor buddy thinks VA loans have higher rates - VA loans have lower base rates, nearly everyone in the mortgage banking sector just hates veterans (according to their actions, not their patriotic words). Go find a local independent mortgage broker in your state; juicing up VA profit margins is kind of a banker thing, not so much a broker thing.

Brian D Gleason · Answer

Thank you everyone so much for the replies. I suppose I should've stated that I am looking to live in this house for 2 - 3 years, then save up enough money to buy a new house. So my current thinking is get pre approved for a loan from multiple sources, then do my math and see if I can make the 20% payment on a home or not. Knowing how expensive housing is in CT, probably not. I'm not afraid to put a big chunk of change down on a house if needed because I will be saving quite a bit in the next few years (woo for deployments!). This is where I got confused, because most of these webinars about doing your first house hack seem to really be aimed toward people that can't make the down payment.

John Walter · Answer

@Brian D Gleason As asked earlier, your goals should steer you in the right direction. How conservative do you want to be? Ultimately, without any specific information, I would recommend the VA loan above all else. My strategy: I am somewhat conservative. I am closing on a triplex using the VA loan. After all is said and done, I will be out of pocket about $12k (closing costs). I have more than enough cash reserves, but after I close, I will then have the option to put money down on another property (still having some cash in reserves), or waiting a few month to refinance my current property or get a HELOC (I plan on having over $100k in equity at closing). I'll use that cash as my downpayment for an additional property.My point is that I am giving myself multiple options, and because I am using the VA loan first, I don't need a ton of cash.

George Pauley · Answer

One of my favorite aphorisms is "Do the math, and the math will tell you what to do."The key here is that these types of questions can almost always be answered with simple math. But, just like those dreaded word problems in math class, you have to set it up correctly.For example, you're realtor friend suggests putting 20% down to lower your interest rate, and you're wondering if this is a good idea or not. The first question is: How much lower of a rate? Let's assume that the 20% down lowers your rate from 5% to 4%. So you save 1%. Now, the next questions are. 1. Can you afford to pay the extra 1% if you don't put 20% down? (If not, then you have to put the 20% down!) 2. If you took that down payment and made a different investment with it, could you make more than 1% on that investment? If you can make more than 1% in a different investment, well then you should probably put that down payment money in the other investment!Of course, in the end, there are other considerations than just pure math. For example, its usually a good idea to have cash reserves. If making the 20% down payment leaves you cash strapped, then there is risk that you could lose the home during a bad economic situation. Whether to accept this risk or not is a personal decision. But the math moves you a long way towards coming up with informed decisions.The same sorts of mathematical analysis can help you determine whether to buy house #1 for $200k, or house #2 for $250k.

Anthony Wick · Answer

@Brian D Gleason I'm a leverage guy. Why put down 20% if you don't need? Peace of mind. That's the reason most people do it. You need to compare apples to apples. What is the difference in interest rates? How long are you planning on living there? Once you move out, it's all about your tenants paying your mortgage, not having dead equity.

Adam Tafel · Answer

Do you have goals of purchasing more properties in the future? You'll want to save the VA for your highest dollar purchase in order to get the most bang for your buck. Depending on your income you might qualify for a 5% conventional duplex loan, speak with your loan officer about the possibility. Make sure your lender is also an experienced investor, as well as your agent. I would personally rather have a greater return on my cash than a slightly lower interest rate, but thats me.