Why Getting a VA Loan Could Backfire on You

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  • VA loans allow eligible borrowers to purchase a home with no money down.
  • While VA loans make homeownership accessible to those on a limited income, they could be problematic for borrowers when home values decline.

You may want to think twice before going this route.

If you're a member of the U.S. military or a military veteran, you may be eligible to take out a VA loan. To be clear, you're not limited to applying for a VA loan. If your finances allow for it, you can apply for a conventional mortgage.

The benefit of taking out a VA loan is not having to make a down payment. By contrast, with a conventional mortgage, you'll typically need to make a sizable down payment (some lenders will accept as little as 5%, but many require at least 10%).

If you can afford to pay the mortgage on a home but don't have money in savings for a down payment, then a VA loan might seem like a good solution. But there's a downside to not putting any money down on a home, and it's important to be aware of it before moving forward.

Could you end up underwater on your mortgage?

The danger of not putting any money down at closing when buying a home is ending up underwater on your mortgage. When you're underwater, your loan balance is higher than what your home could sell for. That's a problematic scenario where your finances take a turn for the worse and you need to get out of your mortgage payments by selling -- but can't.

The less money you put down on your home when you buy it, the more you might increase your chances of ending up underwater on your mortgage. This especially applies in today's housing market.

Right now, home values are way up on a national level. That's part of the reason why you may be looking at a VA loan in the first place -- you can't afford a down payment on a conventional loan.

But if you take out a mortgage with no money down based on today's home prices, and home values then start to come down, you could end up with negative home equity -- where your home's market value is less than your mortgage balance.

Imagine you buy a home today with no money down thanks to a VA loan for $300,000, but that home would normally only sell for $260,000. If, in a year, home values plummet, you might still owe a good $290,000 on your mortgage. But if your home's value drops down to $260,000, at that point, you're underwater.

Now if you're able to keep up with your mortgage payments and don't want to move, that's not so problematic. But if your financial situation changes, or if your military orders change and you need to move, you'll effectively be stuck.

If you sell your home for $260,000, you won't get enough money from that sale to repay your lender, so you might have to raid your savings to make your lender whole. Or, you might get stuck having to do a short sale, which could damage your credit score (if your lender even agrees to one).

That's why you need to be careful with a VA loan. Though skipping the down payment might seem like a good thing, it can also backfire.

Make the right choice

Though many military members and veterans turn to VA lenders when they need to borrow for a home, it's not your only solution. It pays to explore different loan options before signing a VA loan.

Another thing to consider, though, is that while you don't have to make a down payment on a VA loan, you can put money down if you have it available. That's an option worth considering if your circumstances allow for it.

Our Research Expert

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