What is a VA NO-NO Mortgage

VA home loans, insured by the Veterans Administration, offer a 100% financing option with a 2-3.3% funding fee.  This means that an active duty service member or eligible veterans of the Armed Forces can purchase a home with no money down (the first "no").

Sellers are allowed to contribute up to 4% of the sales price towards the veteran's closing costs.  Typically, closing costs in California, for a VA home loan, are about 2-3% (inclusive of pre-paid escrow items).  A full 4% seller contribution allows us to "buy down the rate" for a veteran.  Essentially, the transaction can be structured so that the veterans pays nothing out of pocket for closing costs (the second "no").

Both features together mean:  No down payment and No out-of-pocket closing costs.  We call that a VA NO-NO.

Nothing speaks like numbers; let's examine how it might work for a $300,000 purchase:

Typical closing costs for a $300,000 VA home loan:

Lender Fees                                           $4,650 (with 1 point, fee will vary based on rate)
Appraisal Fee                                         $500
Escrow and Title Fees:                           $1800
Prepaid Items:                                        $2925

TOTAL CLOSING COSTS          $9,875

If the real estate agent were able to negotiate a 3% seller contribution, with an agreed upon price of $300,000, that would cover $9,000 towards the veteran's closing costs.  While it isn't a true "no-no", the veterans would come in to closing with about $875.