Taking out mortgage with zero down. Smart or no?

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shaX
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Taking out mortgage with zero down. Smart or no?

Post by shaX » Mon Jul 28, 2014 11:30 am

Greetings Bogleheads... I summon you all to get your opinions on home purchase/mortgages. I am 28 years old, currently renting and would like to purchase a home. I have a credit score over 760 and sufficient income and job history to get approved for a mortgage. I am a veteran and could utilize a zero down, no PMI 30 year fixed VA loan if I wanted to. Right now it looks like I could get under 4% on one of these (around 3.75%).

I have an idea of what I could get approved for based on my debt to income ratio and to be honest, I'm looking to spend much less than what I could actually get approved for, as I am not one to live beyond my means.

My question for you all is, how would you feel about buying a home/taking out a mortgage with no money down? Certainly there's a level of risk in doing so, but being able to avoid PMI and locking in today's sub 4% interest rate, it has to factor into the equation.

Currently i've got about 3 months of expenses in my emergency fund and really no money for a down payment or even closing costs without tapping into this. I have a decent monthly surplus of income so its not as though I am strapped to the wall, I've just been paying down my student loans this year.

I Could continue to rent and save up for a down payment, but in doing so I run the risk of mortgage rates rising (in addition to losing the value of this savings to inflation). Let's say I spend the next 2 years saving, and can save $20k for a down payment (this is probably realistic if I stay on a tight budget), but rates go from 3.75 to 4.75 between now and then... I basically will have lost more than that to the increased cost in interest for the life of the loan.

I don't have a time frame for wanting to move or sell a house that I might buy now. If I buy something, I will do so with the intention of staying there for the long term, so long as life doesn't drastically change.

Thanks all in advance for the feedback.

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Ged
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Re: Taking out mortgage with zero down. Smart or no?

Post by Ged » Mon Jul 28, 2014 11:45 am

Home ownership comes with the risk that home prices will decline and leave you underwater. If you don't have a financial cushion that can severely affect you if you need to move.

The risk that you will end up underwater declines the longer you own the home, and whether or not your entry point turns out to be at a market high or not. These are hard to assess as they cannot be determined in the present. That fact increases the risk.

steve_14
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Re: Taking out mortgage with zero down. Smart or no?

Post by steve_14 » Mon Jul 28, 2014 11:45 am

I think zero down mortgages are great if you can comfortably afford the payments. If the house gets hit by a meteor tomorrow, you just walk away. Nothing magic about initial home equity. I'd plan on owning the home by retirement, however.

poker27
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Re: Taking out mortgage with zero down. Smart or no?

Post by poker27 » Mon Jul 28, 2014 11:46 am

shaX wrote:Greetings Bogleheads... I summon you all to get your opinions on home purchase/mortgages. I am 28 years old, currently renting and would like to purchase a home. I have a credit score over 760 and sufficient income and job history to get approved for a mortgage. I am a veteran and could utilize a zero down, no PMI 30 year fixed VA loan if I wanted to. Right now it looks like I could get under 4% on one of these (around 3.75%).

I have an idea of what I could get approved for based on my debt to income ratio and to be honest, I'm looking to spend much less than what I could actually get approved for, as I am not one to live beyond my means.

My question for you all is, how would you feel about buying a home/taking out a mortgage with no money down? Certainly there's a level of risk in doing so, but being able to avoid PMI and locking in today's sub 4% interest rate, it has to factor into the equation.

Currently i've got about 3 months of expenses in my emergency fund and really no money for a down payment or even closing costs without tapping into this. I have a decent monthly surplus of income so its not as though I am strapped to the wall, I've just been paying down my student loans this year.

I Could continue to rent and save up for a down payment, but in doing so I run the risk of mortgage rates rising (in addition to losing the value of this savings to inflation). Let's say I spend the next 2 years saving, and can save $20k for a down payment (this is probably realistic if I stay on a tight budget), but rates go from 3.75 to 4.75 between now and then... I basically will have lost more than that to the increased cost in interest for the life of the loan.

I don't have a time frame for wanting to move or sell a house that I might buy now. If I buy something, I will do so with the intention of staying there for the long term, so long as life doesn't drastically change.

Thanks all in advance for the feedback.


I'm not familiar with VA loans, but people generally advocate 20% down to get rid of PMI, sounds like you can do that with out putting anything down... If there are no 'gotchas' I dont see anything wrong with it, you would obviously add up equity slower than someone that would put x% down. My only concern would be your EF at this point. Generally I would want a higher cash savings after buying a home, you never know what may come up

music_man
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Re: Taking out mortgage with zero down. Smart or no?

Post by music_man » Mon Jul 28, 2014 11:50 am

Normally, you try to put 20% down to avoid paying PMI (less risk to the lender), but in your case since there's no PMI and you are planning on staying their long term, I wouldn't see a problem with it. Just make sure you don't stretch yourself to the max with the monthly payment.

steve_14
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Re: Taking out mortgage with zero down. Smart or no?

Post by steve_14 » Mon Jul 28, 2014 11:56 am

Ged wrote:Home ownership comes with the risk that home prices will decline and leave you underwater. If you don't have a financial cushion that can severely affect you if you need to move.

The risk that you will end up underwater declines the longer you own the home, and whether or not your entry point turns out to be at a market high or not. These are hard to assess as they cannot be determined in the present. That fact increases the risk.


In this case, I'd much rather have zero equity in the property.

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Ketawa
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Re: Taking out mortgage with zero down. Smart or no?

Post by Ketawa » Mon Jul 28, 2014 12:02 pm

Are you familiar with the VA funding fee? Make sure you read about it. http://benefits.va.gov/homeloans/purchaseco_loan_fee.asp

You might be exempt from it. If not, it makes sense to put down 5% or 10%. For example, consider a $100k loan. Putting down $5k saves you $650 in fees, which is a 13% return. Putting down an additional $5k saves you another $250, a 5% return.

As long as you are putting down 10%, you might consider a loan from NFCU. With NFCU, both the 30 year fixed and 5/5 ARM loans are available with no PMI at only 10% down. I went with a 5/5 ARM as this was a much better deal than I could get through a VA loan.

sscritic
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Re: Taking out mortgage with zero down. Smart or no?

Post by sscritic » Mon Jul 28, 2014 12:05 pm

It depends what the alternatives are.

1) Buy $300k house with zero down, borrow $300k
2) Buy $300k house with cash, borrow $0
3) Buy $600k house with $300k down, borrow $300k

If the value of the house drops by 50%, you end up with

1) a $150k house with a $300k debt.
2) a $150k house with no debt.
3) a $300k house with a $300k debt (this is the zero down that wasn't meant to be zero down result)

Now I realize these aren't your specific alternatives, but if you have $20k for a down, are you buying the same house or taking out the same mortgage? (see 1 vs 2 as opposed to 1 vs 3)

bcjb
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Re: Taking out mortgage with zero down. Smart or no?

Post by bcjb » Mon Jul 28, 2014 12:06 pm

Since this is available to you without PMI, I think you should definitely put zero down. Buy a house that you can comfortably afford -- don't be tempted to buy an expensive house (for your income) just because you don't have to put down a sizable downpayment. You may be underwater early on, but that can also happen to people who put down 20%, and you should anyway plan to be in the house for 5-7 years. I think this is a great opportunity; you can invest the money you would otherwise have used for a downpayment.

billjohnson
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Re: Taking out mortgage with zero down. Smart or no?

Post by billjohnson » Mon Jul 28, 2014 12:11 pm

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Last edited by billjohnson on Mon Jul 28, 2014 6:10 pm, edited 1 time in total.

Corleone
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Re: Taking out mortgage with zero down. Smart or no?

Post by Corleone » Mon Jul 28, 2014 12:12 pm

I think where/what you are buying and your current personal situation should play a role here, along with purchase price relative to what the house is worth. If you are single, what happens if you buy this home with no equity, get married in a few years and it is not where you would like to start a family? This would put you in a difficult situation if the housing market goes down at all. Though to be fair, if you saved up for a 20% down payment and the market goes down you are still going to lose the same amount of money. It's just with the down payment scenario you aren't as stuck if you are willing to take the loss.

Having said that, I purchased a home with a VA loan and no money down in 2010, and it has worked out amazingly. Started with a 5.25% rate and just refinanced down to 3.125 on a 15 year. I had zero reservations about purchasing my home at the time. It was a foreclosed HUD home that I got for well under market value, it is in a desirable neighborhood with good schools, and my girlfriend and future wife liked the home and the area. The home is currently worth nearly double the purchase price.

Calm Man
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Re: Taking out mortgage with zero down. Smart or no?

Post by Calm Man » Mon Jul 28, 2014 12:16 pm

I am totally confused. I thought that lending standards were tightened after the last real estate crash to prevent just this -- people buying houses with no skin in the game. I recognize that this is a veteran but can't veteran's run into financial troubles and default on loans? Who underwrites this that makes them exempt from the rules of all other lenders? (I hope I don't hear what I fear I will hear about who is bearing the risk.)

Corleone
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Re: Taking out mortgage with zero down. Smart or no?

Post by Corleone » Mon Jul 28, 2014 12:25 pm

Calm Man wrote:I am totally confused. I thought that lending standards were tightened after the last real estate crash to prevent just this -- people buying houses with no skin in the game. I recognize that this is a veteran but can't veteran's run into financial troubles and default on loans? Who underwrites this that makes them exempt from the rules of all other lenders? (I hope I don't hear what I fear I will hear about who is bearing the risk.)


A VA loan is a loan where the government assumes the risk of the loan if it defaults, thus allowing the banks to give loans under circumstances they wouldn't normally because they are guaranteed their money, one way or the other. In terms of a veteran running into financial trouble and defaulting, what does the down payment matter if you default on a loan, so long as the monthly payment is acceptable at the time of the financing? You are not less likely to lose your job or run into other financial hardship because you put a large down payment down.

Jack
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Re: Taking out mortgage with zero down. Smart or no?

Post by Jack » Mon Jul 28, 2014 12:28 pm

Calm Man wrote:I am totally confused. I thought that lending standards were tightened after the last real estate crash to prevent just this -- people buying houses with no skin in the game. I recognize that this is a veteran but can't veteran's run into financial troubles and default on loans? Who underwrites this that makes them exempt from the rules of all other lenders? (I hope I don't hear what I fear I will hear about who is bearing the risk.)

VA loans are insured by the Veterans Administration. Ultimately taxpayers assume the risk of the loan.

On the other hand, this benefit is in exchange for the much greater risk the veteran previously assumed on behalf of taxpayers. The cost of this benefit is approximated by the foregone PMI fee.

"Support the troops" is more than just a bumper decal.

Acesalad
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Re: Taking out mortgage with zero down. Smart or no?

Post by Acesalad » Mon Jul 28, 2014 12:49 pm

No, No, NO! My wife and I bought a house 9 years ago with no money down. We thought prices will never go down and only keep going up so we better buy now even though we have to finance 100%. Well the bottom dropped out and we are still underwater. You can tell yourself this will not happen to you but there is no way you can know what the housing market will do in the future. We have wanted to sell this house and move and we are not able to because it is still underwater. We have given up our freedom to choose to move because of a stupid decision we made when we were uneducated about personal finance. It is the biggest regret in my life!! Buying a house with no money down is a dangerous move and when it backfires the implications go on for years!

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Re: Taking out mortgage with zero down. Smart or no?

Post by Calm Man » Mon Jul 28, 2014 12:56 pm

Corleone wrote:
Calm Man wrote:I am totally confused. I thought that lending standards were tightened after the last real estate crash to prevent just this -- people buying houses with no skin in the game. I recognize that this is a veteran but can't veteran's run into financial troubles and default on loans? Who underwrites this that makes them exempt from the rules of all other lenders? (I hope I don't hear what I fear I will hear about who is bearing the risk.)


A VA loan is a loan where the government assumes the risk of the loan if it defaults, thus allowing the banks to give loans under circumstances they wouldn't normally because they are guaranteed their money, one way or the other. In terms of a veteran running into financial trouble and defaulting, what does the down payment matter if you default on a loan, so long as the monthly payment is acceptable at the time of the financing? You are not less likely to lose your job or run into other financial hardship because you put a large down payment down.


Corleone, forgetting whether we "owe" Veterans special treatments on mortgages as proposed by a subsequent responder for risking their lives for us in addition to the pay they got, the VA medical benefits, etc, the answer to your question is more clear to me...... The difference between somebody making a down payment or not is that if there is no down payment, and hence less to lose if anything, one is more likely to default. Think about your willingness to walk away from a house with no money down or one with 30% or 50% down.

strafe
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Re: Taking out mortgage with zero down. Smart or no?

Post by strafe » Mon Jul 28, 2014 1:02 pm

Not only is zero down smart, it's the sensible choice.

Why tie up all that money in your house? Keep it liquid.

The mistake would be to spend the down payment money, as alluded by the poster above me who bought with zero down and spent his savings.

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Re: Taking out mortgage with zero down. Smart or no?

Post by HardKnocker » Mon Jul 28, 2014 1:03 pm

As long as you are not overpaying and can afford the payment I see no reason not to go zero down if you have to.
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bcjb
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Re: Taking out mortgage with zero down. Smart or no?

Post by bcjb » Mon Jul 28, 2014 1:05 pm

Acesalad wrote:No, No, NO! My wife and I bought a house 9 years ago with no money down. We thought prices will never go down and only keep going up so we better buy now even though we have to finance 100%. Well the bottom dropped out and we are still underwater. You can tell yourself this will not happen to you but there is no way you can know what the housing market will do in the future. We have wanted to sell this house and move and we are not able to because it is still underwater. We have given up our freedom to choose to move because of a stupid decision we made when we were uneducated about personal finance. It is the biggest regret in my life!! Buying a house with no money down is a dangerous move and when it backfires the implications go on for years!


I'm very sorry for your predicament.

But -- and this is a genuine question, I really don't understand this -- isn't the problem with zero down that people are/were tempted to buy houses they can't/couldn't afford? Or, as Calm Man writes, that people are more likely to walk away from a home when they don't have skin in the game? If the OP buys the exact same house that s/he otherwise would have with 20% down, how much more of a risk is the OP really taking? Especially if the money that would have been used for the downpayment is being invested somewhere, and remains (in principle) available to pay down the mortgage. I don't see how this could become the biggest regret in the OP's life, at least not under these circumstances.
Feel free to let me know where I'm going wrong.

bberris
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Re: Taking out mortgage with zero down. Smart or no?

Post by bberris » Mon Jul 28, 2014 1:12 pm

Acesalad wrote:No, No, NO! My wife and I bought a house 9 years ago with no money down. We thought prices will never go down and only keep going up so we better buy now even though we have to finance 100%. Well the bottom dropped out and we are still underwater. You can tell yourself this will not happen to you but there is no way you can know what the housing market will do in the future. We have wanted to sell this house and move and we are not able to because it is still underwater. We have given up our freedom to choose to move because of a stupid decision we made when we were uneducated about personal finance. It is the biggest regret in my life!! Buying a house with no money down is a dangerous move and when it backfires the implications go on for years!


I'm not seeing how you would be better off if you had made a down payment. You could move now by putting up cash at closing when you sell. But you regret not putting up cash when you bought. Either way it takes cash to move, either up front or at the end. Or maybe you are saying you bought a house that was too expensive for your means? But that could happen with a down payment too.

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Re: Taking out mortgage with zero down. Smart or no?

Post by Jack » Mon Jul 28, 2014 1:17 pm

Calm Man wrote:The difference between somebody making a down payment or not is that if there is no down payment, and hence less to lose if anything, one is more likely to default. Think about your willingness to walk away from a house with no money down or one with 30% or 50% down.

Your simplistic assumptions are incorrect.

According to the Mortgage Bankers Association National Delinquency Survey, the delinquency rate for VA loans is less than half that of FHA loans and comparable to the rate for prime loans.

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HardKnocker
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Re: Taking out mortgage with zero down. Smart or no?

Post by HardKnocker » Mon Jul 28, 2014 1:20 pm

Acesalad wrote:No, No, NO! My wife and I bought a house 9 years ago with no money down. We thought prices will never go down and only keep going up so we better buy now even though we have to finance 100%. Well the bottom dropped out and we are still underwater. You can tell yourself this will not happen to you but there is no way you can know what the housing market will do in the future. We have wanted to sell this house and move and we are not able to because it is still underwater. We have given up our freedom to choose to move because of a stupid decision we made when we were uneducated about personal finance. It is the biggest regret in my life!! Buying a house with no money down is a dangerous move and when it backfires the implications go on for years!


You'd still have "lost" the same amount of money when you sold. It makes no difference.

The "problem" is you got in at the top of the market and overpaid for the house in the first place.

It really is a lousy situation to be in and I empathize with you.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

Jack FFR1846
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Re: Taking out mortgage with zero down. Smart or no?

Post by Jack FFR1846 » Mon Jul 28, 2014 1:29 pm

bcjb wrote:I'm very sorry for your predicament.

But -- and this is a genuine question, I really don't understand this -- isn't the problem with zero down that people are/were tempted to buy houses they can't/couldn't afford? Or, as Calm Man writes, that people are more likely to walk away from a home when they don't have skin in the game? If the OP buys the exact same house that s/he otherwise would have with 20% down, how much more of a risk is the OP really taking? Especially if the money that would have been used for the downpayment is being invested somewhere, and remains (in principle) available to pay down the mortgage. I don't see how this could become the biggest regret in the OP's life, at least not under these circumstances.
Feel free to let me know where I'm going wrong.


The difference here is that the op does not have a down payment and as he says, it would take him 2 years to come up with 20%.
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Re: Taking out mortgage with zero down. Smart or no?

Post by Ldevelopment » Mon Jul 28, 2014 1:36 pm

HardKnocker wrote:
Acesalad wrote:No, No, NO! My wife and I bought a house 9 years ago with no money down. We thought prices will never go down and only keep going up so we better buy now even though we have to finance 100%. Well the bottom dropped out and we are still underwater. You can tell yourself this will not happen to you but there is no way you can know what the housing market will do in the future. We have wanted to sell this house and move and we are not able to because it is still underwater. We have given up our freedom to choose to move because of a stupid decision we made when we were uneducated about personal finance. It is the biggest regret in my life!! Buying a house with no money down is a dangerous move and when it backfires the implications go on for years!


You'd still have "lost" the same amount of money when you sold. It makes no difference.

The "problem" is you got in at the top of the market and overpaid for the house in the first place.

It really is a lousy situation to be in and I empathize with you.


Sometimes it's just better to let it go to a short sale status and take the hit, then move where you want to quicker. It only takes a few years sometimes to get out of a short sell credit hit. Even better, only get the loan in one of the spouses names if you have a partner or are married in case the worst happens.

Calm Man
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Re: Taking out mortgage with zero down. Smart or no?

Post by Calm Man » Mon Jul 28, 2014 1:39 pm

Jack wrote:
Calm Man wrote:The difference between somebody making a down payment or not is that if there is no down payment, and hence less to lose if anything, one is more likely to default. Think about your willingness to walk away from a house with no money down or one with 30% or 50% down.

Your simplistic assumptions are incorrect.

According to the Mortgage Bankers Association National Delinquency Survey, the delinquency rate for VA loans is less than half that of FHA loans and comparable to the rate for prime loans.


Jack, thank you for that fact. It is good that the default rate is half. When you refer to my simplistic assumptions being incorrect, the fact you present does not address the assumption at all. Are you suggesting that amongst any set of loans that the default rate would not be higher with no down payment? So for example in the non VA loans with the FHA, I would assume that there are more defaults with lower down payments. Similarly the VA loan universe has different levels of down payment. Are you confusing the fact that VA loans AS A WHOLE have half the defaults as FHA loans AS A WHOLE with whether VA loans have differential rates of default depending on down payment? I do not wish to be insulting by doing something like calling somebody's assumptions simplistic and do not take your criticism personally, but you do not seem to be understanding the data. So to challenge by assumption you would have to look at the universe of VA loans and compare rates of default vs down payment. Are you aware of this information? If you found it, I would wager that defaults are higher with lower down payments.
Last edited by Calm Man on Mon Jul 28, 2014 1:41 pm, edited 1 time in total.

shaX
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Re: Taking out mortgage with zero down. Smart or no?

Post by shaX » Mon Jul 28, 2014 1:41 pm

Corleone wrote:I think where/what you are buying and your current personal situation should play a role here, along with purchase price relative to what the house is worth. If you are single, what happens if you buy this home with no equity, get married in a few years and it is not where you would like to start a family? This would put you in a difficult situation if the housing market goes down at all. Though to be fair, if you saved up for a 20% down payment and the market goes down you are still going to lose the same amount of money. It's just with the down payment scenario you aren't as stuck if you are willing to take the loss.

Having said that, I purchased a home with a VA loan and no money down in 2010, and it has worked out amazingly. Started with a 5.25% rate and just refinanced down to 3.125 on a 15 year. I had zero reservations about purchasing my home at the time. It was a foreclosed HUD home that I got for well under market value, it is in a desirable neighborhood with good schools, and my girlfriend and future wife liked the home and the area. The home is currently worth nearly double the purchase price.


This isn't a problem here. I already have a son and if I were to get married and want anymore children, I will be buying a home in a nice location and with enough space to do so. I currently live in a tiny 1BR apartment and I don't need a lot of space. I wouldn't buy something unless it was big enough to add a family to it down the road and the goal would be to stay put. I'm NOT of the belief that you need 3,000 sq/ft, 6 bedrooms and 3 baths to raise a family. I grew up in a 3BR house with 1 bath with less than 1,000 sq/ft and it was totally fine, and i'll buy something just a little bit bigger than this.

shaX
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Re: Taking out mortgage with zero down. Smart or no?

Post by shaX » Mon Jul 28, 2014 1:53 pm

Corleone wrote:
Calm Man wrote:I am totally confused. I thought that lending standards were tightened after the last real estate crash to prevent just this -- people buying houses with no skin in the game. I recognize that this is a veteran but can't veteran's run into financial troubles and default on loans? Who underwrites this that makes them exempt from the rules of all other lenders? (I hope I don't hear what I fear I will hear about who is bearing the risk.)


A VA loan is a loan where the government assumes the risk of the loan if it defaults, thus allowing the banks to give loans under circumstances they wouldn't normally because they are guaranteed their money, one way or the other. In terms of a veteran running into financial trouble and defaulting, what does the down payment matter if you default on a loan, so long as the monthly payment is acceptable at the time of the financing? You are not less likely to lose your job or run into other financial hardship because you put a large down payment down.


I'd like to drive home a point that you've made that many seemed to have overlooked.

Assume a $200k house is purchased to illustrate this example.

$200k @ 3.75% zero down: $926.23 per month.

Lets assume I save up 10% for a down payment.

$180k @ 3.75% zero down: 833.61

So putting $20k down results in savings of LESS than $100 per month ($92.62 in this example). I am certainly of the belief that if $100 per month is going to be the difference in whether or not I default on a mortgage or not, then I am totally out of line in even considering buying a home of any sort.


The good news for the taxpayers backing my potential mortgage is that I don't even WANT to spend $200k, i'm looking to spend even less. :)

PatrickA5
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Re: Taking out mortgage with zero down. Smart or no?

Post by PatrickA5 » Mon Jul 28, 2014 2:10 pm

All of this talk of no money down, leveraging with debt, walking away from mortgages, and investing the down payment in something other than the home, is making me think we haven't learned our lesson.

I remember back in 2000, all of my friends were taking out HELOCs and daytrading their equity. I wouldn't do it. They all thought I was stupid passing up a sure thing. Same thing happened in 2006 with all of the zero down crap where anybody with a pulse could get a mortgage. Nearly caused a depression due to greed and stupidity.

I don't have a particular problem with the OP situation since he/she says they are going to buy a house for much less than they can afford. Also, the fact that they'd have to use the EF for the down payment, leads me to think the zero down might be an ok idea for them, but, when I hear people saying the less down payment the better because "you can always walk away"?? What ever happened to taking responsibility for your debts?

Acesalad
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Re: Taking out mortgage with zero down. Smart or no?

Post by Acesalad » Mon Jul 28, 2014 2:52 pm

Yes it was unfortunate that I bought at the top of the market. Who here wants to guarantee that the market won't go down again? I guess if you can time the real estate market you can time the stock market too, but wait, I thought one of the core principals of Bogleheads is that market timing is a futile endeavour.

Yes, I would have lost the same amount, but with my house a 20% down payment would be $74,000 and I would not be underwater now if I had done that then, thus not trapped in this house.

Short sales are not as easy as people think. We tried it but without a hardship or high mortgage to income ratio we were not able to. Unfortunately we make enough to pay our bills, but not enough to make much headway on getting out from underwater.

I think this is foolish. If he tried this in 2005 or 2006 his house value and his portfolio would have plummeted. He'd be underwater on the house and the almost half money he thought he was investing so wisely would be gone.

Acesalad
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Re: Taking out mortgage with zero down. Smart or no?

Post by Acesalad » Mon Jul 28, 2014 2:53 pm

All of this talk of no money down, leveraging with debt, walking away from mortgages, and investing the down payment in something other than the home, is making me think we haven't learned our lesson.

I remember back in 2000, all of my friends were taking out HELOCs and daytrading their equity. I wouldn't do it. They all thought I was stupid passing up a sure thing. Same thing happened in 2006 with all of the zero down crap where anybody with a pulse could get a mortgage. Nearly caused a depression due to greed and stupidity.

I don't have a particular problem with the OP situation since he/she says they are going to buy a house for much less than they can afford. Also, the fact that they'd have to use the EF for the down payment, leads me to think the zero down might be an ok idea for them, but, when I hear people saying the less down payment the better because "you can always walk away"?? What ever happened to taking responsibility for your debts?

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Re: Taking out mortgage with zero down. Smart or no?

Post by Meg77 » Mon Jul 28, 2014 3:02 pm

Ketawa wrote:Are you familiar with the VA funding fee? Make sure you read about it. http://benefits.va.gov/homeloans/purchaseco_loan_fee.asp

You might be exempt from it. If not, it makes sense to put down 5% or 10%. For example, consider a $100k loan. Putting down $5k saves you $650 in fees, which is a 13% return. Putting down an additional $5k saves you another $250, a 5% return.

As long as you are putting down 10%, you might consider a loan from NFCU. With NFCU, both the 30 year fixed and 5/5 ARM loans are available with no PMI at only 10% down. I went with a 5/5 ARM as this was a much better deal than I could get through a VA loan.


This. The interest rates on VA loans are great, but the fees can be terrible depending on your circumstances. Some vets are exempt from the funding fee or can get a discounted one (disabled vets, for instance), and I have heard that first time users of VA loans may pay a smaller fee. However my SIL and her husband are about to buy a home using their second VA loan and the funding fee is 3% - which equates to about $9,000 they are throwing down the drain because they are anxious to buy now and haven't saved up even a 5% down payment (in which case they could get an FHA loan).

There's definitely nothing wrong with putting less down if you can get away with it, but make sure you are OK living there for at least 5 years, since you may be underwater for awhile (since to sell it you will pay 6% in realtor commissions and often other fees as well such as the buyer's title insurance). However if you HAVE a down payment it pays to ask your lender for two GFEs showing the rates and fees both ways. If you can afford it you usually come out ahead using conventional financing, as my sister and her husband did a few years back. Just compare the APR which takes into account the rate and all fees.
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greg24
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Re: Taking out mortgage with zero down. Smart or no?

Post by greg24 » Mon Jul 28, 2014 3:05 pm

Buying a home is a lifestyle choice. You don't seem to have a big reason to buy a home, such as an expanding family or anything like that. I tell younger colleagues that they are renting their freedom.

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davebarnes
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Do it

Post by davebarnes » Mon Jul 28, 2014 3:46 pm

Do it.
Make extra mortgage payments.
Build some equity and you will sleep better at night.
A nerd living in Denver

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Re: Taking out mortgage with zero down. Smart or no?

Post by TheRightKost87 » Mon Jul 28, 2014 3:58 pm

Acesalad wrote:Yes, I would have lost the same amount, but with my house a 20% down payment would be $74,000 and I would not be underwater now if I had done that then, thus not trapped in this house.


The point they were making earlier was that, yes, with a 74K downpayment you wouldnt currently be underwater. But that means you'd have 74K less now. If you had saved the 74K instead of putting towards a downpayment, you'd still have the cash and could pay it now to get yourself out from underwater.

As a poster mentioned earlier - Either you'd need to put the money down in the beginning (when you buy), or in the end (when you sell)
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Re: Taking out mortgage with zero down. Smart or no?

Post by freddie » Mon Jul 28, 2014 4:04 pm

Acesalad wrote:Yes it was unfortunate that I bought at the top of the market. Who here wants to guarantee that the market won't go down again? I guess if you can time the real estate market you can time the stock market too, but wait, I thought one of the core principals of Bogleheads is that market timing is a futile endeavour.

Yes, I would have lost the same amount, but with my house a 20% down payment would be $74,000 and I would not be underwater now if I had done that then, thus not trapped in this house.

Short sales are not as easy as people think. We tried it but without a hardship or high mortgage to income ratio we were not able to. Unfortunately we make enough to pay our bills, but not enough to make much headway on getting out from underwater.

I think this is foolish. If he tried this in 2005 or 2006 his house value and his portfolio would have plummeted. He'd be underwater on the house and the almost half money he thought he was investing so wisely would be gone.


He buys a 200k house and a invests the 40k. House price drops 30% and stocks drop 50%, he is laid off and takes a new job 200 miles away who is better
a) 140k house with a 160k mortgage and zero dollars
b) 140k with a 200k mortgage and 20k in investments?

Clearly b. He sends the keys back to the bank an moves on with his life with 20k. A is going to send the keys back also but isn't going to have that 20k to rebuild with. If either party invested in bonds, the numbers favor 0% down a lot more. As far as responsibility for your debts, when you give back the house, you have fulfilled your obligations to the bank in most states. Which is why a sane bank wants either 20% down or PMI. If there was no risk to the bank, the loan rate should be much lower than what they charge. There is a risk so mortgage bond owners get a nice premium.

Having the cash and putting 0% down is a heck of a lot different than not having the cash and putting 0% down. I would definitely run the loan numbers to make sure your 0% loan is a good deal.

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Re: Taking out mortgage with zero down. Smart or no?

Post by bloom2708 » Mon Jul 28, 2014 4:26 pm

One of the things that was most disappointing about the housing meltdown was the number of people who "could pay" but chose not to because their house was worth much less.

If today I sign up for a $2,000/month house payment. I better be darned sure I can make that payment for 15 or 30 years. I need to live in my house, eat in it and sleep in it. It is a house.

People that lost their jobs had no problems, but thousands who had jobs and income just walked away. They could pay, but it wasn't "worth it".

I guess I understand, but then again I don't. It is inherent in the risk of owning a home. Having a $5,000 mortgage is risky.

I would put down 20% if possible.
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Re: Taking out mortgage with zero down. Smart or no?

Post by billjohnson » Mon Jul 28, 2014 4:32 pm

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Last edited by billjohnson on Mon Jul 28, 2014 6:10 pm, edited 1 time in total.

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Re: Taking out mortgage with zero down. Smart or no?

Post by MoonOrb » Mon Jul 28, 2014 4:38 pm

Use the VA loan. The risk to not putting money down is only a meaningful risk if you want to sell the home when you're underwater. If your house value drops by 50% and you have zero or little equity, who cares if you're not wanting to sell?

The other risk is the behavioral risk that you'll spend above your means because making a 20% down payment acts a a potential limitation on how much home you can afford. So, do a good job making sure you know how much of a house payment you can afford, including insurance and taxes, and you're good to go.

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Re: Taking out mortgage with zero down. Smart or no?

Post by Twins Fan » Mon Jul 28, 2014 4:39 pm

Boy, this one is spinning off in all sorts of directions. It's obvious many commenting in this one are not familiar with VA loans. Those many probably need not comment in this one. :wink:

shaX wrote:My question for you all is, how would you feel about buying a home/taking out a mortgage with no money down? Certainly there's a level of risk in doing so, but being able to avoid PMI and locking in today's sub 4% interest rate, it has to factor into the equation.


I would feel just fine, since that's just what I did three years ago. I used the VA loan to buy my primary home then (have a rental also, no VA loan) and put zero down. I plan to stay here for quite some time with a stable job and my kids near by. Since I learned my lesson about being underwater on a home with my accidental rental, I paid down my primary mortgage a bunch over the last couple years and things would really have to tank to get there on this one.

The VA loan is different, in that the government once again basically owns the Vet. There's more rules and oversight with the VA loan. So, walking away isn't so easy. I agree with others that walking away is a poor way to handle things anyway. But, that 's a different issue and shouldn't have even been brought up in this one.

A good thing about the VA loan is, and I would have to look at the paperwork again so don't quote me, that you can sell the home someday and pass along the interest rate you get to the buyer. That could be huge if interest rates go the way most think they will and you had to move for some reason someday. Again, that's just off memory from about three years ago, so that may not be exact.

Yes, there's a funding fee. But, nothing is completely free, right?

If you plan to not take the max loan you can qualify for, live below your means, stay there for a while, and maybe pay it down somewhat aggressively, I say go for it. You earned it, so use it. :D

Check these guys out. I had a great experience with them with the purchase and a refinance since...

http://www.veteransunited.com/welcome-p ... lsrc=aw.ds

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Re: Taking out mortgage with zero down. Smart or no?

Post by BL » Mon Jul 28, 2014 5:02 pm

Are you just dying to own a home and do yard work, fixing the toilet, etc., every weekend? If so, you can probably risk it, even though you don't have enough back-up funds to cover extra unanticipated costs. Maybe halt any 401k contributions over the match, and wait on IRAs, also cut spending dramatically to build up that emergency fund and don't buy furniture except through Craigs List or thrift stores until you are certain about having costs covered.

If you just think it may be a good deal now, think seriously about whether it is how you really want to live right now.

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Re: Taking out mortgage with zero down. Smart or no?

Post by scone » Mon Jul 28, 2014 5:03 pm

As a taxpayer, I'm proud to help back your mortgage. As far as the market goes, you need to look at your rental costs versus your total costs of ownership. That's a major factor in the rent versus buy decision. And the problem of the market tanking after you buy is part of your risk, obviously, but you take some of that risk anyway, if the owner loses the rental to foreclosure. Buy the cheapest house in the best area, and put some sweat equity into it. Then stay put as long as you can. This is the best use of the leverage opportunity you have. Good luck, and thank you for your service! :beer
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Re: Taking out mortgage with zero down. Smart or no?

Post by Twins Fan » Mon Jul 28, 2014 5:11 pm

Oh, that's another thing about the VA loan... you don't get to buy a heap and fix 'er up. I think they have loan programs for that. But, if you plan to buy it as your primary residence and move right in, the home will have to be in pretty darn good shape for them to approve. If there's issues found in the inspection, or the paint is flaking, or... they can be pretty picky, they say, find another.

It's pretty structured, folks. Not just Vets out there doing whatever they want with VA loan money.

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Re: Taking out mortgage with zero down. Smart or no?

Post by shaX » Mon Jul 28, 2014 7:55 pm

BL wrote:Are you just dying to own a home and do yard work, fixing the toilet, etc., every weekend? If so, you can probably risk it, even though you don't have enough back-up funds to cover extra unanticipated costs. Maybe halt any 401k contributions over the match, and wait on IRAs, also cut spending dramatically to build up that emergency fund and don't buy furniture except through Craigs List or thrift stores until you are certain about having costs covered.

If you just think it may be a good deal now, think seriously about whether it is how you really want to live right now.


I am not afraid of work and I know that home ownership comes with lots of it.

I've already "cut spending dramatically" in the past 2 years to put myself into a better financial position. 3 years ago I probably couldn't even have been approved for a $100k mortgage.

The reason I have very little cash saved is because i've payed off $20k in student loan debt in 2014. All of this debt carried a 6.8% interest rate which is why I decided it was more important to pay off instead of holding the money in cash.

Furniture isn't any sort of argument for anything.. I'd sleep on the floor if I had to (i've done it before).

I sense a lot of negativity in your post without any recommendation or advice on how best to proceed under the circumstances described in the original post.

I live in a shit hole apartment in an even shittier neighborhood all so I can live cheap and save money... At some point I need to move onward. I certainly won't rush a home purchase just for the sake of it, but if I wait too long then I run the risk of interest rates rising and rising and eventually negating any sort of down payment I could accumulate.

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Re: Taking out mortgage with zero down. Smart or no?

Post by shaX » Mon Jul 28, 2014 8:01 pm

Twins Fan wrote:Oh, that's another thing about the VA loan... you don't get to buy a heap and fix 'er up. I think they have loan programs for that. But, if you plan to buy it as your primary residence and move right in, the home will have to be in pretty darn good shape for them to approve. If there's issues found in the inspection, or the paint is flaking, or... they can be pretty picky, they say, find another.

It's pretty structured, folks. Not just Vets out there doing whatever they want with VA loan money.


I just learned this myself. I'm currently inquiring about a home that needs some work (paint, flooring, other cosmetic stuff) and the agent already said that in its current condition the VA wouldn't approve it... Sadly the price is very reasonable, the location is awesome and the house isn't even old (built in 1990). It's plenty big enough for me as well. I may not be able to go the VA loan route with this but i'm going to explore other options as this particular property is a good value (it's currently listed for the value that it bottomed at out at the floor of the housing market crash).

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Re: Taking out mortgage with zero down. Smart or no?

Post by nimo956 » Mon Jul 28, 2014 8:27 pm

I don't see why you want to tie yourself down with a house when you could very well need to be mobile in the coming years. How long have you been working in your current job? Do you plan on staying there for the next 7 years or will you want to switch companies or careers? What if the next job you want to take is over an hour away, or in another state? What if you meet someone you want to marry in the next few years, but she wants to find a new place together in a good school district?

In my opinion, young people in their twenties shouldn't buy houses. Houses are for people who are ready to settle down in a career and start a family.
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Re: Taking out mortgage with zero down. Smart or no?

Post by bottlecap » Mon Jul 28, 2014 8:44 pm

To me, there are several benefits to using a down payment. First, it forces you to live below your means and learn how hard it can be to save money - appreciate the value of a dollar. Second, it prevents you from moving too quickly, both before you are ready and know what you want to buy and before you should be buying instead of renting in the first place. But for these two things, zero percent down would almost always be better at today's low interest rates.

I think our country is doing service people a disservice by offering such a loan at a relatively young age and not permitting them to learn what it takes to be financially responsible. But perhaps you already have such responsibility, as you've shown by attacking your student loans. You obviously have a level of self awareness - and concern - just by asking the question. What do you think?

If you do have concerns, perhaps a compromise is to save for a 10% down payment before buying, even though it may not be required. That gives you time to decide what to do while still preserving some benefit from your service. I think buying now, regardless of need or desire, simply to take advantage of low rates is a mistake. The monthly amount of interest you will save is not likely to be that great compared to the possible consequences of buying before you are financially and emotionally ready.

Good luck,

JT

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Re: Taking out mortgage with zero down. Smart or no?

Post by MoonOrb » Tue Jul 29, 2014 12:04 am

The moralizing in this thread is weird. This isn't a moral issue. You won't be the first veteran to put no money down on a house (I've done it!); it's a fabulous benefit offered by the VA, and if you can afford the house payment and are otherwise planning on living in the house for a while, go for it.

The two times I've used a VA loan the total house payment including taxes and insurance was the rough equivalent to the amount I was paying every month in rent, anyway. This made it an easy call (the houses I bought weren't as nice as the rental units I was occupying, but I was happy with them in both cases and in any event the monthly cost was about the same).

There were some fees that were rolled into the loan, some fees that weren't, and the out of pocket costs of moving, buying some new furniture, and spending all the $ that you spend at Home Depot when you own a home. So consider that, too.

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Re: Taking out mortgage with zero down. Smart or no?

Post by Jack » Tue Jul 29, 2014 12:43 am

Calm Man wrote:When you refer to my simplistic assumptions being incorrect, the fact you present does not address the assumption at all. Are you suggesting that amongst any set of loans that the default rate would not be higher with no down payment? So for example in the non VA loans with the FHA, I would assume that there are more defaults with lower down payments. Similarly the VA loan universe has different levels of down payment. Are you confusing the fact that VA loans AS A WHOLE have half the defaults as FHA loans AS A WHOLE with whether VA loans have differential rates of default depending on down payment? I do not wish to be insulting by doing something like calling somebody's assumptions simplistic and do not take your criticism personally, but you do not seem to be understanding the data. So to challenge by assumption you would have to look at the universe of VA loans and compare rates of default vs down payment. Are you aware of this information? If you found it, I would wager that defaults are higher with lower down payments.

There's no need to torture the data. It's very simple. 90% of VA loans have zero down payment. 90% or more of prime loans have a 20% or larger down payment. Yet VA loans default at no higher rate than prime loans. There is no evidence in the data for your simplistic correlation between down payments and defaults, at least as regards VA loans. Other factors are more important.

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market timer
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Re: Taking out mortgage with zero down. Smart or no?

Post by market timer » Tue Jul 29, 2014 1:08 am

Acesalad wrote:Yes it was unfortunate that I bought at the top of the market. Who here wants to guarantee that the market won't go down again? I guess if you can time the real estate market you can time the stock market too, but wait, I thought one of the core principals of Bogleheads is that market timing is a futile endeavour.

There actually is strong evidence that you can time the housing market, unlike the stock market. The key difference between the two markets is that smart investors cannot short the real estate market.

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Re: Taking out mortgage with zero down. Smart or no?

Post by pjstack » Tue Jul 29, 2014 1:46 am

I bought my first house with a VA loan.

None of the terrible things alluded to in some of the above posts happened to me.

It's a good deal. If you need a house to live in, this is a good way to buy one.

I don't understand all this talk about "no skin in the game"; you're going to be making monthly payments. That seems like "skin in the game" to me.

At least you won't be paying 15% interest like I was!!
pjstack

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