A Case Study in VA Loan Set Up and Getting the Maximum Benefit for a VA Buyer

A Case Study in VA Loan Set Up and Getting the Maximum Benefit for a VA Buyer

Over the years I have originated many VA loans and learned that whenever I am working with a repeat VA borrower, it is worthwhile to give the Veteran a cash flow analysis of both a $0 or minimum down payment option and a 5% down option. Why would I do this? Isn't the objective of most VA buyers and the attraction of the VA loan program that little or no down payment is required? The answer is yes. However, if you are an experienced and diligent loan originator you instinctively think outside the box a little bit sometimes.

A case in point is a recent VA purchase transaction I just completed. I was working with a Veteran using his VA eligibility for the second time. The veteran was purchasing a brand new home in a single family home development of my client / builder. The loan would be a VA jumbo (over $417,000) but the property was not located in a county designated as a high cost area by VA. So the VA loan limit in this county is $417,000.

The selling purchase price of the home was $477,000 and the Veteran initially wanted to put as little down as possible. VA, of course, will allow for loan amounts greater than $417,000 in non high cost areas but the Veteran is required to contribute 20% of the base loan amount exceeding the $417,000. So in this case, the Veteran can put as little as $12,000 ( $477,000 $417,000 x .20% ) plus the VA funding fee (which has to be paid in cash over the $417,000 limit).

My initial goal was to make sure that I efficiently set the loan up because I kept staring at the 3.35% subsequent use VA funding fee and knew that with 5% (5% < 10%) down payment the VA funding fee could be reduced to 1.50%, a savings of over half. That is a big difference, especially on a VA jumbo loan and I felt that if I could lay out a minimum down payment option and a 5% down payment option to the buyer he would see the logic in making a higher down payment. At the very least I would have done my duty in presenting options for him to make an informed decision. The question I wanted to solve was if the extra cash needed from the Veteran to put 5% down would actually SAVE him money. As previously mentioned the home is not located in a high cost area so the VA loan limit of $417,000 applies. I laid out the scenarios side by side much as I have done below. Take a look at how close the cash requirements are for each but then look at the equity advantage from scenario B.

Scenario A B

Purchase Price $477,000 $477,000

Down Payment$12,000 (2.52%) $23,850 (5.00%)

VA Funding Fee $15,577 (3.35%) $ 6,797 (1.50%)

Total Cash Req. $27,577 $30,647

Total Equity after closing $12,000 $23,850

This comparison shows that a subsequent user can benefit from putting 5% down. His cash to close will be slightly higher (in this case $3,070) but more of that cash ($11,850) is going toward equity versus the expense of a VA Funding Fee.

I am not sure what percentage of loan originators do these sorts of calculations as a practice on VA loans but when arranging the largest debt on the larger asset a buyer is likely to ever be responsible for, there must be an effort to make sure it is planned well and managed correctly upfront. In this case a little instinct, experience and a few extra moments of loan originator work allowed the Veteran to close with a little less cash in his account but a higher net worth over all.

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