Contrary to popular belief, the Veterans Administration does allow a Veteran borrower to obtain a new VA first mortgage and a second mortgage from a third party simultaneously. This combination of mortgages could allow a Veteran to reach homes in excess of the maximum VA first mortgage amounts usually allowed by VA lenders. When the seller is willing to carry back a second mortgage on top of a VA loan, it is technically possible to purchase any priced home with nothing down, if the second mortgage meets the following guidelines:
- The property being purchased must appraise for the combination of the first and second mortgage.
- The veteran purchaser must be qualified for the payments on both the VA first mortgage and the third party second mortgage.
- The interest rate being charged on the second mortgage must not exceed the interest rate on the VA guaranteed first mortgage.
- The VA will not guarantee the second mortgage, only the first, but homebuilders, sellers, loan companies or investors would be allowed to make the second mortgage.
ADVANTAGES
The veteran buyer can purchase homes in excess of what most lenders limit VA first mortgages to and the combined down payment for the first and second mortgage can be substantially smaller than if conventional financing is employed. In fact, it is technically possible to have no down payment on either the first or second mortgage; other advantage would be that the VA first mortgage- could later be assumed upon sale without escalation of the interest rate, as frequently happens on conventional loan assumptions. This feature makes low interest rate VA loans very attractive upon resale. Not only would assuming a low interest rate VA loan be attractive but the assumptor would avoid paying all new closing costs associated with new mortgages and the veteran seller would avoid paying any discount points.
The veteran buyer can purchase homes in excess of what most lenders limit VA first mortgages to and the combined down payment for the first and second mortgage can be substantially smaller than if conventional financing is employed. In fact, it is technically possible to have no down payment on either the first or second mortgage; other advantage would be that the VA first mortgage- could later be assumed upon sale without escalation of the interest rate, as frequently happens on conventional loan assumptions. This feature makes low interest rate VA loans very attractive upon resale. Not only would assuming a low interest rate VA loan be attractive but the assumptor would avoid paying all new closing costs associated with new mortgages and the veteran seller would avoid paying any discount points.
DISADVANTAGES
It may be difficult to find a knowledgeable lender willing to allow the first and second mortgage combination, even with VA approval. If the seller carries the second mortgage, which has often been the case, they would not receive as much cash proceeds, but would receive a monthly income.
It may be difficult to find a knowledgeable lender willing to allow the first and second mortgage combination, even with VA approval. If the seller carries the second mortgage, which has often been the case, they would not receive as much cash proceeds, but would receive a monthly income.
EXAMPLE
A veteran buyer would like to purchase a home valued at $224,000. He does not have $22,400 to make a conventional 10% down payment. VA lenders limit him to a maximum mortgage of $184,000. The seller agrees to carry a second mortgage of 30,000 to help the veteran purchase his property. The veteran obtains a VA insured first mortgage for $184,000 from a local lender and the seller agrees to provide a $30,000 second mortgage at the same interest rate as the first mortgage. The veteran agrees to put down $10,000 on the second mortgage as security that the seller will be paid as agreed. The veteran?s total down payment is only $10,000 or about 4% down. The VA would allow this arrangement as long as the house appraises for $224,000 and the vet is qualified for both mortgage payments.
A veteran buyer would like to purchase a home valued at $224,000. He does not have $22,400 to make a conventional 10% down payment. VA lenders limit him to a maximum mortgage of $184,000. The seller agrees to carry a second mortgage of 30,000 to help the veteran purchase his property. The veteran obtains a VA insured first mortgage for $184,000 from a local lender and the seller agrees to provide a $30,000 second mortgage at the same interest rate as the first mortgage. The veteran agrees to put down $10,000 on the second mortgage as security that the seller will be paid as agreed. The veteran?s total down payment is only $10,000 or about 4% down. The VA would allow this arrangement as long as the house appraises for $224,000 and the vet is qualified for both mortgage payments.
SALES PRICE OF HOME $224,000
VA FIRST MORTGAGE (INSURED) $184,000
SELLER SECOND MORTGAGE (UNINSURED) $30,000
DOWNPAYMENT TO SELLER $10,000
