VA home loans, insured by the Veterans Administration, offer a 100% financing option (with a 2-3.3% surcharge, AKA a 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 San Diego, 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:
Escrow and Title Fees: $1800
Prepaid Items: $2925
TOTAL CLOSING COSTS $9050
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 fifty bucks.
