June 29, 2008

Triple Zero Heaven For VA Buyers

June 29, 2008

Dear Dave: My wife and I have been living on base at Elmendorf and were told we could buy a condo in Anchorage without needing any cash upfront. What is this “Triple Zero Down” business all about?

Answer: Military personnel are in a unique position in the mortgage hunting field. Your VA eligibility is a Federal Guarantee to any mortgage lender who helps you buy a home. This is why you become the only borrower in town who can purchase a home with a zero downpayment.

Homebuyers using FHA or Conventional financing cannot obtain a mortgage loan without bringing a minimum 3% for FHA, or 5% for Conventional, of the Sales Price in real hard cash. Not only is there a downpayment to consider but also closing costs and reserves for property taxes and hazard insurance on the home.

Closing costs and reserves are somewhat negotiable between Buyer and Seller but a non-military buyer will be stuck with coughing up cash. However, the Veterans Administration (VA), being a Federal government institution, can make its own rules and, besides the zero down guarantee, it permits the VA borrower to evade closing costs (the second zero) and reserves (the third zero) if the Seller is willing to help.

A Triple Zero transaction occurs when you can negotiate with a seller, by Federal permission, to pay absolutely all and every closing cost that may show up on your settlement statement. This, of course, can amount to anything from $4,000 on a $150,000 Condo to 8, 9 or 10 thousand dollars on a $300,000+ Single Family Residence.

2008 is Triple Zero Heaven for VA buyers. Why? – Because sellers outnumber buyers in the market place and the valuation trend for real property is on a decline.

If you are bidding on a $180,000 condo, you can offer full price and ask for $5,000 back to cover your closing costs and reserves. This results in triple zero down for you. You will need no cash whatsoever to buy the condo and, remember, your first monthly payment will not fall due until a minimum of 30 days after you move in!

Why do I mention the valuation trend? – Because this is also critical to facilitate your triple zero down. When the market is on the rise, the triple zero deal is tougher to negotiate. Sellers may still want full price for the $180,000 condo and only be willing to contribute your $5,000 of closing costs and reserves by ‘adding’ it to the purchase price – i.e. the price becomes $185,000. This kind of transaction, where the purchase price is ‘bumped’ to cover you expenses, can work provided the Appraisal comes in at $185,000.

Here lies the triple zero problem in a rising market. Comparable sales used by the appraiser from the previous 3 months are trailing the market and, indeed, you are needing an appraisal ‘above’ the market! Unless the Appraiser can be persuaded to value the property at $185,000, your Triple Zero cannot work.

In a declining value trend, however, ‘comps’ abound to support price and you may well be able to negotiate the closing costs and reserves ‘out of’ the purchase price instead of an ‘add -on’ to the price. Hence, the Appraisal issue goes away.

Any reader with VA eligibility should go for it in 2008. It’s triple zero heaven, and the angels don’t come flying your way every year!

Dear Dave: This is a ‘sort-of’ real estate question. The families on our cul-de-sac let their kids use the road as a playground. I nearly ran over one the other day. Shouldn’t parents keep their children on their own real estate?

Answer: You would be surprised how many people have asked me about this in 2008. Some families even block traffic with ‘Children at Play’ signs. Now, this is a controversial subject, depending on which family you are.

However, the law is clear. Under Anchorage Municipal Code (9.20.080) no persons, child or adult, should be on the roadway. Roads are for traffic – period. I asked a senior Municipal administration official about this issue recently and he said, “You  just can’t legislate for people’s stupidity”.

It is unwise, to say the least, for parents to let their 3 year old child play on the road unsupervised. By law, it is not permitted. Anchorage Police Department enforce the law and may be called and asked to enforce it (AMC 9.08.010.A). Educating parents is even more difficult than educating children. Have the courage to politely raise your concern with the parents on your street before taking stronger action.

Dear Dave: Since we arrived at Elmendorf last year we have been trying to decide whether to buy a house or keep renting. We want to go ahead now, using our VA, and buy a house since we will be staying in Alaska for the foreseeable future. How much can we spend?

Answer: Provided you qualify, VA will allow you a maximum loan amount of $625,250. VA financing requires that your total monthly debts plus your mortgage payment not exceed 41% of your gross pay (including all your allowances). If you are mathematically inclined, you can calculate your own allowable mortgage payment and extrapolate your maximum purchase price, but far better to visit one of the many fine lending institutions in Anchorage for prequalification.

Keep in mind that, as a rule of thumb, it is difficult to break even when you sell unless you expect to be in Alaska at least 3 years.