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Is a VA loan during residency without a down payment a bad idea?

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  • Is a VA loan during residency without a down payment a bad idea?

    Here's my dilemma:

    I am currently facing the decision to purchase a house while in residency. I am leaving the military after four years as a GMO and entering a residency in a PGY-2 slot. I was foolish enough to not save enough cash for a down payment on a home loan, and I realize that now. However-

    1. I paid into the Montgomery GI bill to the tune of $1800.00, so I am entitled to $1789.00 monthly to be deposited directly into my checking account for a total of 36 months, then another 12 months of income from the post 9/11 GI bill all for living expenses while enrolled in post graduate training. This equates to at least $64,404.00.

    2. As a Veteran, I qualify for a VA loan with no down payment, and the rates are around 3.6-3.75% at the moment. My credit score is very good because I've continued to pay on student loans for the duration of my AD service.

    3. I am looking at homes in my residency area that cost between 90-100k, and the monthly payment for one of these homes with a 15 year mortgage will be around $800.00.

    4. I am very tempted to buy an inexpensive home and make monthly payments from my 52k resident's salary (4300/mo before taxes, etc), then pay $1789 directly to the principle on the mortgage each month, thus building equity in the home quickly.

    Admittedly, this approach is in direct opposition to the 20% down payment rule, even though I can afford a 15 year mortgage. Additionally, I will be moving to a relatively small town and I'm not certain that I'd be able to turn around and sell a home quickly once we're done with residency, and I plan to continue on to a fellowship. We could feasibly convert the home to a rental property, especially since the hospital has three new residency programs, and I may be able to rent to incoming residents or even college students at the local university. I just don't feel comfortable about not having a down payment. We've also considered renting, but rental costs are going to be higher (around $1200/mo) and I also don't like the idea of the GI bill payment going into another person's pocket when it could be used to generate equity. If you were in this situation, what would you do?

  • #2
    I would rent.  As a PGY-2 you are probably halfway through residency?  The costs of buying and selling are easily going to eat up 10% of the value of a home and you would likely need to be there longer to overcome the cost.  If you buy a 100k home then think about it as 10k in costs round trip.  Even at $1200 a month $10k would cover almost 8 months of rent.  Add another 3.6% of ~100,000 for the interest from the first year and you have 3 more months of 11 months rent paid for.  Add on anything that you have to repair because you own the property and I'd say you've almost hit a year of rent in costs before you consider property taxes/insurance.  All of this is before you get to the real problem of selling the house on the backend.

    If you are concerned about your GI bill money going to someone else's pocket then consider that a good sum of it will go elsewhere no matter what you do.

    I've heard enough rental home nightmares to advise against running a low end rental, especially if you are planning to move far away.

    I don't think the question here is "can" you afford to buy a home but "should" you buy a home...I think you shouldn't.

    The flexibility at the end of residency to turn your key in and leave town should not be underestimated.


    • #3
      Thanks for responding! Starting the PGY-2 year, in my case, means approximately another 2.5 years in residency, then a move for a 1 year fellowship.


      • #4
        Rent. Houses in cheap areas like that just arent worth it. They can just build new ones and people will prefer those. You dont want the hassle or maintenance during residency either, especially having to leave so soon after. Agree about transaction costs.

        Just take that money and build up your emergency fund, 401k, taxable account, etc...Then think about buying a house a couple years into your real job.