Hidden Dangers of VA Loans in Higher Inventory Markets

By JD Modrak and Lauryn Dempsey

1. Key Takeaways

Just because you can afford a home on paper doesn't mean it’s the right time to become a homeowner. Many VA buyers are stretching themselves thin, which has caused challenging, costly situations in today’s market shifts. VA Loans are powerful, but they also create potentially dangerous leverage. If you aren’t working with an experienced VA lender and Realtor, you could be putting yourself in a challenging financial position without fully understanding the risk you’re assuming.

Article Highlights:

• $0 down homebuying means you're highly leveraged. If you roll in closing costs, get a rate buy down from the seller, and/or incorporate VA funding fees into your loan your 100%-financed loan could be 10% more than the home is worth the day after closing. Your home could be ‘underwater’ for years to come, especially in a high inventory market where prices are holding steady and/or declining. Understanding your personal goals (kids, marriage, job, location) for the medium term (5 years) is a non-negotiable before deciding to buy.

• We’ve done a deep dive here to cover the mechanics of where we’ve seen VA buyers make mistakes and share stories to illuminate the consequences of not having the right strategy in place from the start.

2. 0% Down VA Loans come with material risks that aren’t immediately obvious

• VA loans are NOT free:

• At closing,  you spend ~2-5% in "sunk closing costs" - ie, money you never get back (taxes, fees, lender, insurance and VA Funding fees).

• Plus, it will likely cost 3-8% of the sales price to sell. Highly leveraged loans are better in “bull” markets (ie, the pandemic market):

• With 100% or more leverage, you need 3-4% home appreciation per year to break even if you plan to sell within 2-3 years after buying. 

• If the market flattens or drops, selling shortly after buying often means a BIG loss. For example, a $500,000 mortgage could result in a $25-75k loss or worse. 

• VA Funding fees create 'excess leverage'

• VA funding fee ranges 1.5% to 3.3% of the loan, which is typically rolled into the loan (you must pay this back if you sell!). This is a cost that can take years to make back in home value - it’s especially important to understand this in today’s higher inventory market.

• VA Loans can cause liquidity crunches:
  VA Loans do not require you to have much liquid savings after you buy and some people spend nearly every dollar they have: 

• One roof fix or an HVAC failure (every ~7 years in Florida) and you could be forced to use credit cards to make repairs or, even worse, miss mortgage payment(s)

• Ensure you have an emergency reserve fund (6 mo. min, 12+ mo. better), or family or friends who can support you in an emergency.

• If you need to depend on someone else to help with unexpected housing repairs, you should really ask yourself if now is the time to become a homeowner.

• A 401K is a terrible emergency reserve - you destroy serious long-term net worth by tapping into your 401k 

• The VA Loan’s overly generous DTI (debt-to-income) allowances stretch buyers thin:
  The VA doesn't use DTI calcs, it uses 'residual income'. A family of 4 can have ONLY $1,500 a month after mortgage, taxes and childcare and still be approved for that loan. 

• Ask yourself: How far does $1,500 get a family of 4 in a high inflation economy?

• As a result, the VA allows higher income buyers to obtain mortgages at 70% of their PRETAX income, which is risky unless you have extenuating circumstances such as:

• A spouse / partner not on the loan that works or plans to return to work

• A HIGHLY likely salary increase, or bonus structure 

• You have meaningful net worth cushion (10X+ annual income - this is rare) 

3. Work backwards to identify your needs, goals and budgetary considerations so you can identify a comfortable monthly housing budget. 

• Firmly trust what the next 3-5 years looks like for you and your family (if you have one). Think about everything from schools, to childcare, proximity to family support, to fun money, grocery shopping, and debt payoff.

• Run the numbers on your budget and account for future needs such as savings, big ticket events (marriage/wedding, childbirths, kids’ tuition).

• Ask yourself why you are buying a home. Are you buying because you want to buy? Or because you’ve evaluated your situation and determined it’s the right time to buy? 

• Consider alternatives:

• When in transition periods, like going from active duty to grad school, renting is often a better alternative due to today’s high rates. It provides flexibility and more affordable monthly costs. 

• One author loves buying multifamily during transitions because it provides flexibility - it likely isn’t a place you want to live forever, but it can be a good long-term investment. Side note: you may not want to use your VA loan in this type of situation. Ask us why.

• Living with family for a while isn’t ideal, but it can allow you to build savings and/or prevent you from going into debt while in transition. 

4. Pressure test your assumptions about Mortgage costs, and your income stability

• Your mortgage payment is NOT ‘set forever’

• Escrow adjustments HURT. For example, escrow increases in Florida have risen over 50% since 2020 according to HousingWire. Now, a $500k home purchased in 2020 costs $800/month more in just five years.

• Government spending has exploded in many places since Covid, and others are still catching up. Due to the increase in home values seen during the pandemic, property taxes have risen meaningfully. 

• Insurance costs have taken off nationally.

• Job stability can be outside your control with layoffs, AI and offshoring

• Private sector layoffs have been growing, and as they increase momentum, finding a new job gets increasingly difficult as well.

• Since Covid, and even before AI became mainstream, offshoring has been taking US jobs. AI and offshoring are making finding a job in the US harder today than ever before and the difficulty will likely only increase in the coming years.

• VA disability ratings are not necessarily guaranteed forever:

• Your VA rating may not be where it’s at forever given the political pressure to cut spending. Rating inflation is real - politicians don’t have to ‘get rid of the system’ to reduce your payments. For example, they could install income caps or re-assess Pact Act provisions.

• Fiscal reality and government jobs are at risk:

• Public sector jobs are no longer the guaranteed safe option, especially in a world where legislation almost always increases the Deficit further

5. Story time, a few examples of folks we have worked with where things went sideways in higher inventory markets:

A retiring veteran worked with Veterans United (side note: avoid this fairly problematic company) to purchase a home. He was told his VA funding fee would be waived if he applied for VA disability before closing. What his loan officer failed to explain was that he needed to be officially retired before closing for the waiver to apply. He closed while still on terminal leave, which meant no waiver - and a $30,000 funding fee added to the loan.

Three years later, he had to relocate for work. The market had shifted, and while he sold the home for more than he purchased it, the large funding fee had eaten into his equity. On top of that, repairs were needed for the buyer to move forward. He ended up bringing money to closing. Total loss: $30,000.

In another case, a veteran bought a condo in 2023 using a 2-1 temporary rate buy down. At closing, her loan balance was already higher than the purchase price. Three years later, her rate adjusted upward to the permanent rate, and she tried to refinance to a lower fixed rate. By then, condo values had dropped, leaving her with negative equity. Unable to refinance, she’s now stuck with an 8% rate while the market average is ~6.5%. Extra monthly cost: ~$500.

6. Next Steps: Align the stars before asking 'how much can I spend'

• Before buying:

• Work backwards from your income and savings rates to establish a mortgage budget. You will likely qualify for more than you want to spend so don’t rely on a lender’s preapproval letter to dictate your purchase price.

• Have 6 - 12+ months in an emergency fund or similar options

• Have 3+ year certainty in your career/ PCS planning. If you lack it and still want to buy, you should understand how much you could rent your home for before you buy it.

• Don't assume the market you're buying in will continue to go up in value. Instead, assume your timeline of ownership is 3+ years (ideally 5+ years), and test assumptions about your career and family needs against your purchase.

• Ask ‘what if’s’ like ‘what if I hate this new job?’ or ‘what if we need to move closer to family’. How could having a mortgage change that calculus? Should you take on the additional considerations owning a home could bring?

Lauryn Dempsey is a top real estate advisor in the Denver Metro area, delivering data-driven strategies, expert negotiation, and trusted guidance through complex transactions. A U.S. Naval Academy graduate who served for 10 years as a Surface Warfare Officer and later as a Public Affairs Officer, she applies the same discipline, precision, and mission-first mindset to helping clients achieve their real estate objectives. To contact Lauryn, visit www.lauryndempsey.com or call/text (720-740-1024)

JD Modrak is a Navy Veteran and VA and Multifamily-centric lender, based in Illinois but lending everywhere except NY. Using the VA loan to get started buying real estate 10 years ago changed his life, and he wants to help others do the same now, IF the situation makes sense based on their needs. To get in touch, book time, and see our other blogs at: https://www.bcgrealestategroup.com/blog