VA Loan Down Payment Requirements
May 10, 2023 6-Minute Read
Author: Dan Rafter
When you’re ready to buy a home, you can choose from several types of home loans. But if you qualify for one, a VA loan is a smart choice. Why? These loans, available to current and former members of the U.S. military, don’t require a down payment, something that can make saving enough money for a home an easier task.
What Is A VA Loan?
A VA loan is a type of government loan backed by the U.S. Department of Veterans Affairs. Not everyone qualifies for these loans. You'll need to be an active-duty member or veteran of the U.S. military, National Guard or Reserve. You might also qualify for a VA loan if you are the unmarried widow of a service member. To apply for a VA loan, you’ll need to first obtain a Certificate of Eligibility from the Department of Veterans Affairs. To apply for this certificate, visit their eBenefits page. Most lenders will obtain the Certificate of Eligibility on your behalf with information you provide.
While VA loans are insured by the federal government, they are originated by private lenders. To take out a VA loan, then, you’ll apply with a private lender.
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Do VA Loans Require A Down Payment?
VA loans are attractive because they usually don’t require any down payment. This is an important benefit for home buyers who are short on cash. A down payment of 10% on a home costing $240,000 comes out to $24,000. That’s a lot of money for buyers to scrape together.
Be aware, though, that you can make a down payment with a VA loan if you’d like. By doing so, you can lower your VA funding fee, a one-time payment that applicants make when taking out a VA loan. This fee varies depending on the size of your down payment – it will be higher if you don’t put any money down – and whether you are taking out a VA loan for a first or subsequent time.
There’s another financial benefit of taking out a VA loan: You won’t have to pay for private mortgage insurance (PMI). This is insurance that protects your lender in case you stop making payments on your loan. This fee varies, but it can cost 0.1% – 2% of your loan amount each year until you build up enough equity in your home to remove this charge. With a VA loan you’ll never have to pay for this insurance.
Why VA Loans Require No Down Payment
There’s a reason why VA loans don’t require down payments. The federal government insures a portion of every VA loan that private lenders close. If you don’t make your payments, the government pays your lender back for at least a portion of its loss.
This is a type of safety net that offers the lenders who originate VA loans financial protection. With a conventional mortgage loan, one not insured by a government agency, this safety net disappears.
That’s why lenders typically require that borrowers come up with a down payment when they apply for conventional loans.
Why Should You Make A Down Payment For Your VA Loan When It Isn’t Required?
Just because you don’t have to make a down payment when applying for a VA loan doesn’t mean that you shouldn’t. There are times when making a down payment on these loans makes financial sense.
Lowers The VA Funding Fee
When you take out a VA loan, you'll have to pay a one-time fee known as the VA funding fee. This fee varies, largely depending on the size of your down payment. The larger your down payment, the lower your VA funding fee.
If you are taking out a VA loan for the first time, and your down payment is less than 5%, your VA funding fee will be 2.15% of your home's final purchase price. That comes out to $4,300 for a home costing $200,000.
If your down payment is 5% or more, your VA funding fee will be 1.5% of your home's purchase price. For that same home costing $200,000, then, your funding fee will be $3,000. If you come up with a down payment of 10% or more, your VA funding fee will be 1.25% of your home's final purchase price, or $2,500 on a home costing $200,000.
Cuts The Cost Of Monthly Payments
Coming up with a down payment can also lower your monthly mortgage payments. First, you’ll be borrowing less money. If you buy a home for $200,000 and you put down $10,000, you’ll only be borrowing $190,000, which will result in slightly smaller mortgage payments than if you were borrowing $200,000.
You’ll usually qualify for a lower interest rate, too, if you come up with at least some down payment. A lower interest rate means lower monthly payments.
A down payment can also help you build equity in your home. Equity is the difference between what you owe on your mortgage and what your home is currently worth. If your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 equity.
Coming up with a down payment immediately gives you equity. If you buy a home for $220,000 and come up with a down payment of $10,000, you now have $10,000 worth of equity before making any mortgage payment.
Equity is important. You can borrow against it to take out loans that you can use to pay for everything from home repairs to paying off credit card debt or paying for your children’s college tuition. The amount of equity you have when you sell your home also determines how much money you’ll walk away after closing the sale.
Reduces Principal Balance And Loan Costs
Making a down payment also reduces your loan’s principal balance, the amount you owe. If you buy a home for $200,000 and don’t make a down payment, your starting principal balance is $200,000. If you come up with a down payment of $5,000, your starting principal balance is a lower $195,000.
If your principal balance is lower, your loan closing costs can be lower, too. Closing costs are the fees that third-party providers – such as your lender, title insurer and real estate attorney – charge for the work they do in closing your loan.
Many of these charges are based on a percentage of your loan’s principal balance. The lower your principal balance, then, the lower your closing costs might be.
Increases Approval Chance
Coming up with a down payment could increase your chances of qualifying for a mortgage. Lenders consider you less likely to stop making your mortgage payments if you have already sunk some money in your home through a down payment. However, it’s important to remember that not making a down payment won’t scuttle your chances of qualifying for a VA loan. Most borrowers taking out these loans don’t make any down payment.
When Do VA Home Loans Require A Down Payment?
It’s less common, but there are times when borrowers do need a down payment when applying for a VA loan.
Once you make an offer on a home and the sellers accept it, your lender will send an appraiser to the home you are buying to determine its market value. If that market value is lower than the price you are paying to buy it, you might have to come up with extra cash at closing to make up this difference. Lenders won't lend you more mortgage dollars than what your home is currently deemed to be worth.
The money you provide to make up this difference isn't technically a down payment. But it is extra money you'll need to bring to closing.
VA Loan Limit
The Department of Veterans Affairs formerly placed limits on how large of a VA loan borrowers could take out. Starting in 2020, though, the department eliminated these limits for active-duty military personnel and veterans who have full VA loan entitlement. Loan limits, though, are still in place for borrowers who have earlier defaulted on a VA loan or those who are already paying down existing VA loans.
If you fall in one of these categories, you'll need to come up with a down payment if you want to take out a VA loan that is higher than your county's VA loan limit. You can find your county’s VA loan limits here.
VA Loan Entitlement
A VA loan entitlement represents the amount the Department of Veterans Affairs will guarantee on your VA loan. It's the maximum number of dollars that the VA will pay your lender if you stop making your mortgage payments and default on your loan.
As of 2020, borrowers with full VA loan entitlement aren't limited in how much they can borrow even if they put up no down payment. For these borrowers, the VA will pay lenders up to 25% of the loan amount if borrowers stop making payments.
Most veterans or active-duty members of the military will qualify for full entitlement if they've never taken out a VA loan before or if they've paid off a previous VA loan in full and sold the home that loan was used to buy.
If you only have partial entitlement – maybe you are still paying off an existing VA loan or you defaulted on a previous VA loan – you might be required to make a down payment on your new VA loan.
The Bottom Line
A VA loan is a popular choice for veterans and current military service members, largely because these loans don’t require down payments. If you are ready to move, and you’ve served in the military, this might be the smart choice for you.
If you’re financially ready for the responsibility of a monthly mortgage payment, it’s time to start the mortgage process.
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