VA loans exist only because the federal government wanted to help veterans purchase homes after they helped win World War II. The idea was to put veterans on equal footing with their peers who had been able to work and save money during the war years.
VA loans have several benefits that civilian mortgages do not. The primary benefit for many veterans is that VA loans do not require a down payment – which is one of the main challenges first-time home buyers face. A down payment is a measure of a prospective home buyer’s financial responsibility and gives the buyer a financial stake in the home.
In a VA loan, financial responsibility and investment are provided by the federal government, which guarantees VA mortgages. In most VA loans, that guarantee takes the place of a down payment in traditional mortgages.
There are other costs associated with applying for and processing a VA loan. Most significant is the VA funding fee, which goes toward future VA loans. The funding fee can be as much as 2.3% of the total amount of the loan.
Do VA Loans Require a Down Payment?
In the vast majority of cases, the answer is no.
There are exceptions, however. In a couple of scenarios, a down payment is required. And then there is the slightly different question of whether a borrower may choose to make a down payment when obtaining a VA loan. Altogether, there are several ways a VA loan can include a down payment.
Why Don’t VA Loans Require a Down Payment?
A VA loan is guaranteed by the United States government, a fact that gives lenders an enormous amount of protection from the risk of default by the borrower. Because a down payment is merely a way to show your personal commitment to the loan, that becomes unnecessary when the government is making that commitment.
The government’s role protects the lender and provides a significant benefit to the borrower, who in this case is a U.S. veteran or servicemember.
Should You Make a Down Payment on VA Loans?
Even if a down payment is not required, in some situations choosing to make one is financially advantageous. To make that choice, it is of course helpful to have the money on hand for the initial outlay.
A down payment can reduce the cost of the VA funding fee required at closing. Instead of paying the full funding fee, the down payment goes toward your equity in the home. That is one significant benefit to choosing to make a down payment.
At the same time, there are situations in which a down payment is not the smartest choice, even if the funds are available.
Pros of Making a VA Loan Down Payment
The lack of a down payment requirement is one of the chief benefits of a VA loan, so there is no shame in taking advantage of that. There are, however, reasons to choose to make a down payment.
- A down payment reduces the amount of the VA funding fee. The standard funding fee, with zero down payment, is 2.3% of the total loan amount. On a $200,000 home, that would mean $4,600 due at closing. But with a down payment above 10% of the cost, the funding fee drops to 1.4%. That means shifting $2,600 from the funding fee to your equity in the home.
- A down payment lowers the amount of money being borrowed, which in turn reduces the monthly payments over the life of the mortgage. This could result in immediate savings every month and thousands in savings over time.
- A down payment creates immediate equity in the home. That means you have ownership of a percentage of your home. But there are practical benefits, as well. Equity gives you access to a home equity line of credit (HELOC) if you need cash quickly. Equity also protects you in the event your home loses value, which could lead to your owing more money than the house is worth.
- A down payment may make your offer on the house more attractive to its current owners. This could be crucial if the owner receives multiple offers. A down payment is a sign of seriousness and commitment. The down payment also improves your chances of being approved by the lender in the event the VA loan process does not come through.
Cons of Making a VA Loan Down Payment
While there are advantages to making a down payment on a VA loan, there are compelling reasons not to.
- Being able to buy a home without making a down payment is considered one of the primary benefits of a VA loan. And saving enough money for a down payment is one of the main hurdles for first-time home buyers to clear. There is value in the opportunity to avoid that hurdle, and that should give any home buyer pause.
- Saving for a down payment could mean waiting to buy a house, which delays a significant life goal. Buying your home should be part of an overall approach to financial planning.
- It can actually cost you money beyond the down payment. If you wait to save money for a down payment, mortgage rates could rise significantly. And that could raise your monthly payment over the life of the loan.
- There are advantages to building equity in your home, but there are disadvantages, too. The money for a down payment could come in handy for home repairs or improvements once you’re in your new home, or it could get you through an unexpected emergency like a health issue or loss of a job.
Situations Where a Down Payment Is Required on a VA Loan
It is important to make an informed choice about down payments on VA loans, but what if you don’t have a choice? There are a couple of circumstances in which a down payment is required for a VA loan.
- If the home is appraised at a lower value than the sale price, you may rethink the purchase entirely. If you decide to go ahead with the purchase, you will have to make a down payment to cover the difference between the sale price and the appraisal. If you bid $400,000 and the appraisal comes in at $380,000, you would need a down payment of $20,000 to proceed with the sale.
- You are entitled to full VA loan benefits if: you have never used a VA loan benefit; you paid off a previous VA loan in full and sold the property involved; you used the benefit and had a foreclosure or short sale and repaid the VA in full. The VA eliminated loan limits for veterans, servicemembers and surviving spouses.
About The Author
Phil Sheridan writes about military benefits for Military Money. Phil spent over 30 years learning about labor negotiations, salary caps, stadium negotiations and a lot of other finance-related matters as a reporter and columnist for the Philadelphia Inquirer and ESPN.
- Mul, Christine (2023, April 24) What is a VA loan and should I apply for one? Retrieved from https://www.cnbc.com/select/what-is-a-va-home-loan/
- Lambrecht Black, Michelle (2023, May 23) What Is a VA Loan Down Payment? Retrieved from https://www.sacbee.com/finance/article269341202.html
- Trout, Jonathan (2023, March 9) 5 Advantages of Making a Down Payment on a VA Loan Retrieved from https://www.retirementliving.com/5-advantages-of-making-a-down-payment-on-a-va-loan