Should I Make a Down Payment on My VA Loan?
VA loans come with numerous benefits for veterans, reservists and qualifying spouses. Not only can you qualify for a VA loan with competitive interest rates, but you can do so with lower closing costs than a traditional mortgage. The main selling point of VA loans, however, is that you can usually get 100% financing — a home loan with zero down. And, if you go that route, you don’t have to pay private mortgage insurance, or PMI. Instead, you’ll pay an upfront funding fee when you close on your loan.
With all these benefits on the table, you may be wondering why anyone wouldn’t get a VA loan with no money down if they were able to do so. But, just because you can get a VA loan with no down payment doesn’t mean you should. In this guide, we’ll go over the pros and cons, and offer information and background that can help you decide.
What you’ll learn:
- Get into a home now instead of waiting to save up more money
- Maintain cash reserves
- Use your down payment on upgrades, furniture or repairs
- Reduced funding fee
- Build equity faster
- Save money each month and over the long haul
- Strengthen your mortgage application
- Buy a manufactured home
- Buy a home that costs more than VA loan limits in your county
Perks of a VA loan with no down payment
Dreaming of a new home with no money down? A VA loan could be the answer you’re looking for, provided you’re a veteran, reservist, member of the National Guard or qualifying spouse who is eligible for a VA loan benefit. If you plan to apply for a VA loan and buy a home with no down payment, here are some of the benefits you can look forward to.
Get into a home now instead of waiting to save up more money
One of the biggest benefits of getting into a home with no money down is the fact that you won’t have to wait to save up the money for a down payment. This can be crucial if you’ve already found a home you want to buy and don’t have time to save up, but it can also be a boon to your finances if your income is low enough that it affects your ability to save.
While there are many costs involved in owning a home, being able to purchase now can also allow you to stop throwing money at rent and start building equity.
Also note that there are lots of ways to use a VA loan other than buying an existing single-family home. You can use a VA loan to build a home or purchase a condo in a VA-approved unit, for example. You can even use a VA loan to finance a qualifying multifamily unit. Finally, you can use a VA loan to refinance a home loan you already own in order to secure a lower interest rate. Either way, all of these options may be available to you now with no down payment.
Maintain cash reserves
Maybe you have money for a down payment saved up but aren’t sure you want to pour it into a home just yet. There are plenty of reasons to maintain your cash reserves instead of using them for a down payment, including maintaining a fund for emergencies in the case of job loss or an unexpected medical scare.
It’s also important to note that, while you aren’t required to put any money down with a VA loan, there’s nothing stopping you from using cash reserves to pay off your mortgage faster later on. VA loans don’t have any prepayment penalties, so you can always make a lump-sum payment to your mortgage when you’re ready.
Use your down payment on upgrades, furniture or repairs
It’s also possible you have a down payment saved up but need it to cover some of the essential (and nonessential) costs of acquiring a home to live in. Maybe you want to replace some unattractive flooring or outdated appliances in your new home before you move in. Or perhaps you need to buy furniture, make important repairs or replace pricey components of your home, such as a roof or HVAC system.
In any of those cases, taking out a VA loan with no money down allows you to use any cash you have to make improvements to your new property before you move in.
Reasons to make a down payment on a VA loan
The benefits above can make it seem like zero money down VA loans are the way to go, but this issue isn’t cut and dry. There are important reasons to consider making a down payment on your VA loan if you can afford to do so, including some that can improve your financial picture over the long haul.
Reduced funding fee
While VA loans don’t require private mortgage insurance, also known as PMI, they do require an upfront funding fee that depends on how much you borrow. This fee varies between 1.25% and 3.3% of the home loan amount depending on your veteran status, whether it’s your first time using a VA loan, the size of your down payment and whether you’re purchasing a home or refinancing.
Because the funding fee is charged as a percentage of your loan amount (and not the price of the home), however, your funding fee will be reduced commensurate with the amount of money you put down on your home. In other words, a bigger down payment leads to a smaller funding fee, and that means lower acquisition costs for you.
Build equity faster
While making a down payment on your home with a VA loan will require an upfront out-of-pocket cost, this cost is different than the funding fee you pay since it reduces your home loan amount and helps build equity faster. Consider making a down payment if you would like to have some instant equity in your home or get on the fast track to building equity.
Save money each month and over the long haul
Making a down payment on your home means that you’ll be able to take out a smaller mortgage. Since your housing payment is determined by your loan amount and interest rate, this also means you will have a smaller monthly payment to make each month.
In addition to a lower monthly payment, you will also save money through incremental interest savings over time. These savings come about when your mortgage amount is reduced by making a down payment. And the bigger your down payment, the more interest savings you’ll accrue.
Imagine for a moment that you plan to use a VA loan to purchase a $200,000 home with a fixed APR of 4.625% for 30 years. Without a down payment, you would pay $1,028.28 per month in principal and interest and a total of $170,180.45 in interest over the course of your 30-year loan.
If you were able to make a $20,000 down payment, on the other hand, you would reduce your loan amount fo $180,000, slash your monthly payment to $925.45 (including principal and interest) and lower your total interest costs to $153,162.41.
Strengthen your mortgage application
While the VA doesn’t enact strict credit score requirements, private lenders who make VA loans will have their own requirements for approval. Typical lender overlay requirements could include a minimum credit score for approval, a maximum debt-to-income ratio, property restrictions and even a minimum loan amount. In any case, a down payment will always make your loan application stronger and more likely to be approved.
You can also use all or part of your down payment as “earnest money” — a type of deposit you make with the seller when you write an offer on a home. Earnest money shows sellers that you’re serious about the purchase, which could be helpful in a competitive sale where there is more than one offer.
Buy a manufactured home
If you plan to use your VA loan for a manufactured home, you will probably need to put down at least 5%. Also note that the terms for manufactured homes are slightly different because you can only get a VA loan for 15 to 25 years instead of for up to 30 years.
Buy a home that costs more than VA loan limits in your county
While the VA doesn’t set limits on how much home you can buy, it does set limits on the size of the loan you can take out. It bases its limits on the Federal Housing Finance Agency’s guidelines for conforming loan limits, which vary depending on where you live and local housing prices. For the most part, families are able to borrow up to $484,350 with no money down for a single-family home, although limits are higher in some areas with a high cost of living.
Keep in mind, however, that these limits dictate the amount of money you can borrow only with no money down. You can purchase a home that costs more than VA loan limits entail, but you’ll be required to come up with a down payment that is typically equal to 25% of the difference. If, for example, you want to use a VA loan to purchase a home that is $584,350 and the loan limit in your county is $484,350, you would need to come up with 25% of 100,000, or $25,000.
VA loans come with myriad benefits that can help you save money and get into a home sooner, and it’s nice to know you can make a down payment — or not — depending on your situation. Before you decide, consider all the pros and cons ,and the best way to allocate any extra funds you have.
While you can take out a VA loan without a down payment, only you can decide whether you should.