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4 Reasons to Make a VA Loan Down Payment

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VA home loans are backed by the U.S. Department of Veterans Affairs (VA) and help military service members, veterans and eligible spouses become homeowners. The VA loan down payment is 0%, meaning you can get 100% financing to buy a home.

Still, just because it’s not required in many cases doesn’t mean you shouldn’t consider putting some money down on a VA loan.

4 reasons to make a VA loan down payment

If your budget allows, making a VA loan down payment involves several benefits. Here are four key ones to consider:

You’ll build home equity faster

Making a down payment means you’ll start out with home equity, which is the difference between your home’s value and your outstanding mortgage balance. Essentially, equity represents the dollar amount you own in your home outright.

Once you build a sizable amount of equity, you can tap into it through a home equity loan, home equity line of credit (HELOC) or cash-out refinance to fund other financial goals.

You’ll pay a reduced VA funding fee

VA loans don’t require mortgage insurance, but there is an upfront fee to pay as part of your VA loan closing costs.

The VA funding fee varies between 0.5% and 3.6% of your loan amount, depending on your down payment amount, the loan’s purpose and whether you’re a first-time or repeat borrower. The fee offsets the VA loan program cost to taxpayers.

If you make at least a 5% down payment as a first-time homebuyer, your funding fee drops from 2.3% to 1.65% of your loan amount. If you put down 10% or more, your fee drops to 1.4%.

You’ll save money each month and over time

Deciding to make a VA loan down payment means you’ll have a smaller loan amount. This means you’ll have a lower monthly mortgage payment and total interest cost over the life of your loan.

Let’s look at an example, using LendingTree’s home loan calculator. We’ll compare the cost differences on a $250,000 home with a 30-year, fixed-rate mortgage at 0% down and 5% down.

0% down payment 5% down payment
Loan amount $250,000 $237,500
Interest rate 3% 3%
Monthly payment $1,054.01 $1,001.31
Total interest cost $129,443.63 $122,971.45

 

As the table shows, a 5% down payment could save you about $53 each month and more than $6,400 in interest over your repayment term.

You’ll be a more competitive buyer

Lenders care about minimizing their risk, and contributing a down payment toward your home purchase can help this cause. A down payment can strengthen your mortgage application and may even get you a slightly lower interest rate.

You can also use some of the funds you deposit toward overall closing costs for earnest money, which is an upfront deposit you pay when submitting an offer on a home. Earnest money shows sellers that you’re serious about the purchase, which might be helpful in a competitive market where homes get multiple offers.

NOTE: If you’re buying a manufactured home or don’t have a full VA loan entitlement available, you’re required to make a down payment.

0% down VA loan pros and cons

In many cases, VA loan guidelines don’t include a down payment requirement. Here are some benefits and drawbacks to a VA loan with 0% down.

Pros  Cons 
  You can buy a home sooner.   You won’t start out with equity.
  You’ll keep your mortgage reserves intact.   You’ll pay a higher VA funding fee.
  You can budget for other home-related expenses.   You’ll pay more in principal and interest over time.

Pros

You can buy a home sooner. It can take years to save up tens of thousands for a mortgage down payment. One of the biggest benefits of buying a home with no money down is that you can become a homeowner much sooner. This may be crucial if you’ve already found a home you want to buy and don’t have time to save up. While there are many costs involved in owning a home, being able to purchase now can also allow you to build your own equity instead of a landlord’s wealth.

You’ll keep your cash reserves intact. There are plenty of reasons to maintain your cash reserves instead of using a majority of those funds for a down payment. One reason? Maintaining an emergency fund. 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 some of your reserves to pay off your loan faster.

You can budget for other home-related expenses. Maybe you want to replace the floors or upgrade the appliances in your new home before moving in. Or perhaps you need to buy furniture or make important repairs. Taking out a VA loan with no money down allows you to use your available cash to cover these items and other necessities.

Cons

You won’t start out with equity. Choosing a zero-down-payment VA home loan means your lender is financing 100% of your purchase. This also means it will take you a longer time to build equity and own your home outright.

You’ll pay a higher VA funding fee. VA borrowers who don’t put any money down at the closing table will have a higher upfront VA funding fee. If you’re a first-timer, the fee is 2.3% of your loan amount. On a $250,000 loan, that’s a $5,750 fee, on top of your other closing costs.

You’ll pay more in principal and interest over time. Since you’re borrowing the maximum and not putting any money down, you’ll have a larger loan amount. This larger loan balance translates to a higher monthly payment and increased interest costs over your loan’s lifetime.

Do I qualify for a VA loan?

VA lenders expect prospective borrowers to meet the following general qualifications:

  • A 620 credit score, though you may qualify with a lower score.
  • A maximum 41% debt-to-income ratio, which is calculated by dividing your total monthly debt payments — including your new mortgage payment — by your gross monthly income.
  • Enough residual income that meets requirements for your family size.

You’ll also need a certificate of eligibility (COE), which indicates that you qualify for a VA loan and includes information about your entitlement amount. Check out LendingTree’s guide on VA loan requirements for more details.

 

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