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VA Loan Down Payment

man wearing white uniform saluting
Photo by sydney Rae on Unsplash
Josh Rapaport
February 5, 2023

VA home loans for active-duty service members and qualifying veterans are backed by the U.S. Department of Veterans Affairs. They are meant to help military members, eligible spouses, and veterans purchase homes for their families.

These loans come with a long list of benefits, e.g., the ability to close on a home without having to pay a down payment, competitive interest rates, and no need to pay mortgage insurance.

However, some servicemen and women still choose to make a down payment.

In this case, the question becomes, why would someone choose to make a VA loan down payment? Well, it turns out that putting down a down payment can help you save some cash in the long run and lower other costs that come with buying a home.

Below is a detailed look at VA loan down payment requirements.

What Is a VA Loan?

Before answering the question, ‘does a VA loan require a down payment?’ We must first look at what it is and who backs it. All VA loans are funded by the U.S. Department of Veterans Affairs, as mentioned in the introduction.

According to Veterans United, the VA Home Loan has helped more than 24 million veterans fulfill their dream of owning a home. Additionally, first-time home buyers and existing homeowners with qualifying military experience are eligible to access its many benefits, which include a 0% down payment.

However, just because it’s not a requirement doesn’t mean you shouldn’t put down a VA loan down payment. To apply for this loan, you’ll first need to get a certificate of eligibility from the VA department. You can do this by visiting the VA eBenefits page.

Do VA Loans Require a Down Payment?

No! One of the biggest benefits offered by this loan is that it doesn’t need a down payment. While buyers with FHA-backed loans must raise a percentage of the purchase price, those using VA loans for the acquisition will typically have a much easier number to raise: zero.

It’s, however, important to notice that you may sometimes encounter some rare exceptions to these zero-down payment rules. For example, you’ll need to make a down payment if the selling price is higher than the appraisal value.

The same holds for those who don’t have full entitlement, as they’ll be subjected to VA loan limits, which require them to contribute towards the down payment.

Why VA Loans Don’t Require a Down Payment

The main reason why there’s no down payment required for VA loans is that the federal government insures a portion of every loan closed by District Lending. What this means is that if you’re unable to meet your obligations, the government will pay a portion of the losses.

It’s a safety net intended to provide financial protection for lenders who originate VA loans. The safety net disappears when applying for a mortgage loan that a government agency does not insure.

That’s why private lenders require that a borrower raises a down payment when applying for a conventional home mortgage loan. If such a borrower were to walk away from their monthly payments, they’d have at least paid the lender the money put down as the down payment.

Reasons Why You Need a VA-Backed Mortgage loan

The VA-backed-up mortgage loan has numerous advantages compared to conventional loans. Qualified applicants should consider applying for a VA mortgage loan due to several reasons, as outlined below:

  • VA loans have friendly terms compared to conforming mortgage loans offered by mortgage companies, banks, and credit unions
  • Applicants do not need any down payment if the sale price is below the appraised house value. A qualified appraiser determines the actual value of the property.
  • VA loans do not require private mortgage insurance or mortgage insurance premiums
    • Lenders require private mortgage insurance for protection if the borrower fails to pay the loan. It is a requirement in all conventional loans that require down payments of less than 20% of the property price.
    • The monthly insurance premium is a requirement by the Federal Housing Administration. It acts as a self-insurance for conforming loans to offer protection against losses in the future.
  • Qualified applicants can apply for loans that exceed the limits set by Freddie Mac and Fannie Mae in high-cost areas without making any down payment.
  • Unlike conventional loans, early payments do not attract any penalty
  • It has fewer closing costs, which most sellers pay

How does One Become Eligible for a VA-Backed Mortgage Loan?

Once you understand the benefits of VA loans, it is essential to check whether you or your spouse qualify for a VA loan. Veteran Affairs stipulates the requirements for one to qualify for the VA loan. These requirements include:

  • You qualify for a Certificate of Eligibility
  • You meet all the VA and lenders requirements, such as income, credit score, and other requirements
  • The property you intend to purchase should be your primary home

VA loans are strictly used to purchase your primary home. However, one can also use the money to:

  • Renovate or upgrade your existing home, such as installing solar heaters to make it more energy efficient
  • Buy a single-family home with less than four units. One of the units should serve as your primary home
  • Purchase a condo in a VA housing project
  • Build a new home

Why Should You Make a Down Payment for Your VA Loan When It Isn’t Required?

Although a down payment isn’t necessary when applying for a VA loan, some borrowers choose to put down one anyway. The following is a look at the reasons why some service men and women and their spouses opt to do so:

  1. It Reduces the One-Time VA Funding Fee

Borrowers taking out a VA loan must pay a one-time funding fee called the VA-funding fee. The fee will typically vary depending on how much you have put down as the down payment. As such, the higher your down payment, the lower the VA-funding fee.

For example, a first-time borrower who has made a down payment of less than 5% will end up paying a VA funding fee of around 2.3% of the home’s purchase price. This comes to around $4,600 for a home whose purchase price is $200,000.

If you put down a down payment of 5% or more, the rate charged for the VA funding fee will be 1.65% of the asking price. As such, the same home costing $200,000 will attract a VA funding fee of $3,300.

  1. Build equity faster

Putting down a down payment means you get to start out with home equity. This is the difference between the value of your home and the remaining mortgage balance. Home equity normally represents the dollar amount a homeowner owns in their home.

You can tap into this equity using a home equity loan to fund other goals after building a sizable amount. Other options include cash-out refinance and a home equity line of credit.

  1. Save on monthly payments

Besides lowering the one-time VA funding fee, putting down a down payment will make a difference every time your monthly mortgage bill gets mailed to you. The chances are that you’ll have reduced payments, considering you’re borrowing less money.

You also have a chance to pay reduced interest rates for the duration of this loan. Remember, the higher your down payment, the more money you’ll get to save on the interest paid on the VA loan.

  1. You’ll become a more competitive buyer

Private lenders are always interested in reducing their exposure. Making a down payment on your home purchase can significantly help their cause. The money you pay will strengthen the VA home mortgage application and may make you eligible for a slightly lower interest rate.

You can use some of the money you have put down as a deposit on the overall closing costs for earnest money. Earnest money refers to an upfront deposit that homebuyers make when submitting an offer on a home.

The deposit shows the seller that you’re serious about your offer, which can make all the difference when operating in a competitive environment. In such an environment, the seller will usually receive multiple offers and may have difficulty choosing one.

Downsides to Making a Down Payment on a VA Home Loan

As you have seen above, making a down payment on a home purchase loan from the VA can help in getting you closer to the home you want. It also enables you to save a significant amount of money. On the other hand, it does come with some drawbacks, such as:

  1. You may end up draining your emergency funds

While you may have enough cash to put down a down payment, using your cash reserves for this could put your bank account in dangerously low territory. Instead of tying it up, consider leaving it in place for unforeseen financial emergencies, such as unexpected expenses.

  1. You might have to wait longer than expected

You could end up wasting precious time as you dedicate the next coming months to saving up for a down payment. As the rates continue to rise, the chances are that you’ll end up paying for a more expensive mortgage than if you were to buy the home today.

Putting zero down and acting right now means you can begin building equity with low borrowing costs. It’s also a chance to stop renting altogether.

  1. Homeownership typically comes with additional costs

The down payment is only one of the many costs you’ll face as a homeowner. Therefore, consider setting aside some cash to make necessary home updates and pay off your moving expenses.

When Do VA Loans Require a Down Payment?

Though rare, there are instances when you may need to put down a down payment. Examples of such instances will normally include the following:

  • Purchase price

You must make a VA loan down payment if the asking price is higher than the valuation price. In this case, the money you pay will not be a down payment but will act as the additional costs needed to close the purchase.

  • VA loan limit

VA loan limits remain in place for borrowers who are currently servicing VA loans and those who may have defaulted on their repayments in the past. Borrowers who fall under any of the two categories must make a down payment on a home purchase.

Frequently Asked Questions

  • What is a VA loan?

It’s a loan backed by the U.S. Department of Veteran Affairs. The loan is for active-duty service men and women, their spouses, and eligible veterans interested in buying a home or making improvements to an existing one.

  • Do VA loans require a down payment?

No. VA loans don’t require a down payment, unlike the case with conventional loans. You may, however, have to pay one if you have ever defaulted on a loan or are currently servicing down a home loan.

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