You don’t have to make a down payment on a VA loan. Should you anyway?

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One of the main draws of getting a mortgage from the Department of Veterans Affairs is that borrowers don’t need to make a down payment. A VA loan opens the doors for active-duty service members, veterans, surviving spouses and other VA-eligible buyers to the path of homeownership.

Although there’s no requirement for a VA loan down payment, it doesn’t mean that borrowers should always put zero down. Some of the financial benefits of making a down payment include a lower VA funding fee, more affordable monthly mortgage payments and strengthening your loan application.

Even with these advantages, does it make sense for you to put money down if you don’t have to?

The answer depends on your homeownership experience, cash position and other financial considerations. Here are some of the pros and cons of making a down payment for a VA loan.

Pros of making a VA loan down payment

Here are a few reasons it makes sense to put a down payment on your VA loan.

Pay a lower funding fee

A funding fee helps to keep the VA program self-sustaining, which encourages lenders to offer VA loans with easier qualifying guidelines and lower rates. Borrowers typically roll the funding fee into their loan — although it can be paid upfront at closing.

With some exceptions (such as those who have a service-connected disability), borrowers need to pay 1.4 percent to 2.3 percent of the loan amount if with no down payment for a first-time homebuyer and 3.6 percent for second-time buyers.

Save on monthly payments

A down payment could result in a lower monthly monthly mortgage payment since you’re borrowing less money. In addition, you’ll save money by paying less interest throughout the lifetime of your loan. The larger your down payment, the more you could save on interest.

Build equity quicker

Making a down payment means you’ll have instant home equity, which means you’ll owe less on your home than it’s worth. Without one, your property could be “upside down,” meaning if it loses value due to market conditions you may owe more on your mortgage than the property’s market value. If you need to move and can’t make enough on the sale to pay off the loan, you could be in financial trouble.

Plus, building equity faster means you can tap into it if the need arises by taking out a home equity loan or home equity line of credit. These types of secured loans, which use your home as collateral, can cost less, saving you money when you need cash for major home upgrades or repairs.

Become more competitive in the market

Borrowers who live in a competitive housing market can find that putting down some money upfront shows that you’re a more serious buyer. Some of your funds could be put down as earnest money — cash you have in escrow to show the seller you want to purchase the home. It could make you more competitive, especially when there’s been more than one offer.

Private lenders who offer VA loans each have their own underwriting requirements. While there aren’t strict requirements for credit scores, you might want to make a down payment to strengthen your application and chances for approval. Making a down payment could also improve other factors lenders look at, such as your maximum debt-to-income ratio.

Cons of putting down a down payment

Sometimes it makes little sense to make a down payment. For one, you’ll need to wait until you save up enough money for one before you can buy a home. Moving right away and putting zero down means you don’t have to rent any longer and can start building equity immediately.

Perhaps you have enough cash reserves for a down payment but want to keep it in case of emergencies. Rather than tying your money up in a home, it’s probably a better idea to maintain this cash reserve in case of unforeseen circumstances and financial emergencies like a job loss or other large expenses.

Having cash reserves on hand also helps to pay for related costs of home purchases. Maybe you found a home in a neighborhood you love but it needs a new HVAC system, or you want to purchase new furniture. In cases like these, freeing up cash flow can be a smart choice.

Besides, VA loans don’t have prepayment penalties — you can always make a large lump-sum payment later on once you have adequate cash reserves for emergencies.

You may not have a choice on down payment

There are a few situations where you must make a down payment. If the home you want to buy appraises for less than your purchase price, then you must put up cash. Or if the purchase price is more than the VA loan limits in your county, you’ll also need to make a down payment before the VA will guarantee your loan.

Otherwise, you’ll need to back out of your purchase.

How to make the best decision for your needs

The decision on whether you should make a VA loan down payment depends on your financial situation. If you can afford to do so, then making a down payment could save you thousands of dollars over the life of the loan. However, if putting money down towards your home comes at the expense of having an emergency fund or freeing up cash flow for moving-related expenses, then it’s better to wait or purchase the home without a down payment.