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VA home loans come with a long list of perks for military service members, veterans and eligible spouses: no need to pay mortgage insurance, some of the most competitive interest rates and the ability to close on a home without making a down payment, in most cases. However, some buyers still opt to make down payments on VA loans, which goes a step beyond the requirements for the loan.
Why would someone make a down payment on a VA loan? Putting money down upfront can lower other costs and save some cash in the long run. If you’re thinking about a VA loan down payment, understand all the advantages and disadvantages for your finances.
Do VA loans require a down payment?
No. One of the biggest selling points of a home loan backed by the U.S. Department of Veterans Affairs (VA) is the lack of a down payment requirement. While buyers with conventional and FHA-backed loans need to come up with a percentage of the purchase price — some aim for as much as 20 percent of the loan to avoid mortgage insurance — those with VA loans have a much easier number to hit: zero.
It’s important to note that there are some rare exceptions to this rule. If the sales price of a property is higher than its appraised value, you’ll have to make a down payment. For example, if you make a $400,000 offer to buy a home and an appraiser determines it is only worth $380,000, you’ll need to come up with a down payment to cover the gap. If you don’t have full entitlement, you might be subject to VA loan limits and need to contribute a down payment.
Pros of making a VA loan down payment
Even if you don’t have to make a down payment, you might still be asking yourself a big question: Should I put money down on a VA loan? There are plenty of reasons why it still makes sense:
Pay a lower funding fee
The funding fee is a critical part of the VA home loan program, helping to lower the cost to taxpayers. If you make a down payment, you’ll pay a lower fee.
Let’s say you’re a first-time homebuyer planning to take out a loan for $340,000. With no down payment (or a down payment of less than 5 percent), the funding fee would be 2.3 percent of that amount, for a total of $7,820. If you were to make a down payment between 5 percent and 10 percent, that fee would shrink to 1.65 percent, or $5,610. If you were to make a down payment greater than 10 percent, the funding fee would drop to the lowest available rate of 1.4 percent, or $4,760.
If this isn’t your first time using the VA loan benefit, there’s an even bigger incentive to make a down payment: The VA funding fee jumps to 3.6 percent after the first use.
Save on monthly payments
In addition to lowering the one-time funding fee, making a down payment can make a difference every time you receive your monthly mortgage bill: Since you’re borrowing less money, you’ll likely have a lower payment. Plus, 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. Use Bankrate’s VA home loan calculator to estimate your monthly payments.
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 you might owe more on your mortgage than the property’s worth. If you need to move and can’t make enough on the sale to pay off the loan, you could be in financial trouble.
Also, 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 (HELOC). 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 hot housing market might 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. It’s important to note that a lot of homes are receiving more than one offer in this hot housing market. In fact, recent data from the National Association of Realtors shows that the average home is receiving nearly five offers.
Also, your VA loan application won’t automatically be approved. 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 (DTI) ratio.
Cons of making a down payment on a VA loan
While making a down payment on a VA loan can help save you money and get you closer to getting the home you want, there are some drawbacks, too. Be sure you consider these cons before saving up your cash:
You might have to wait
If you need a few extra months to save up enough money for a down payment before you can buy a home, you’re wasting precious time — with rates rising, you could end up with a much more expensive mortgage the longer you hold off. Moving right away and putting zero down means you don’t have to rent any longer and can start building equity immediately with lower borrowing costs.
You could drain your emergency fund
Perhaps you have enough cash reserves for a down payment but using it will put your bank account in dangerously low territory. 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.
You might need the money to fix up your new place
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.
You might 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 as to whether you should make a VA loan down payment ultimately comes down to 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. Take a close look at your budget to understand what your payments will look like with and without a down payment, and use Bankrate’s home affordability calculator to get a clearer picture of how much you can spend on a home.