VA Loan Down Payment: Is It Required?
VA home loans, which are backed by the Department of Veterans Affairs (VA), offer active and former members of the military and eligible surviving spouses the opportunity to purchase a home without making a down payment, purchasing mortgage insurance or meeting stringent qualification requirements.
However, while a VA loan down payment is not required, there could be several benefits to putting down some cash when making a home purchase. We’ll explore the trade-offs and benefits of each option when buying a home with a VA loan.
Do VA loans require a down payment?
No, a VA home loan does not require a down payment. For those who qualify for a VA loan, this could make homeownership much more accessible than it would be with other types of mortgages. For example, FHA loans, which are backed by the Federal Housing Administration (FHA), require borrowers to put down a minimum of 3.5% of the loan’s value. With conventional loans, lenders typically require a down payment of at least 3%.
Pros of making a down payment on a VA loan
Although there is no VA loan down payment requirement, you could benefit from putting down some cash on your home purchase. The benefits include saving money over the loan term and building home equity from the start.
Lower VA funding fee
For many VA loans, borrowers will need to pay a VA funding fee, which is a one-time payment that helps offset the cost of the loan for U.S. taxpayers. The VA funding fee is based on the type of loan and a percentage of the total loan amount. By making a down payment, you will reduce the total amount of the loan, which, in turn, will lower the percentage that you’ll pay in a funding fee.
| Down payment | First use | Second use |
|---|---|---|
| 0% to less than 5% | 2.3% | 3.6% |
| 5% to less than 10% | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
Smaller monthly payments
Borrowers who make a down payment will reduce the total loan amount and, therefore, lower their monthly payments. For example, if you purchase a $350,000 home with a 30-year fixed-rate mortgage that has a 7% interest rate and no down payment, your monthly payments would be $2,328.56 for principal and interest. By making a 5% down payment, you could reduce your monthly payments by more than $115.
| 0% down payment | 5% down payment | |
|---|---|---|
| Loan amount | $350,000 | $350,000 |
| Interest rate | 7% | 7% |
| Monthly payment (principal and interest) | $2,328.56 | $2,212.13 |
| Total interest | $488,281.14 | $463,867.09 |
This comparison shows a 30-year fixed-rate mortgage with and without a down payment of 5% and does not include taxes or insurance.
Build home equity faster
Home equity is the value of the home you own less the mortgage balance. For example, if you have a home valued at $250,000 and owe $100,000 on a VA mortgage, your home equity is $150,000. By making a down payment on your VA loan, you can start out with home equity. As you build equity, you can leverage it for other expenses. For instance, you could use your home equity to qualify for a home equity line of credit, which you can use for such expenses as college tuition, medical bills or home improvements.
Improved chances of loan approval
Although a VA loan doesn’t require a down payment, making a down payment could show you are serious about the purchase, potentially increasing your approval odds with the lender. This could be especially helpful if other financial factors aren’t as strong as you would like, such as your credit score or debt-to-income ratio.
Cons of making a down payment on a VA loan
While there are some key benefits to making a down payment on a VA loan, it’s not necessarily the best choice for every borrower. Not taking advantage of the VA loan benefit of no down payment requirement might leave you struggling with your finances if you don’t have sufficient cash on hand.
Exhaust cash reserves or emergency fund
Making a down payment could deplete your cash reserves or emergency fund, which could leave you in a tight spot if you need cash fast for an unexpected home repair or emergency situation. Trying to come up with these funds in short order could be extremely difficult, so it might be better to keep this money in the bank.
Not having funds for home repairs
It’s possible your new home may need a few tweaks before you move in, such as a new garage door or some new appliances. Having cash on hand means you can take care of these tasks right away instead of having to wait.
You may have to wait
If you plan to make a down payment, it may take you some time to save the money you need. If interest rates go up, you could end up paying more for the loan later than you would pay now without a down payment. In addition, if you wait to save up enough for a down payment, you could risk losing the home to another buyer in a competitive market.
When a down payment is required on a VA loan
While many borrowers are not required to make a VA loan down payment, there are a few exceptions. These include:
- If you are paying off another VA loan, you may have to make a down payment on the new VA loan.
- If you do not have full entitlement to your VA benefit, you could have to make a down payment.
If the VA appraisal is lower than the purchase price, you will likely need to make a down payment to cover the difference in values.