Benefits of a VA Loan Down Payment (Even Though It’s Optional)

The VA home loan program enables you to buy a house with no down payment by financing 100% of the purchase price. This feature allows military members and veterans to become homeowners sooner rather than later by reducing the money they have to save. 

But there are some distinct benefits to making a VA loan down payment, even if you’re not required. It could lower your monthly payments, reduce your total interest costs, and make you more competitive in the real estate market. 

VA Loans Don’t Require a Down Payment, But… 

To reiterate, the Department of Veterans Affairs (VA) home loan program allows eligible military members and veterans to buy a house with a VA loan no down payment whatsoever. 

As it states on the VA.gov website: 

“You don’t need a down payment. None whatsoever. Most mortgage programs, such as FHA and conventional loans, require at least 3.5 percent to five percent down. That’s up to $12,500 on a $250,000 home purchase. With a VA loan, you can buy immediately, rather than years of saving for a down payment.” 

We emphasize this point to avoid confusion. Most borrowers who use this program can qualify for 100% financing, eliminating the need for an upfront investment. 

Even so, making a down payment on a VA loan could deliver some significant benefits: 

Benefit #1: A Lower VA Funding Fee

VA-guaranteed mortgage loans require a one-time funding fee, which helps sustain the program and reduce the burden on taxpayers. This funding fee can be paid upfront, at the closing, or financed into the loan and paid off over time. 

Most first-time VA loan borrowers have a funding fee of 2.5% of the loan amount. But if you were to make a down payment of 5% or more, your funding fee would drop to 1.5%. 

Borrowers who have used VA loans in the past also have to pay a funding fee in most cases. However, if the down payment is below 5%, it can be as high as 3.3%. In this case, putting down 5% or more would reduce the required funding fee to 1.5%. 

In both cases (first-time and repeat VA borrowers), a down payment of 10% or more would further reduce the funding fee to 1.25%. 

Benefit #2: Smaller Monthly Payments 

A VA home loan down payment reduces the total amount you borrow. The more money you invest out of your pocket, the less you have to borrow from a lender. This translates into lower monthly mortgage payments, freeing up cash for other expenses or savings goals. 

Let’s look at an example using some realistic numbers. 

In this example, two borrowers are purchasing a $300,000 home. All other parameters are the same, including a 6.5% interest rate on a 30-year fixed-rate VA loan. 

• Borrower #1 is financing 100% of the purchase price to avoid making a down payment, so the loan amount is $300,000. 
• Borrower #2 chooses to put down 5%, which reduces the base loan amount to $285,000 (instead of $300,000). 

In this example, borrower #1 would have a monthly payment of approximately $1,896. Borrower #2 would end up with a monthly payment of around $1,805 due to the smaller loan amount. 

By making a 5% down payment, borrower #2 will pay about $91 less per month than Borrower #1. 

A VA loan down payment calculator can help you see these variations.   
 
Entering the home price, loan amount, and down payment percentage can help you examine the implications for your monthly payments and total interest paid throughout the life of the loan. Even though VA loans frequently don’t require a down payment, experimenting with different down payment amounts can yield insightful results.  

Note that making a down payment is only one aspect to consider; you should also balance the advantages against your financial objectives and situation.   

Granted, not all VA loan home buyers can afford to make a down payment. And fortunately, they often don’t have to. However, for those home buyers with a little extra money in the bank, this becomes an important consideration, with pros and cons. 

Benefit #3: Stronger Offer in a Competitive Market 

In a competitive real estate market, where sellers get multiple competing offers, making a down payment on a VA loan could improve your chance for success. 

When sellers consider offers from home buyers with mortgage loans, they might prefer to see a down payment. It demonstrates the borrower’s financial capability. So, putting some money down on your VA loan home purchase could make your offer more attractive to sellers. 

Even a down payment of just 5% will match the minimum on many conventional loans, putting you on more even ground with those buyers. 

Although there is usually no down payment required for VA loans, it can be helpful to comprehend the idea of a VA loan minimum down payment and its ramifications.  

A minimal down payment, while not mandatory, may, in certain situations, strengthen your position in a competitive market and bring your offer closer to the standards of a traditional loan. 

Benefit #4: Possibly Securing a Lower Interest Rate 

Interest rates assigned to individual loans can vary due to several factors. For example, borrowers with higher credit scores tend to qualify for lower interest rates since they are viewed as being less risky. 

But the down payment plays a role here as well. 

According to the Consumer Financial Protection Bureau: “In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property.” 

If you have the financial ability to decide whether or not to make a down payment on a VA loan, get some quotes from your lender in both scenarios. Find out if you can score a lower rate by putting some money down upfront. 

Once again, a tradeoff is being made. You have to invest more money in your purchase, but you could significantly reduce the interest you pay over the life of the loan. 

Ultimately, all of these choices come down to priorities. Some VA loan borrowers don’t have much money saved up, so they must eliminate the down payment entirely. On the other hand, borrowers with more financial resources might choose to make a down payment for some of the benefits listed above. 

One of the great features of the VA home loan program is its flexibility, which accommodates all types of borrowers. 

Some VA Loans That Require No Down Payment

Certain VA loan types do not require a down payment, making them an appealing alternative for qualified borrowers, even though most VA loans have the benefit of no down payment. The following VA loans have no down payment requirements:   

1. VA Jumbo Loan  

Higher-end properties that cost more than the Federal Housing Finance Agency’s (FHFA) conforming loan limits are financed with VA jumbo loans. VA jumbo loans don’t demand a down payment, even for more significant loans, so veterans can afford to buy more expensive homes upfront.   

2. VA Land Loan 

Land purchases for future construction are financed through VA land loans. With this kind of loan, veterans can secure land for their dream house without having to make a sizable upfront payment, as no down payment is required.  

3. VA Construction Loan 

Building a new house is financed with a VA construction loan. Veterans can construct their homes from the ground up without worrying about the cost of a down payment thanks to these loans, which do not demand one. 

VA Loan Property Requirements  

Various property requirements must be fulfilled to qualify for financing when using a VA loan to buy a home. Key conditions for VA loan property requirements are as follows:   

Minimum Property Requirements (MPRs)  

The home must have all of the VA’s Minimum Property Requirements (MPRs), which include structural integrity, adequate heating, water, and electricity, a safe and hygienic living environment, a functioning roof, and the absence of any risks to one’s health or safety.  

Appraisal  

A VA-approved appraiser must appraise the property to determine its worth and verify compliance with the MPRs.  

Occupancy  

The borrower must intend for the property to serve as their principal residence.  

Property Types  

VA loans can be used to purchase various kinds of property, including traditional single-family detached homes, townhomes, condominium units, manufactured homes, new construction homes, and multi-unit properties (like duplexes and triplexes).   

VA Approval  

The VA must approve the property before financing can be completed.