Marcus Marion, CMA™ The VA home loan program allows 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 amount of money they have to save.
But there are some distinct benefits to making a down payment on a VA loan, even if you’re not required to do so. 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 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. The truth is that most borrowers who use this program can qualify for 100% financing, eliminating the need for the 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 that helps to 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. But it can be as high as 3.3% if the down payment is below 5%. In this case, putting down 5% or more would reduce the required funding fee to 1.5%.
And 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 down payment reduces the total amount you borrow. The more money you invest out of your own 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, we have two borrowers who are both purchasing a $300,000 home. All other parameters are the same, including an interest rate of 6.5% 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 equals $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 down payment of 5%, borrower #2 will end up paying about $91 less per month compared to Borrower #1.
Granted, not all VA loan home buyers can afford to make a down payment. And fortunately, they often don’t have to. But 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 receive 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 of some kind. It demonstrates the borrower’s financial capability. So by putting some money down on your VA loan home purchase, you 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.
Benefit #4: Possibly Securing a Lower Interest Rate
Interest rates assigned to individual loans can vary due to a number of 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 up front.
Once again, a tradeoff is being made. You have to invest more money in your purchase, but you could significantly reduce the amount of 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 a lot of money saved up, so they need to take the down payment out of the picture entirely. On the other hand, borrowers with more financial resources might choose to make a down payment for some of the benefits listed above.
That’s one of the great features of the VA home loan program. It offers a lot of flexibility to accommodate all types of borrowers.
