Marcus Marion, CMA™ This article is part of an ongoing series that explores all aspects of the VA home loan program, from a borrower’s perspective. In previous articles, we’ve examined everything from property requirements to the borrower funding fees.
Today, we will address another common question home buyers have about this program: “How much money do I need when using a VA loan to buy a house?”
The short answer is that you need a lot less money than you would with a conventional mortgage loan. That’s because the VA program allows you to finance up to 100% of the purchase price, avoiding the need for a down payment.
But you’ll probably encounter closing costs along the way, and these can add up to thousands of dollars. Other purchase-related costs include moving expenses and furnishings. So you’ll want to budget for those as well.
How Much Money Is Needed When Using a VA Loan?
Most mortgage programs require home buyers to make a down payment of some kind. The minimum required down payment can vary based on the type of loan being used, the amount being borrowed, and the borrower’s qualifications.
Conventional mortgage loans (that are not backed by the government) often require at least 3% down, and sometimes up to 20% for a larger mortgage amount. The FHA loan program requires 3.5% down. But the VA loan program, which is available to most military members and veterans, does not require a down payment at all.
As it states on the Department of Veterans Affairs website, the program requires “no down payment as long as the sales price isn’t higher than the home’s appraised value…”
The appraised value is the estimated market value of the home, as determined by a VA-approved property appraiser. So, if the purchase price is equal to or less than the appraised value, the home buyer does not need to make a down payment.
In addition to reducing the amount of money needed for a VA loan, this feature allows you to buy a home sooner rather than later. You don’t have to wait years to save up enough money to cover the down payment on a VA loan. You could potentially finance the entire purchase price.
Despite these benefits, you will need to come up with some money when using a VA loan to buy a house. Your biggest expense will likely be closing costs. So let’s talk about that component next.
Closing Cost Considerations
The term “closing costs” refers to the fees and expenses associated with a home purchase, in addition to the purchase price.
All types of mortgage loans come with closing costs, and that includes the VA home loan program as well. As their name suggests, these costs typically have to be paid on the day you close or finalize your transaction.
Some of the most common costs include appraisal fees, mortgage origination and processing fees, title company charges, recording fees, and transfer taxes.
Borrowers who use a VA loan will need enough money to cover their closing costs. The actual amount can vary due to a number of factors. Generally speaking, home buyers who use this program tend to pay somewhere between 2% and 5% of the purchase price in closing costs.
When you apply these percentages to the median home price in your area, you’ll see it adds up to a significant amount of money. So it’s best to start saving as early as possible.
On a median-priced home in the U.S. ($349,770), VA loan closing costs might range from $7,000 to more than $17,000. But that’s just a ballpark range. Your mortgage lender will give you an estimate when you apply. This will help you determine how much money you’ll actually need, in order to close on a VA loan home purchase.
By eliminating the need for a down payment, a VA loan could greatly reduce the amount of money needed to buy a house. It helps clear a path to homeownership. But it does not eliminate closing costs.
Even with a government-backed mortgage program like this, there are many people involved who perform a lot of different services. Home buyers pay for these services in the form of closing costs. So you’ll need to save up enough money for your closing costs and any other upfront expenses.
Money-Saving Strategies for Borrowers
It’s one thing to talk about saving money—and quite another to actually do it. With all of the daily expenses and curveballs life can throw at us, saving enough money for a VA loan home purchase might seem impossible. But it’s not!
Here are some strategies you can use to reach your savings goal:
- Establish a goal. Determine how much money you might need for closing costs, and create a budget to save that amount. Use the average range stated earlier as a starting point, by applying it to an average-priced home in your area.
- Open a separate savings account. Having a dedicated savings account can make it easier to track your progress. It also keeps that money “out of sight and out of mind,” so you’re less likely to spend it.
- Automate your savings. Set up automatic transfers from your checking account to your savings account each month. That way, you don’t even have to think about doing it.
- Cut unnecessary expenses. Identify “non-essential” expenses that you can reduce or eliminate, like dining out or subscription services. Every expense you cut frees up more money for your VA loan closing costs and other purchase-related expenses.
- Avoid new debt. Try to avoid taking on new loans or credit card debt while saving for a home purchase. In addition to increasing your monthly expenses, this could lower your credit score and make it harder to qualify for a home loan.
- Use windfalls wisely. If you receive any financial “windfalls,” such as a work-related bonus or a tax refund, channel it straight into that separate savings account.
For eligible borrowers, the VA loan program is arguably the best mortgage financing option available. It offers a number of compelling benefits, including 100% financing and no mortgage insurance.
But you’ll still need to come up with some money when using a VA loan to buy a house. So the sooner you start saving, the better.
