“I’m planning to use a VA loan to buy a house and need to start saving money. How much
money will I need when using a VA home loan?”
This is one of the most frequently asked questions relating to the Department of Veterans
Affairs home loan program. And it’s easy to understand why. Borrowers often want to know
how much they might have to pay out of pocket, so they can prepare ahead of time.
The amount of money you need to save when using a VA loan can vary depending on a number
of factors. For example, borrowers who pay discount points in exchange for a lower mortgage
rate tend to have higher closing costs, when compared to those who skip this option.
That’s just one variable that can influence the amount of cash you need to close on a VA loan.
Through the rest of this guide, we’ll discuss other factors that can influence your borrowing
The sooner you start saving up for a home purchase, the better. Closing costs alone can add up
to thousands of dollars, and you might incur other upfront expenses as well. So the best time to
start saving money is right now.
How Much Money You Might Need for a VA Loan
Home buyers who use a VA loan to buy a house can finance up to 100% of the home’s purchase
price. This means you can skip the down payment entirely, if you choose to do so. It’s one of
the most helpful benefits this program has to offer.
But you’ll still encounter some upfront expenses when using a VA loan to buy a house. So you’ll
need to save enough money to cover those purchase-related costs.
Below, we have reviewed some of the expenses you might incur when using the VA loan
program to purchase a home. Some of these costs are optional, such as mortgage discount
points. While others are mandatory for most borrowers, including the VA funding fee.
In this context, the term “closing costs” refers to the various fees and expenses associated with a home purchase and a mortgage loan.
This is actually a collective term that includes many different types of fees charged by different individuals and organizations. For a typical VA loan, closing costs can include mortgage processing fees, title searches and insurance, legal fees, and government recording fees.
So, how much money will you have to save to cover your VA loan closing costs?
When you apply for a loan, your mortgage lender will provide you with a fairly accurate estimate of your closing costs. But you don’t have to wait for that. The best-case scenario is to start saving money for your VA loan closing costs and other expenses sooner rather than later.
And today is a great time to start!
These costs can vary widely due to the size of the loan, your geographical location, third-party fees, and other factors such as discount points (explained below).
Borrowers who use VA loans typically pay somewhere between 2% to 5% of the purchase price in closing costs. The average home price in the U.S. is currently around $375,000. So a typical home buyer using a VA loan might encounter closing costs ranging from $7,500 to $18,750.
The bottom line is that you’ll need to save up enough money to cover your VA closing costs, and you need to have this money in the bank prior to closing.
Earnest Money Deposit
It’s common for home buyers to make a deposit when submitting an offer to buy a house. This is referred to as the “earnest money deposit,” because it shows that the buyer is earnest or serious about purchasing the home.
There is no law requiring you to make an earnest money deposit when using a VA loan. But it is common practice in most parts of the country. If you don’t make a deposit, and the seller receives competing offers that do include them, your offer might get rejected.
The typical size of an earnest money deposit can vary depending on local real estate customs. On average, they tend to range from 1% to 3% of the purchase price. So be sure to factor this in, when determining how much money you need to save up for a VA loan home purchase.
As the name suggests, a mortgage “discount point” allows you to reduce the interest rate assigned to your home loan. It’s basically a form of prepaid interest. You pay a certain amount up front, at closing, in order to secure a lower mortgage rate over the long-term.
You don’t have to use discount points with your VA home loan. But it might be beneficial, especially if you plan to keep the home for many years.
Each point will cost 1% of the base loan amount and could reduce the interest rate by around 0.25%. If you plan to use points when buying a home with a VA loan, make sure you are saving enough money for this expense plus your other closing costs.
As you can see, the amount of money needed to buy a home with a VA loan can vary depending on a wide range of factors. But at least now you have a better understanding of the types of costs you might incur along the path to homeownership.
And remember, the sooner you start saving up for your VA loan and home purchase expenses, the better!