What Are the VA Loan Down Payment Requirements?

VA Loan Down Payment Requirements

If you’re in the market for a new home and are eligible, opting for a VA loan can be an astute decision. These loans, tailored for current and former U.S. military personnel, waive the requirement for a down payment, thereby simplifying the financial burden of purchasing a home.

Understanding VA Loans VA loans are government-backed mortgages provided by the U.S. Department of Veterans Affairs. Eligibility is reserved for active-duty members, veterans of the U.S. military, members of the National Guard or Reserve, and in some cases, the unmarried widows of service members. To initiate the process, applicants must secure a Certificate of Eligibility from the Department of Veterans Affairs, which can be applied for on their eBenefits page. Typically, lenders will assist in acquiring this certificate with the information supplied by the applicant.

Although insured by the federal government, VA loans are offered through private lenders. Therefore, applicants must approach a private lender to secure a VA loan.

Do VA Loans Require A Down Payment? One of the standout features of VA loans is the absence of a mandatory down payment, an advantage for buyers who may find accumulating substantial savings challenging. For example, avoiding a 10% down payment on a $240,000 home means saving $24,000 upfront.

However, applicants have the option to make a down payment, which can reduce the VA funding fee—a one-time charge assessed when a VA loan is issued. The amount of this fee depends on the down payment size and whether the loan is a first or subsequent VA loan.

Another financial perk of VA loans is the elimination of private mortgage insurance (PMI) payments, a cost borne by borrowers to protect lenders if payments cease. This can lead to significant savings as PMI costs can range from 0.1% to 2% of the loan amount annually until sufficient home equity is established. With a VA loan, this expense is non-existent.

Why VA Loans Do Not Require Down Payments 

The rationale behind the no down payment feature of VA loans lies in the partial insurance provided by the federal government on these loans. This insurance acts as a safeguard for lenders, offering financial protection in instances where borrowers default on their payments. This contrasts with conventional mortgages, where such a safety net is absent, prompting lenders to require down payments.

Choosing to Make a Down Payment on a VA Loan: Benefits and Considerations

Opting for a down payment on a VA loan, even when not mandated, can be a wise financial move. Here’s why contributing towards your home purchase upfront can be beneficial:

Minimize the VA Funding Fee A significant advantage of a down payment is the potential reduction in the VA funding fee. This compulsory fee for VA loans is determined by the down payment amount. For first-time VA loan borrowers, a down payment of less than 5% incurs a 2.15% funding fee based on the purchase price. For a $200,000 home, this amounts to $4,300. Increasing the down payment to 5% or more reduces the fee to 1.5%, or $3,000 for the same home, and a 10% down payment further lowers it to 1.25%, equating to $2,500.

Lower Monthly Mortgage Payments A down payment decreases the loan amount, resulting in lower monthly payments. Moreover, a substantial down payment often leads to more favorable interest rates, further reducing monthly costs.

Instant Equity Gain Contributing a down payment instantly boosts your home equity, the portion of your property you truly own. This equity can be advantageous, offering a financial cushion that can be leveraged for loans or used for various expenses. Immediate equity also plays a crucial role in the profit realized from selling your property.

Reduce Principal Balance and Closing Costs A down payment directly reduces the principal balance of your loan, potentially leading to lower closing costs. Since many closing costs are calculated as a percentage of the loan’s principal, a reduced loan amount means less money owed at closing.

Enhanced Likelihood of Loan Approval Although a down payment is not a prerequisite for VA loan eligibility, making one could bolster your mortgage application. Lenders may view borrowers who invest their funds into the property as having a lower risk of defaulting. However, it’s important to note that foregoing a down payment doesn’t automatically disqualify you from obtaining a VA loan, as many borrowers successfully secure these loans without an upfront payment.

While VA loans offer the unique benefit of zero down payment, there are compelling reasons to consider making one if possible. From savings on fees and interest to immediate equity and possibly better loan terms, the advantages are worth evaluating as part of your home buying strategy.

When Might You Need a Down Payment for a VA Loan? Although it’s rare, certain situations may necessitate a down payment for a VA loan.

Purchase Price Considerations After your offer on a home is accepted, a lender-ordered appraisal will assess the property’s market value. If this value falls short of your purchase price, you might need to cover the difference at closing. This additional payment isn’t labeled a down payment, but it’s extra money required at closing since lenders won’t offer a mortgage exceeding the home’s appraised value.

VA Loan Limits Previously, the Department of Veterans Affairs set caps on the size of VA loans borrowers could access. However, starting in 2020, these limits were removed for active-duty military members and veterans with full VA loan entitlement. Limits still apply to those who have defaulted on a VA loan before or are concurrently paying off an existing VA loan. Should your desired loan exceed the VA loan limit for your county, a down payment will be necessary. County-specific VA loan limits can be checked online.

Understanding VA Loan Entitlement Your VA loan entitlement is the maximum amount the VA guarantees to your lender if you default on your loan. With full entitlement, there’s no cap on borrowing without a down payment, as the VA covers up to 25% of the loan amount for lenders in case of default.

Full entitlement typically applies to veterans or active-duty military personnel who haven’t previously used a VA loan or who have fully repaid and sold the property bought with a VA loan. If you have partial entitlement, perhaps due to an ongoing VA loan or a past default, you may need to make a down payment on your new VA loan.

Final Thoughts A VA loan stands out as a favorable option for veterans and active military members, mainly because it often doesn’t require a down payment. If you’ve served and are considering buying a home, and are financially prepared for a mortgage, exploring a VA loan could be a wise decision as you embark on the mortgage process.