VA Loan Down Payment: Should You Make One?

Are you a veteran or active-duty military member who wants to buy a new home? Military veterans have special access to funding when buying a home through the VA home loan program.

There are many benefits to choosing a VA loan over an FHA or conventional loan, with the VA home loan down payment requirements being one of the most attractive. Coming up with a down payment is one of the biggest challenges of getting a mortgage, and having to pay less upfront makes it possible for more veterans to own a home.

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    Before you opt for a conventional or government-backed loan, you should take a closer look at how a VA loan and a VA loan down payment works. If you don’t, you may be leaving money on the table.

    VA loan down payment basics

    What sets a Veterans Affairs mortgage apart from all other mortgage programs is the VA loan down payment rules. To get a mortgage, there is no VA home loan down payment required. Veterans can buy a home for no money down, as long as they’re qualified and the lender approves it.

    In addition, the VA guarantees mortgages to all qualifying military, even if you have bad credit. If a VA-backed lender doesn’t approve you for a mortgage, the U.S. Department of Veterans Affairs will serve as the direct lender.

    [ See: How to Save for a House Down Payment ]

    The best part is that borrowers with VA loans won’t be subject to the pesky private mortgage insurance (PMI) that buyers with conventional loans get hit with if they don’t put at least 20% down. PMI can add up to $70 month in fees for every $100,000 you borrow. About 90% of all VA home loan applicants close on a mortgage with no money down, which means PMI can get really costly on their loans.

    Knowing you won’t have to wait to save up tens of thousands of dollars before you buy a house can make the difference between renting and homeownership. No down payment is a feature that’s exclusive to VA loans — other types of government-backed loans, such as an FHA home loan have down payment requirements of at least 3.5% of the purchase price and have to pay PMI.

    Benefits of making a down payment on a VA loan

    Down payments are optional with VA loans, but you may still want to put money down when you buy your house. A couple of reasons you may want to make a down payment include:

    Lower closing costs

    If you’re able to pay at least 5% down, you can reduce the VA funding fee you pay at closing. The one-time fee goes toward the VA loan program and is charged based on how much money you’re willing to put down as a down payment.

    Here’s what you can expect to pay as a VA funding fee:

    • First-time buyer, no money down: 2.3% of the loan amount
    • First-time buyer, at least 5% down: 1.65% of the loan amount
    • First-time buyer, at least 10% down: 1.4% of the loan amount

    It may make more financial sense to make a small 5% down payment on your home than it would to pay half of the amount in funding fees.

    Lower monthly payment

    Lowering your initial loan balance can save you money on your mortgage over the life of the loan. A small down payment may only reduce your monthly mortgage payments by $50, but the small amount adds up to significant savings over 30 years.

    [ More: VA Loan Requirements and Eligibility ]

    Drawbacks of a VA loan down payment

    Although a VA loan has many benefits, there are also drawbacks to choosing one. Take a closer look at what they are:

    Interest rates

    VA loans have always offered lower interest rates than many of the conventional loan products, but the current economic slowdown due to the pandemic has led to historically low interest rates. That has made borrowing cheaper for all types of mortgages — which, in turn, negates the perk of lower rates with a VA loan. The VA loan will likely still offer lower interest rates once things normalize, but this is an unusual time in housing due to the pandemic.

    Borrowing again gets more expensive

    If you want to borrow again or refinance using a VA loan, the VA funding fee will be more expensive the second time around. A first-time buyer with no down payment will pay a 2.3% fee on the loan amount. Next time you borrow (and every subsequent use), the funding fee is 3.6% with no money down.

    [ Read: Everything You Need to Know About VA Loan Limits ]

    VA loans take longer

    VA loans statistically take longer to close. It’s not by much — on average, a VA loan may only add two days to the closing, but results can vary. Some buyers face longer wait times, delaying the whole process.

    How to make the right decision on a down payment

    Whether or not you should make a down payment on your VA loan is a personal decision. It will depend on your short- and long-term goals, your cash flow situation and a number of other factors.

    If you’re trying to decide, you can use these points to help decide what the best choice is for you:

    • A VA home loan down payment is optional — you don’t have to put money down if you’re not able to or don’t want to.
    • You won’t have to pay PMI even if you don’t make a down payment.
    • You could save on the VA funding fee if you put at least 5% down. A down payment could save you 0.65% in fees. The savings could be significant depending on your loan amount.
    • Calculate the difference in your monthly payments between your home loan amount with no money down and by putting at least 5% down. The reduction in your monthly payments could be sizable.

    Remember that a home loan is a 15- or 30-year commitment. Take the time to evaluate the pros and cons of how much of a VA loan down payment you should make.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Cynthia Paez Bowman

    Contributing Writer

    Cynthia Paez Bowman is a finance, real estate and international business journalist. Her work has been featured in Business Jet Traveler, MSN, CheatSheet.com, Bankrate.com and Freshome.com.

    She owns and operates a small digital marketing and public relations firm that works with select startups and women-owned businesses to provide growth and visibility. Cynthia splits her time between Los Angeles, California, and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development

    Reviewed by

    • Angelica Leicht
      Angelica Leicht
      Editor

      Angelica Leicht is a writer and editor who specializes in everything mortgage-related for The Simple Dollar. Her work has spanned topics that include lending product reviews, interest rate trends, racial biases in mortgage lending and the role of fintech in lending practices, and has appeared in publications such as Interest, Bankrate, The Spruce, Houston Press and VeryWell, among others.