Advantages of a VA loan down payment (2023)

Down payment requirements on VA loans

VA loans are offered by the U.S. Department of Veterans Affairs to help eligible veterans and their families buy a home. VA loans are known for their unique benefits, including the fact that they do not require a down payment. This is a significant advantage compared to many other types of mortgage loans that often require a down payment of 3% to 10% or more.

There are two main reasons why down payments are not required for VA loans:

• The VA guarantees a portion of the loan to the lender. This government backing reduces the lender's risk, allowing them to offer more favorable terms to borrowers, including the option to forego a down payment.
• The program was established as a benefit for military service members. Waiving the down payment requirement makes it easier for those who have served their country to buy a home without the need for substantial savings for a down payment.

When a VA down payment is required

In most cases, VA loans require no down payment. However, there are certain situations where a down payment may be necessary for a VA loan:

• Home appraisal discrepancy: If the appraiser determines the market value of the home is less than the purchase price, borrowers may need to bring extra funds to the closing table to cover this shortfall. While not technically a traditional down payment, it is additional money needed for the transaction.
• Loan limits and entitlement: In 2020, the Department of Veterans Affairs eliminated loan limits for active-duty military personnel and veterans with full VA loan entitlement. However, these limits still apply to borrowers who have defaulted on a VA loan or are currently repaying one. If you fall into either of these categories and wish to obtain a VA loan that exceeds your county's VA loan limit, you may be required to provide a down payment.

"In situations where a portion of the buyer’s VA entitlement is tied up with a prior VA loan, or a prior VA foreclosure/DIL/short sale, and the buyer wants to purchase a home over the maximum allowed for 100% financing, the VA can require the veteran to make a down payment of 25% of the difference between the max allowed 100% calculation and the sales price," explained Jennifer Miller, a certified veteran lending specialist at Geneva Financial in Greenville, South Carolina.

» COMPARE: Best VA loan lenders

Pros of a VA down payment

While VA loans don’t require a down payment, there are circumstances where making one can be advantageous. 

Stand out in a competitive housing market

In a market where there are more buyers than available homes, sellers have the luxury of being selective when considering offers. A down payment could boost your chances of success in such a situation. Sellers are generally more inclined to accept offers from buyers who have already invested some of their money because they are less likely to back out of the deal.

A down payment can also provide bargaining power. By offering a substantial down payment, you may be in a better position to secure a lower purchase price, more favorable terms or even expedite the closing process.

Get easier loan approval 

When lenders review your application, one of the numbers they look at is your debt-to-income ratio (DTI). VA lenders want a DTI below 41%.

DTI is calculated by dividing your total monthly debt payments, including your mortgage payment, by your gross monthly income. If you are right on the cusp of qualifying, reducing your total loan amount by providing a down payment could be all you need to get your DTI to a qualifying percentage.

Pay a lower VA funding fee

Making a down payment can reduce the VA funding fee, a one-time cost that supports the program. The funding fee varies based on your down payment amount and whether it's your first or subsequent VA loan.

For your first VA loan, a down payment of:

• Less than 5% incurs a 2.15% funding fee
• 5% or more results in a 1.5% fee
• 10% or more lowers it to 1.25%

After your first VA loan, a down payment of:

• Less than 5% incurs a 3.3% funding fee
• 5% or more results in a 1.5% fee
• 10% or more lowers it to 1.25%

A down payment of 5% or more can significantly reduce your funding fee, saving money upfront and over the life of your loan.

Gain immediate home equity

Home equity refers to the financial stake you have in your home, or the difference between your outstanding loan balance and the current market value of your home. Home equity becomes significant when you consider options like home equity loans, home equity lines of credit (HELOCs) and cash-out refinances.

If you choose to make no down payment, your initial equity will be zero. Whereas if you make a small down payment, you'll start off with immediate equity in your home.

Save on monthly payments

When you make a down payment, your total loan amount is reduced — and so are your monthly payments.

For example, if you get a 30-year fixed-rate loan with a 7.21% APR for $200,000 and put no money down, your monthly payments may be around $1,359 (dependent on taxes and insurance). However, if you make a 10% down payment, your loan amount drops to $180,000, and your monthly payments will now be around $1,223.

Save on interest over time

By making a down payment, you can reduce the amount of interest you'll need to pay. For instance, if you have a $200,000 loan with a fixed interest rate of 7.21% over a 30-year period, you could end up paying more than $280,000 in interest alone.

The more you can lower your principal balance, the less you'll ultimately pay in interest on your loan.

» MORE: Is mortgage interest deductible?

Cons of a VA down payment

While paying a down payment has significant benefits, this may not be the right choice for everyone.

You may need more time to save

Saving up a substantial down payment can be a lengthy process and can significantly delay your aspirations of homeownership. The extent of this delay hinges on the amount you need to save. Depending on how much you have to save, you’ll have to remain in your current situation until you’ve amassed the required funds.

You may use up your cash reserves

A down payment can deplete your cash reserves. Having readily available cash on hand is vital for addressing unexpected expenses, making home improvements or covering emergencies. Without this financial cushion, you might find yourself in a tight spot when unforeseen financial challenges arise.

As well, by channeling your available funds into a down payment, you may miss out on valuable investment opportunities. This could impact your long-term financial goals and limit your ability to grow your wealth and secure your financial future.

» MORE: Is buying a house a good investment?

Bottom line

VA loans provide numerous benefits, including the option to purchase a home without a down payment — almost 90% of VA loans are approved without one, according to the VA.

However, there are compelling reasons to consider a down payment: it can make you more attractive to sellers, reduce the total interest paid over the loan's lifespan and lower the VA funding fee. But before deciding, it's essential to evaluate your financial situation, taking into account your long-term goals, current savings and the potential impact on your monthly budget.