Advantages of a VA loan down payment (2023)
VA loans don’t require a down payment — but should you make one anyway?
VA loans are a valuable resource for veterans and active-duty service members on the path to homeownership. They offer flexible eligibility requirements and competitive interest rates and require no private mortgage insurance (PMI). There’s also no down payment required — however, there are significant advantages to making one.
Down payments can help borrowers qualify for lower interest rates, reduce the amount of interest paid over the life of the loan and build equity in the home more quickly. Additionally, making a down payment can make a homebuyer more competitive in the market, especially when bidding on homes in high-demand areas.
- VA loans do not require a down payment, setting them apart from many other mortgage loans.
- A down payment might be necessary if a borrower has used their VA entitlement for a previous loan or is repaying a defaulted VA loan.
- Making a down payment on a VA loan can help you stand out in a competitive housing market, reduce your debt-to-income ratio and lower the VA funding fee.
- On the downside, a down payment may require more time to save and potentially restrict access to funds for unexpected expenses.
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.
What is the highest VA loan you can get?
VA loan limits are determined by a borrower's VA entitlement, which is the maximum amount the VA will guarantee in case of default. To have full entitlement, borrowers must meet specific criteria.
For borrowers with partial entitlement, VA loan limits are the same as the Federal Housing Finance Agency (FHFA) limits and vary by county. In 2023, the standard loan limit in most areas is $726,200, but it can go as high as $1,089,300 in higher-priced counties.
Note that these limits set by the VA represent the maximum amount the VA guarantees to the lender in case of default, not the limits set by individual mortgage lenders.
How much should you put down for a VA down payment?
VA loans don’t typically require a down payment. However, some borrowers may choose to make a down payment voluntarily to reduce the overall loan amount and potentially lower their monthly mortgage payments. It's essential to discuss your specific financial situation with a lender to determine the best approach for your VA loan.
Do VA loans have PMI?
No, VA loans do not have PMI insurance; instead, you’ll pay the VA funding fee.
Do VA loans have closing costs?
Yes, VA loans do have closing costs. VA loan closing costs range from 2% to 5% of the home’s purchase price. Some of the fees you can expect to pay are the origination charge, appraisal fee, title charges, discount points, credit reports and inspection fees.
- VA News, “ Debt-To-Income Ratio: Does it Make Any Difference to VA Loans? ” Accessed Sept. 19, 2023.
- U.S. Department of Veterans Affairs, “ VA funding fee and loan closing costs .” Accessed Sept. 19, 2023.
- U.S. Department of Veterans Affairs, “ VA home loan limits .” Accessed Oct. 13, 2023.
- Federal Housing Finance Agency, “ Conforming Loan Limit (CLL) Values .” Accessed Oct. 13, 2023.
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