If you’ve qualified for a VA loan, you know about the beneficial program that offers veterans, service members and their families loans with low rates, fewer closing costs, no mortgage insurance and 0% down payments. Oftentimes veterans can’t qualify for conventional loans, so this program is committed to getting them into the homes they deserve with favorable terms. If you’re about to get a VA loan, you may want to consider making a down payment even if you don’t have to. Read below to find out if this might be the right decision for you.
How VA mortgage loans work
VA home loans are mortgages backed by the federal government for veterans, service members and family members. Though the Department of Veterans Affairs doesn’t actually fund the loans, it does provide insurance for the lenders who provide them, allowing veterans who may not qualify for a conventional loan to obtain a mortgage. Banks and other lenders offer VA loans for buying, building and refinancing homes.
Nearly 90% of VA loans are made with no down payment, but there are benefits to putting money down.
Past and current service members, as well as spouses of veterans, can qualify for a VA loan if they meet the following requirements:
- Are an active service member or have been honorably discharged, and
- Have served more than 90 total days during wartime, or more than 180 consecutive active days during peacetime, or
- Served in the Reserves or National Guard for six or more years, or
- Are the surviving spouse of a service member who died in the line of duty or the spouse of a service member who is a prisoner of war missing in action
All applicants have to provide a COE (Certificate of Eligibility) that proves their eligibility.
The VA loan program is set up to provide certain benefits that conventional loans don’t, including lower rates, better terms, no mortgage insurance requirement and no down payment as long as the sales price isn’t higher than the appraised value.
In general, the qualification requirements for VA loans are more lenient than for conventional loans. The VA doesn’t set a mandatory minimum credit score; instead, each lender has its own standards, with the requirement that it must review the entire loan profile. In general, you’ll want a credit score of at least 620, though you may need a score of 640 to qualify for a 0% down payment. Lenders will also look at your income, expenses and debt-to-income ratio (DTI) when reviewing your application.
7 reasons you may want to make a down payment on a VA loan
Putting no money down with a VA loan is an attractive option, but there are a number of reasons that you might consider a down payment.
1. Stand out in a competitive housing market
If you're shopping for homes in a seller’s market, there are more buyers than there are houses to buy. To stand out in the field, you’ll want to make your offer more appealing to a seller. One way to do this is to make a larger down payment to show the seller you're in a stable financial position. The last thing a seller wants is to accept a loan only to have it fall through due to lack of funds. If you show the seller upfront that you’re putting down a portion of the purchase price, they may be more inclined to accept your offer.
Sometimes sellers are more hesitant about VA loan offers since they’re structured in a way that increases the seller’s closing costs. By making a down payment, you can show them you’re ready to negotiate and be taken seriously.
2. Get easier loan approval
Service members and veterans who may not qualify for conventional home loans can find easier lending requirements with VA loans. Still, the lender still has to confirm creditworthiness. One way to make yourself a more attractive applicant is to have a down payment in hand. By putting money down upfront, you may demonstrate to the lender you’re less likely to default. It also brings down the total loan amount, which improves your DTI. This can make your approval process faster and easier.
3. Pay a lower VA funding fee
One drawback to obtaining a VA loan is the VA funding fee. This is a fee that most borrowers must pay to the government and is typically between 1.4% and 3.6% of the loan amount.
You can reduce this fee by making a larger down payment. If you are using a VA-backed home loan for the first time and put no money down, the VA funding fee is 2.3% of the loan amount. However, if you put down 5% to 10%, the fee drops to 1.65%, and if you put down 10% or more, it drops to 1.4%.
4. Gain immediate equity in your new home
Your home equity is determined by your loan balance and the value of your home. Having equity is important if you want to borrow against your home with a home equity loan, take out a home equity line of credit (HELOC) or get a cash-out refinance. If you opt for making no down payment, your starting equity will be zero. On the other hand, by making a small down payment on your home, you’ll be starting out with instant equity.
5. 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 3.388% APR for $200,000 and put no money down, your monthly payments may be around $1,135 (dependent on rate, 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 $1,022.
6. Save on interest over time
Making a down payment lowers how much you pay in interest. If you have a $200,000 loan at a 3.5% fixed rate, over 30 years you’ll pay more than $120,000 in interest. The lower you can make your principal balance, the less interest you will pay on your loan.
7. Lower your debt-to-income ratio
When lenders review your application, one of the numbers they look at is your DTI. VA lenders are looking for a number 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.
Disadvantages of a large down payment
While there are a number of advantages to making a down payment on a VA loan, there are also some possible drawbacks. Depending on your specific circumstances, it could be in your best interest to take out a VA home loan with no money down if any of the following is true:
- Saving for a down payment delays move-in time: If you need to postpone buying a house by six months to a year to save up for a down payment, that means you’re stuck paying rent that much longer instead of building equity in your home. If you’re in a time crunch to move out of your current home, sometimes getting the loan to buy the house is your best option, with or without a down payment.
- You need the savings: Even a small down payment represents a big chunk of most people’s savings. If making the down payment means you’re depleting your emergency fund, it may be wiser to opt for no down payment instead of wiping your savings clean.
- Making a down payment limits future home projects: Once you own your home, all the maintenance and repairs are your financial responsibility. It’s wise to set aside a chunk of money for use after you buy your home for unexpected costs, renovations or a home warranty.
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