VA Loans Don't Require Down Payments. Should You Make One Anyway?
One of the biggest VA loan perks is that borrowers are not required to make a down payment. If you have the cash, however, putting money down has some major advantages.
As part of the Department of Veteran’s Affairs benefits program, borrowers who qualify for VA-backed mortgages — which includes most active-duty military and veterans, as well as surviving military spouses — have the option of purchasing a home with $0 down. This allows service members to invest in a home sooner or to put their savings toward other goals.
VA loans don’t require a down payment because the government guarantees the loan, ensuring that the lender will recover between 25% and 50% of the borrowed amount in case of a default. (This is also why USDA loans don’t require down payments and FHA loans only require small ones.)
While not spending a huge chunk of money upfront is tempting, putting money down can cut your costs in the long run.
“I think the biggest benefit is saving money” in the long run, says Lacey Langford, an accredited financial counselor who works with members of the military.
The advantages of making a down payment
Reducing your monthly payment
If you make a down payment, your monthly mortgage payments on the same home price will be lower, because you’re borrowing a smaller amount. Over the life of a loan, this can result in thousands of dollars in savings. The higher your down payment, the less you’ll pay each month.
For example, if you have a $200,000 30-year fixed rate mortgage with zero down and an interest rate of 3%, your monthly payment will be $842.
By contrast, if you make a 5% down payment on the same loan with the same interest rate, your monthly payment will go down to $800.
Reducing your total interest payments
By putting money down on a home, you’ll be financing a smaller amount of money. The lower your loan balance and the lower the balance the less you’ll pay in interest over the length of the loan. A larger down payment could also help you qualify for a lower interest rate, which can result in long-term savings as well, notes Langford.
For example, a borrower buying a $200,000 home at 3% interest rate with no money down will pay $103,554 in total interest over a 30-year loan. If they put just 5% down, they would pay $98,376 in interest.
Reducing your VA funding fee
By making a down payment, you’ll also reduce the amount you’ll pay toward the VA’s funding fee. This upfront fee is used by the VA to fund the mortgage program.
- If you’re a first time homebuyer and your down payment is less than 5%, you’ll pay a funding fee of 2.3% of the loan amount. On a $200,000 home, that amounts to $4,600 at closing.
- If you’re using the VA loan benefit for a second time and put less than 5% down, the funding fee will be 3.6%.
- With a 5% or higher down payment, the funding fee goes down to 1.65% ($3,300 in the example above) and if you pay 10% or more the fee goes down to 1.4% ($2,800) regardless of whether you have used the benefit before.
Building home equity immediately
In addition to savings, a down payment means you have home equity immediately. If your home gains value, your equity will increase, and you’ll owe a smaller portion of your home’s worth. If it loses value, it’s less likely that you’ll end up underwater (owing more than your home is worth).
Building up equity can also provide a financial cushion, allowing you to take out a home equity loan or line of credit if you needed to take care of unexpected repairs, medical bills or other expenses
How to determine whether to make a down payment
How much could you put down if you had to?
If you have the money, it’s best if you put something down. It doesn’t have to be the idealized 20% down either. A payment as small as 5% has a number of short and long term advantages.
With non-VA loans, making a 20% down payment eliminates the need to pay for private mortgage insurance, which protects the lender. With a VA loan, however, there is no PMI, regardless of whether you put money down or not.
Keep in mind, the no down payment benefit also hinges on the appraisal value of the home — the sales price cannot be higher than the appraised value. Otherwise, you’ll need to cover the difference.
How would a down payment influence your monthly payments?
Use a mortgage calculator to compare monthly payments with and without a down payment. What would happen if you put a small amount down? What if you went all the way to 20% down? Once you have sample payments, see how each fit in with your monthly budget.
A helpful rule of thumb is the 28/36 rule, which says that —
- No more than 28% of your gross monthly income should be put towards housing costs, including mortgage payments, insurance, and homeowner’s association fees.
- No more than 36% of your income should go towards paying all your debts, including your mortgages, other loans, and credit cards.
For example, if you earn $4,000 a month, then you can spend up to $1,200 on housing and up to $1,440 on all debts.
Do you have an emergency fund?
You don’t want to put all your savings into a down payment if that’s going to leave you without enough money for an emergency. Ideally, homeowners should have enough cash to cover six months to a year of expenses in case of a job loss or unexpected home repair.
Also consider that you may have costs associated with moving into and furnishing a new home. When figuring out how much of a down payment to make, make sure you have some wiggle room for initial household expenses. “You don’t want to be house poor,” says Langford.
Does a down payment fit with your other financial goals?
Figuring out whether you can afford to put money down or not will depend on your budget and your financial goals, says Langford.
Before applying for a VA loan, take a hard look at your finances and make the decision that will best suit your needs. “You need to look at the long-term plan for yourself and for your family and then really write out the pros and cons,” she says.
Long-term goals can include saving for retirement or building up a college fund for your kids. If you need the money for those goals soon, it may make sense to hold on to the cash you have. On the other hand, if you have time and can make a down payment, you can take the money you save from lower monthly payments and put it towards achieving your target.
If your top priority is to buy a home and you can afford the monthly payments and home maintenance but don’t have enough for a down payment, then the VA’s no money down feature can be a great opportunity.
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7 VA Loan Tips for Veterans, Service Members and Military Spouses