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What Is a VA Loan Down Payment?
By Michelle Lambright Black MONEY RESEARCH COLLECTIVE
Service members, veterans, and eligible surviving spouses may be able to use a VA loan to purchase a home. There are many benefits to using a VA loan, including (in most cases) not having to come up with a down payment to close on your mortgage. Yet there are some exceptions to this benefit.
The following guide will help you understand what you need to know about VA loans and down payments. Read on to discover when a lender might require a down payment from you on a VA loan, when you’re probably in the clear, and when you might want to consider making a down payment on a VA home loan even though you’re not required to.
Table of Contents
- What is a VA loan?
- Do you need a down payment for a VA loan?
- Pros and cons of making a VA loan down payment
- When is a VA loan down payment required?
- VA loan down payment FAQs
What is a VA loan?
A VA loan is a special type of mortgage that’s available to eligible active duty service members, National Guard members, Reserve members, veterans, and surviving spouses. The U.S. Department of Veterans Affairs (VA) guarantees a portion of these loans, making them a safer proposition for the private VA loan lenders that issue them. The VA guarantees up to 25% of loans over $144,000. As a result, there’s less risk involved for the lender, which usually translates into lower interest rates for borrowers and other benefits as well.
Some of the benefits of the VA home loan program include:
- Limits on closing costs
- No private mortgage insurance (PMI) requirement
- Competitive mortgage rates
These and other benefits and others make VA loans one of the best options available for homebuyers. Whether you’re about to be a first-time homeowner or you’re looking for a cash-out refinance, a VA loan is worth considering if you have the benefit available to use.
The Department of Veterans Affairs doesn’t issue VA loans directly to borrowers. You will need to find a VA lender for this type of mortgage loan. Yet before you can take out a VA loan, you’ll need to obtain a Certificate of Eligibility (COE) to provide to the lender. Additionally, you’ll still need to satisfy all VA loan requirements and the lender’s qualification criteria. This includes meeting all credit score and debt-to-income ratio requirements.
Tip: check out this VA home loan guide for more information on how VA loans work and how to qualify for one, including details on how to refinance a VA loan.
Do you need a down payment for a VA Loan?
One of the biggest perks that VA Home Loans is the fact that most borrowers don’t need to provide a down payment to close on their mortgage. Almost 90% of VA loans close with zero down payments.
Pros and cons of making a VA Loan down payment
Even though a down payment isn’t required for the majority of VA loan closings, you might want to consider providing one anyway. Here are some pros and cons of doing so.
Pros
- Lower VA Funding Fee: When you take out a VA mortgage, you’ll have to pay a funding fee of 0.5% to 3.6%, depending on the loan type, whether you’re a first-time VA loan recipient and other factors. Making a down payment of 10% or more could reduce your funding fee on a new home purchase or construction loan to 1.4%. But if you make no down payment, you could pay a funding fee of 2.3%-3.6% instead.
- Monthly, Yearly, and Long-Term Savings: Putting down more money upfront reduces your overall loan amount. As a result, you should have lower monthly mortgage payments. Even more meaningful is the fact that you will save money on interest charges every month and year throughout the life of your loan. Over a 30-year mortgage (assuming you don’t sell your home or refinance), the savings from even a 5% down payment could add up to thousands of dollars.
- More Home Equity: When you make a down payment on your mortgage, you’ll likely start out with instant equity in your home. (Equity is the difference between your home’s value and the amount you owe on your mortgage.) Having equity in your home makes it easier to sell your home in the future (if needed), borrow against your home, and more.
Cons
- Delayed Homeownership: If you don’t have enough money saved for a down payment, coming up with those funds could take some time. This process could delay your path to homeownership unnecessarily since a down payment likely isn’t required with most VA home loans.
- Reduced Savings: Paying a larger down payment means taking cash from somewhere else. If you take money out of savings to increase your down payment for a VA loan, that could reduce the amount you have available for emergencies and opportunities.
- Less Money to Invest: Some financial advisors recommend maximizing mortgage debt and investing the extra cash rather than tying up your assets in your primary home. However, this strategy does involve a level of risk. You should evaluate your own personal risk tolerance and consider talking with a trustworthy financial advisor about your situation if you’re trying to decide which option is best for you.
When is a VA Loan down payment required?
Below are four examples of scenarios where you might need to make a down payment for a VA home loan.
Partial entitlement
The VA loan basic entitlement amount starts at $36,000. That means if you default on a loan that’s under $144,000, the federal government guarantees to repay the lender up to $36,000. For loans over $144,000, the guarantee will be 25% of the loan amount.
However, if you used a VA loan to purchase a home before, you may only have a partial VA entitlement remaining. You may be eligible to take out another VA loan; however, the lender might require you to provide a down payment to offset its risk since the full entitlement amount (i.e., the standard VA guarantee) would not apply to your new loan.
VA jumbo loan
Since 2020, the VA has guaranteed up to 25% of home loans, regardless of loan size, for borrowers with their full entitlement. No longer do you have to worry about VA loan limits as borrowers did in the past. Therefore, if you have a full entitlement and can qualify for a VA jumbo loan based on your income, credit score, and other factors, you might not need to provide a down payment for this type of loan.
However, if you don’t have full entitlement or sufficient equity in the property you want to buy, the situation could change. A VA lender might require your entitlement, a down payment, or a combo of the two to cover at least 25% of your total home loan amount.
VA co-borrower
When you take out a joint VA loan with a co-borrower who isn’t eligible for the benefit, the non-eligible co-borrower may need to make a down payment. This down payment should cover the co-borrower’s portion of the home loan.
The amount of money you need to put down in such situations can vary depending on the primary borrower’s remaining entitlement, the loan amount, and other factors. A loan officer with experience in VA loan origination should be able to help you figure out how much down payment you will need for your specific loan.
Purchase price
Before you can close on a VA loan, the lender must order a special VA appraisal to assess the value of the property you want to buy. If the appraiser finds that the value of the property is less than the amount you’ve agreed to pay to purchase the home, you’ll likely have the option to back out of the deal (depending on the terms of your real estate purchase agreement).
However, if you still want to move forward with the purchase despite the low appraised value, you may have the option to do so. In this scenario, you would typically need to provide a down payment out of your own pocket to make up the difference between the appraised value and the purchase price.
VA loan down payment FAQs
What are the advantages of buying a house without a down payment?
There are numerous advantages to buying a home with no down payment. Most notably, buying a home without the need to save up a large sum of money first can make homeownership more attainable.
According to the National Association of Realtors (NAR), 13% of home buyers in 2022 stated that saving up a down payment was the hardest part of the home-buying process. Even more notable is the fact that nearly 30% of home buyers say they had to put off buying a home for five years or more because they couldn't save for a down payment while paying off other debts.
Can you put a down payment on a VA loan?
The majority of VA-backed mortgages don't require down payments. Yet there are some benefits to putting money down and reducing your loan amount if desired. If you're interested in making a down payment on a VA loan, let your loan officer know upfront so you can discuss all of your options.
Summary of our guide to VA Loan down payment
- What is a VA loan?
- Do you need a down payment for a VA loan?
- Pros and cons of making a VA loan down payment
- When is a VA loan down payment required?
- VA loan down payment FAQs
Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of CreditWriter.com, Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.