Last Updated on March 2, 2023 by Luke Feldbrugge
The simple answer to “are there VA loan down payment requirements?” is no. But as is often the case in life, the simple answer isn’t always the right one…or the best one. Sometimes you might want to pay the down payment, and sometimes you must make a down payment, when going through the VA loan guarantee program. There are also a couple of reasons where you could make a down payment on your VA mortgage that don’t make any sense. Let’s sort these options out.
The “no down payment” benefit of the VA loan system is the most often mentioned advantage to this program. There are few federal government programs like it. The down payment is often the single-largest obstacle for people looking to buy a new home, especially first time home buyers. The majority of Americans (61%) live paycheck-to-paycheck, so saving up tens of thousands of dollars before you start looking for a house is just too much. The VA loan program gives a substantial boost to eligible veterans and active duty service members.
The numbers show how successful this program has been. VA loans from the U.S. Department of Veterans Affairs have helped more than 25 million veterans and active duty armed forces personnel since it began, and it helped 1.2 million heroes in 2020 alone.
The VA Loan: How it Works for You
If you qualify for the VA loan guarantee, and you want to use the VA loan no down payment option, that’s easy. You are probably all set. That’s the path of least resistance for this loan system. It’s the way it was built.
In addition to the most-often mentioned benefit of no down payment, there are a lot of advantages for the home buyer who is, or was, a military professional. There is, for example, no monthly private mortgage insurance payments. Those can run you between $100 and $300 a month, so this can save you thousands over the life of the loan. In addition, because the VA is guaranteeing your loan, most lenders will give you a lower interest rate on the mortgage. Again, that lower interest rate will save you money on your monthly mortgage payment –every month for the duration of the loan. We are talking about thousands of dollars in savings.
The list of benefits of a VA loan is too long to list here. The one thing you need to understand is that the VA loan program simply guarantees and insures the loan. A private lender, bank or mortgage broker will be giving you the loan. The loan officer looks favorably on the insurance from the VA because it reduces the lender’s risk. If you are eligible for the VA loan program, it essentially means the VA has your back when you are applying for home loans.
As you might guess, it’s important to find the right mortgage lender. Homes for Heroes has assembled a network of local mortgage specialists in all 50 states who are committed to working with veterans and active-duty service members and saving them money in the process. We can help you connect with mortgage specialists who know the ins and outs of the VA loan process. They have joined us in our mission to help heroes like you to say thank for your service to our country.
Not-Very-Good Reasons to Make a VA Home Loan Down Payment
There are some legitimate reasons when you might want to make a down payment on a VA-backed loan, but there are a couple that don’t make a lot of sense.
One thing you can do is make a down payment to reduce your VA Funding Fee. The funding fee is something almost everyone one pays when they get a VA loan guarantee. The fee is between 2.5% and 3.6% of the total loan. The fee itself is used to keep the VA loan system running. But the logic of paying a down payment to reduce the loan simply to reduce the funding fee doesn’t really hold water.
Let’s do the math. You want a $300,000 VA mortgage and the funding fee is 2.5%. You pay $7,500. If you decide to pay the down payment, which would be in the neighborhood of $21,000, your funding fee at 2.5% is $6975. So in this scenario, you’ve spent $21,000 to reduce your fee by $525. Granted, you’ve reduced the size of your loan, which has other advantages, but it’s hard to argue that you’re going to save a lot on your funding fee. In addition, your funding fee can be rolled over into your loan, so you don’t necessarily have to pay it up front.
The second not-great reason to make a VA mortgage down payment is to reduce the amount of your loan, which will necessarily reduce your monthly payment. This is true. In the above scenario, if you have the $300,000 loan at 5% interest, your monthly payment would be about $1610. If you made the $21,000 down payment, your monthly payment would go down to $1498. So you would save about $100 per month over the life of the loan, but you paid $21,000 for that reduced amount. It would take about 17 years to make that balance out.
Both of these arguments ignore the very real fact that coming up with a down payment is hard, especially for a first-time homebuyer. Before you decide to make a down payment (when you don’t have to), make sure the math works.
When you Want/Need to Make a Down Payment
Fact one is: the VA home loan program is very advantageous on many levels. Fact two is: coming up with a down payment is difficult. With those two facts in mind, there are times when a VA down payment is essential to making this process work.
Jumbo Loan and Conforming Loan Limits
There is no upper limit on your mortgage loan as far as the VA is concerned. If you are looking at a home that’s $1.7 million, the VA won’t stop you from getting that mortgage. It will, however, only insure part of that loan–what it calls a Jumbo Loan. The upper limit of the loan as far as the VA guarantee is concerned is $647,000, which is also the number set by the Federal Housing Finance Agency for a conforming loan limit.
If you want that Jumbo Loan, the VA is only going to insure part of the total loan amount (up to $647,000). For any amount over that, your private lender is probably going to want you to make a down payment.
Another reason you may need to make a down payment is if the price of the house and the mortgage you want is more than the appraised value of the property. The VA system requires a VA appraisal of the house in question and if it comes back lower than what you have agreed to pay for it in your arrangement with the seller, you may have to make a down payment on the difference. With the inflated house prices and bidding wars we have seen in the past few years, this is a real possibility.
We talked about the upper limit of the VA insurance on your loan in regards to the Jumbo Loan. That upper limit is also called your entitlement and it can be different for everyone. Your entitlement is listed on your Certificate of Eligibility, which is an important document to get when you are beginning the VA loan process. If you have a full entitlement, it’s that $647,000 figure.
It’s a good idea to keep track of your entitlement, because some things can reduce it. If, for example, you sell your house and pay off the old mortgage, you have to make sure the VA knows that. Otherwise, your entitlement will be tied up with your former house and you’re much more likely to hit that upper limit. That’s when a down payment will be required – anytime you go over the upper limit of your entitlement.
Likewise, if you buy a second home and use multiple VA loan guarantees (one being an investment or rental property), then the sum of both of those mortgages will reduce your entitlement and, if you go over, a down payment will kick in.
Joint VA Loans and Co-Borrower?
In some rare cases, you might want to buy a home with someone else using your VA loan benefit. To be clear, a co-borrower is not your spouse. Anyone else who might be helping pay the mortgage and live in the residence with you – like a friend – is a co-borrower in the eyes of the VA.
In this case, you will have a joint VA-backed home loan, but if the co-borrower isn’t in the military or is not yet VA eligible, you will need to make a down payment for your mortgage.
Private Lender Role
Let’s shift our attention to the private lender or mortgage broker in the VA process. As we have said, the lender is the one who puts up the actual money for your loan, and their approval of your loan is vital to getting the VA loan guarantee.
If you don’t get that approval on the first try, you can try again by including a down payment option. For some lenders, that addition of your willingness to make a down payment on the mortgage in addition to the VA guarantee, might be the tipping point for an approval.
Homes for Heroes Mortgage Specialists Save Your Money
Because the private lender is a big player in the VA loan process, you need to keep the discussions about “requirements” straight. Sometimes the rules are coming from the federal government, but more than likely your private lender will have more requirements as they try to qualify you for the loan. That’s why our Homes for Heroes mortgage specialists are so important as veterans and current service members look for a home and a home loan.
Homes for Heroes wants to help heroes at all stages of the home buying journey, and our real estate and mortgage specialists will help you navigate the VA loan process. After you close on your new home, you will be sent a Hero Rewards check that averages $3,000 that you can use to purchase furniture, appliances, and anything else you may need for your new home! The professional services we bring to the table, as well as the Hero Reward check, are our way of saying thank you to you for your military service.