VA home loans come with a long list of benefits for military service members, veterans, and eligible spouses: No need to pay for mortgage insurance, among the most competitive interest rate and the ability to close a home without making a down payment, in most cases. However, some buyers still choose to make down payments on AV loanswhich goes beyond the requirements of the loan.
Why would someone make a down payment on a VA loan? Putting money aside can reduce other costs and save money in the long run. If you’re considering a down payment on a VA loan, understand all the pros and cons for your finances.
Do VA loans require a down payment?
No. One of the biggest selling points of a US Department of Veterans Affairs (VA) backed home loan is the lack of a down payment requirement. While buyers with conventional and FHA guaranteed loans have to come up with a percentage of the purchase price — some aim for as much as 20% of the loan to avoid mortgage insurance — those with VA loans have a much easier figure to hit: zero.
It is important to note that there are a few rare exceptions to this rule. If the sale price of a property is higher than its appraised value, you will have to pay a down payment. For example, if you bid $400,000 to buy a house and an appraiser determines it is only worth $380,000, you will need to put down a deposit to cover the difference. If you do not have all rights, you may be subject to VA loan limits and must pay a deposit.
Benefits of making a down payment on a VA loan
Even if you don’t have to put down a down payment, you may still have a big question: Should I put money on a VA loan? There are many reasons why this still makes sense:
Pay lower financing fees
The financing costs is an essential part of the VA home loan program, helping to reduce the cost to taxpayers. If you pay a deposit, you will pay lower fees.
Let’s say you’re a first-time home buyer and you’re considering taking out a $340,000 loan. Without a down payment (or a down payment of less than 5%), the finance charge would be 2.3% of that amount, for a total of $7,820. If you were to make a down payment of between 5 and 10%, this fee would decrease to 1.65%, or $5,610. If you were to make a down payment greater than 10%, the finance charge would drop to the lowest available rate of 1.4%, or $4,760.
If this isn’t your first time using the VA loan benefit, there’s an even greater incentive to put down a deposit: VA financing fees climb to 3.6% after first use.
Save on monthly payments
In addition to reducing one-time finance costs, paying a down payment can make a difference each time you receive your monthly mortgage bill: since you’re borrowing less money, you’ll likely have a lower payment. Plus, you’ll save money by paying less interest over the life of your loan. The higher your down payment, the more you could save on interest. Use Bankrate VA Home Loan Calculator to estimate your monthly payments.
Build equity faster
Making a down payment means you’ll instantly have equity in your home, which means you’ll owe less on your home than it’s worth. Without one, your property could be “Upside down,” which means that if it loses value, you may owe more on your mortgage than the value of the property. If you have to move and you can’t make enough money from the sale to pay off the loan, you could be in financial trouble.
Plus, building capital faster means you can tap into it if the need arises by taking out a home equity loan Where home equity line of credit (HELOC). These types of secured loans, which use your home as collateral, can cost less, saving you money when you need money for major renovations or repairs.
Become more competitive in the market
Borrowers who live in a hot housing market may find that putting money up front shows you’re a more serious buyer. Some of your funds could be deposited as a deposit – money you have in escrow to show the seller you want to buy the house. This could make you more competitive, especially when there has been more than one offer. It is important to note that many houses receive more than one offer in this booming housing market. In fact, recently Data from the National Association of Realtors shows that the average home receives nearly five offers.
Also, your VA loan application will not be automatically approved. Although there are no strict requirements for credit scores, you may want to put down a deposit to strengthen your application and your chances of approval. Paying a down payment could also improve other factors considered by lenders, such as your maximum debt-to-income ratio (DTI).
Disadvantages of making a down payment on a VA loan
While making a down payment on a VA loan can help you save money and get you closer to the home you want, there are also some downsides. Be sure to consider these cons before saving your money:
You may have to wait
If you need a few extra months to save enough money for a down payment before you can buy a house, you’re wasting valuable time – with rising rates, you could end up with a much more expensive mortgage the longer you delay. Moving right away and zeroing in means you no longer need to rent and can start building capital immediately with lower borrowing costs.
You could empty your emergency fund
Maybe you have enough cash reserves for a down payment, but using it will put your bank account in dangerously low territory. Rather than tying up your money in a house, it’s probably a better idea to maintain that cash reserve in case of unforeseen circumstances and financial emergencies, such as job loss or other major expenses.
You may need money to repair your new home
Having cash reserves on hand also helps pay for the costs associated with home purchases. Maybe you’ve found a house in a neighborhood you love but needs a new HVAC system, or you want to buy some new furniture. In such cases, freeing up cash can be a wise choice.
You might not have a choice on the down payment
There are a few situations where you need to pay a deposit. If the home you want to buy is appraised at a lower price than your purchase price, you must put money down, or if the purchase price is above the VA loan limits in your county, you will also have to put down a down payment before the VA will secure your loan. Otherwise, you will have to forfeit your purchase.
How to make the best decision for your needs
Whether or not to make a down payment on a VA loan ultimately depends on your financial situation. If you can afford it, paying a down payment could save you thousands of dollars over the life of the loan. However, if pouring cash for your home comes at the expense of having an emergency fund or freeing up cash for moving-related expenses, it’s best to wait or buy the home. without deposit. Take a close look at your budget to understand what your payments will look like with and without down payment, and use Bankrate home accessibility calculator to get a clearer picture of how much you can spend on a home.