Should I Put Money Down on a VA Loan?

The VA loan program offers a benefit for eligible service members, veterans, and surviving spouses seeking to purchase a home. This program is distinct from conventional mortgages due to its down payment structure. While a down payment is not always required, the decision of whether to make one involves various financial considerations. This article explores the implications of making, or choosing not to make, a down payment on a VA loan.

Understanding the VA Loan Down Payment Option

The VA loan program allows eligible borrowers to purchase a home without a down payment. This means 100% financing is available for the home’s purchase price, provided the veteran has full entitlement. This contrasts with other mortgage types, such as FHA loans requiring a minimum 3.5% down payment, or conventional loans that require at least 5% to avoid private mortgage insurance (PMI). The VA guarantees a portion of the loan, which provides security for lenders and allows them to offer more favorable terms without requiring a down payment.

The absence of a down payment requirement is an advantage, especially for individuals who may not have accumulated significant savings. It removes a barrier to homeownership, enabling veterans to acquire property sooner than with other financing options. While a down payment is not mandated for those with full entitlement, it might be necessary if the purchase price exceeds the appraised value of the home or if the borrower has only partial entitlement.

Financial Effects of Making a Down Payment

Making a down payment on a VA loan, even when not required, offers several financial advantages. A down payment reduces the principal loan amount, leading to lower monthly mortgage payments.

A smaller loan amount also decreases the total interest paid over the loan’s lifetime. For instance, a 5% down payment on a $350,000 home could reduce total interest charges by tens of thousands of dollars over a 30-year term compared to no down payment.

A down payment also impacts the VA funding fee, a one-time charge that helps offset the program’s cost. Making a down payment can reduce its percentage. For first-time VA loan users, the funding fee is 2.15% with no down payment. It decreases to 1.5% with a down payment of 5% or more, and to 1.25% with 10% or more down. This reduction can save hundreds or thousands of dollars on closing costs.

Making a down payment establishes immediate equity in the home. Equity is the portion of the home’s value owned by the homeowner, calculated by subtracting the outstanding mortgage balance from the home’s current value. This upfront equity provides a financial cushion, reducing the risk of owing more than the home is worth if property values decline. It also allows homeowners to access home equity through loans or lines of credit sooner.

Financial Effects of Not Making a Down Payment

While the zero-down payment feature is a benefit, choosing this option carries financial implications. Without a down payment, the entire purchase price of the home is financed through the loan. This results in a higher principal loan amount, leading to higher monthly mortgage payments.

The VA funding fee is at its highest percentage when no down payment is made, unless the borrower is exempt. First-time users pay 2.15% of the loan amount, and for subsequent uses, this can increase to 3.3% without a down payment. This fee can be financed into the loan, increasing the overall debt and total interest accrued over time. However, veterans receiving compensation for service-connected disabilities, Purple Heart recipients, and eligible surviving spouses are exempt from paying this fee.

A primary advantage of not making a down payment is the preservation of cash. This allows borrowers to retain savings for other financial needs, such as establishing an emergency fund. These funds can be used for unexpected home repairs, moving expenses, or other life events, providing financial flexibility and security.

Choosing not to make a down payment means no immediate equity is established. Initial equity accumulates solely through principal payments and home appreciation over time. This can mean it takes longer to build an ownership stake in the property, and in a declining market, there is a greater risk of owing more than the home is worth.

Personalizing Your Down Payment Decision

The decision of whether to make a down payment on a VA loan is personal, depending on individual financial circumstances and priorities. Borrowers should consider their financial goals, such as prioritizing lower monthly payments, reduced overall interest costs, or preserving cash savings. Each choice impacts a household’s budget and long-term financial health.

An important consideration is the amount of current savings available. It is advisable to maintain an emergency fund of three to six months of living expenses, regardless of the down payment decision. Depleting savings entirely for a down payment might leave a household vulnerable to unforeseen expenses.

Market conditions and prevailing interest rates also play a role. In a high-interest-rate environment, a down payment can be more impactful in reducing the total interest paid over the loan term. Borrowers should also consider their future plans for the home, as this can influence the significance of immediate equity or cash preservation.