VA loan down payment: Definition and requirements
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Key takeaways
VA loans do not usually require a down payment, but there are certain circumstances in which a down payment might be necessary.
Making a down payment on a VA loan can help reduce your funding fee and monthly payments, and you’ll build equity in your home faster.
There are drawbacks to making a down payment, such as waiting to save up the money and draining your savings.
VA home loans can be an attractive option for military service members, veterans and eligible spouses looking to buy a home. Unlike other loan programs, VA loans do not typically require a down payment. However, making a down payment can reduce overall costs. Here’s how a VA loan down payment works and what to consider when deciding whether to make one.
Do VA loans require a down payment?
Not usually. One of the biggest selling points of a VA home loan, which is guaranteed by the U.S. Department of Veterans Affairs (VA), is the lack of a down payment requirement. While buyers with conventional and FHA-backed loans need to come up with a percentage of the purchase price, those with VA loans have a much easier number to hit: zero.
It’s important to note that there are exceptions to this rule. If you don’t have full VA entitlement, you might be subject to VA loan limits and need to contribute a down payment. Likewise, if the sales price of a property is higher than its appraised value, you’ll have to make a down payment to cover the gap.
Assuming you meet the service requirements for a VA loan, you have full entitlement if:
You’ve never taken out a VA home loan.
You’ve paid a previous VA loan in full and sold the property.
You’ve used the VA home loan benefit and your home was foreclosed or sold in a short sale, but repaid the VA in full.
Why VA loans don’t require a down payment
No-down payment VA loans are a benefit for past and present U.S. military members and their families — but there’s also a financial reason for no down payment. As with FHA and USDA loans, the federal government (in this case, the VA) guarantees a portion of every VA loan, which are actually issued by private lenders. This federal backing alleviates the risk a lender takes on when originating a VA loan. The guarantee is at least 25 percent — more than the equivalent of a typical down payment — so borrowers aren’t required to make an additional contribution.
Should you make a VA down payment even though it’s not required?
There are both benefits and drawbacks to making a down payment on a VA loan. Here’s a look at the pros and cons:
Pros of making a down payment on a VA loan
You’ll save money on your mortgage: Because you’re putting down some of the home’s purchase price, you won’t need to borrow as much with the mortgage. That means you’ll save on your monthly payment as well as interest on the smaller loan balance. The larger your down payment, the more you’ll save.
You’ll save on the VA funding fee: If you make a down payment, you’ll pay a lower funding fee. Let’s say you’re a first-time homebuyer planning to take out a VA loan for $340,000. With no down payment (or a down payment of less than 5 percent), the funding fee would be 2.15 percent of that amount, or $7,310. If you were to make a down payment between 5 percent and 10 percent, that fee would shrink to 1.5 percent, or $5,100. If this isn’t your first time using the VA loan benefit, there’s an even bigger incentive to make a down payment: The VA funding fee jumps to 3.3 percent after the first use if you put down less than 5 percent.
You’ll have more equity to start: Making a down payment translates to instant home equity. With more equity to start, you can tap it that much sooner to pay large expenses via a home equity loan or home equity line of credit (HELOC). If your home’s value declines, an equity cushion also protects you from owing more on your VA loan than the home’s worth.
You could get a better interest rate and higher approval odds: If you’re making a down payment, you might find you receive better rate offers. You’ll also strengthen your application and up your chances of getting approved for the loan.
Cons of making a down payment on a VA loan
You might find it difficult to save. It’s not always easy to save for a down payment, especially if you have a lower income and you’re paying a high rent. Plus, if you hold off on getting a VA loan to build your savings, you might miss out on a lower interest rate or lower home price now compared to rates and prices in the future. You’ll also leave yourself vulnerable to rent increases.
You could deplete your savings. Don’t be tempted to put all of your savings toward a VA loan down payment. If you do, you won’t have funds for emergencies, closing costs, home repairs, moving expenses and more.
When do VA loans require a down payment?
The scenarios in which you will have to make a down payment include:
The home’s purchase price is higher than the appraised value. With a VA loan, you can only borrow up to the home’s appraised value. If your offer on the home ends up being higher than the appraisal, you’ll have to make up the difference.
The VA loan amount is higher than the VA loan limit. Some VA loan borrowers face limits on how much they can borrow. Typically, these limits only apply to those who have defaulted on VA loans in the past or already have a VA loan they’re paying off. If you’re trying to borrow more than the VA loan limit, you’ll need a down payment.
You have partial entitlement. To get a VA loan, you must have entitlement. Most veterans and service members have a full entitlement. However, if you’ve defaulted on a VA loan previously, currently have a VA loan or still own a home that was paid for with a VA loan, you’ll only have a partial entitlement. If the home costs more than your entitlement amount, you’ll need a down payment to cover the rest.
VA loan down payment FAQ
Active-duty members, veterans and surviving spouses who qualify for a VA loan can use their VA loan benefit multiple times throughout their lives. VA loans are specifically intended for primary residences, however. You can have two VA loans simultaneously, but each loan must be for a different primary residence. If a previous VA loan has been fully repaid, the borrower typically needs to sell the home to have their full entitlement restored. Bottom line: There’s no limit to how many times you can use a VA loan, as long as you’re eligible and meet the lender’s qualifications.
Unlike conventional and FHA loans, VA home loans allow borrowers to purchase a house without putting down any money upfront and without needing to pay mortgage insurance.