Understanding your VA loan down payment
Quick insights
- VA loans don’t have a down payment requirement, as long as your full entitlement is available. Lenders may require a down payment on higher loan requests.
- While a down payment may not be required, you may want to make a down payment to lower your monthly payment, get a better interest rate and potentially pay a lower VA funding fee.
- If you’re using a VA construction loan, you’re more likely to need to make a down payment due to the higher costs and complexities of the loan.
As a veteran of the U.S. Armed Forces, you may be able to use a U.S. Department of Veterans Affairs (VA) loan to finance the purchase of your home. One of the most attractive features of VA loans is they often don’t require a down payment. This can make homeownership more accessible for military families.
But while the no down payment option is a major benefit, it’s important to know the existing rules and restrictions related to VA loan down payments. This also includes understanding how the VA entitlement program works and the circumstances where a down payment may be required or recommended.
What are your VA loan down payment requirements?
A VA loan is a government-backed mortgage loan program offered to veterans and their surviving spouses. These loans are offered through banks and other lenders to eligible veterans who can provide a Certificate of Eligibility (COE) and meet the other requirements set by the lender. However, because the loans are backed by the government, approved lenders can offer more favorable terms, including lower interest rates and the possibility of no down payment.
VA loans can help veterans and their families secure homeownership without needing to wait to save up enough money to cover a down payment. By comparison, most conventional loans require a minimum down payment of 3%, while Federal Housing Administration (FHA) loans require a minimum down payment of 3.5%.
How do VA entitlements affect the down payment for a VA loan?
The reason why you may not need to make a down payment on a VA loan is that your loan is guaranteed by the U.S. government. The amount of coverage a lender can expect is based on your VA entitlement, which guarantees up to 25% of any losses on the loan.
As long as your loan is guaranteed by the VA, the lender knows they’re covered. Because of this, they can safely waive requiring you to pay a down payment in many cases.
Do VA loan down payments affect your closing costs?
Another consideration is how your down payment may affect the size of your VA funding fee. Your funding fee is an upfront payment you need to make based on the size of your VA loan. These fees help support the VA loan program and can be folded into the cost of your loan.
The amount charged for your funding fee is a percentage of your loan’s value, and that percentage is based on your down payment.
For first-time homebuyers, if your down payment is:
- Less than 5% of your loan’s value, your funding fee will be 2.15% of the loan’s value.
- Between 5% and 10% of your loan’s value, your funding fee will be 1.5% of the loan’s value.
- 10% or more of your loan’s value, your funding fee will be 1.25% of the loan’s value.
After your first use of a VA loan, if your down payment is:
- Less than 5% of your loan’s value, your funding fee will be 3.3% of the loan’s value.
- Between 5% and 10% of your loan’s value, your funding fee will be 1.5% of the loan’s value.
- 10% or more of your loan’s value, your funding fee will be 1.25% of the loan’s value.
When do VA loans require a down payment?
Though the VA loan program offers the advantage of no down payment in most cases, there are specific situations in which a down payment may still be necessary.
You don’t have your full entitlement available
If you’ve purchased a primary residence using a VA loan and plan to buy a new home before selling your current home, you may not be able to access your full entitlement. In this situation, your down payment permitted will be limited, which means you may need to make at least a partial down payment to qualify for the loan.
If the home you want to purchase exceeds the VA loan limits for your county, you may need to take out a jumbo VA loan. Depending on your lender, you may need to make a partial down payment on the difference in value between the size of your loan and the loan limit for your area.
You have a lower credit score or high debt-to-income (DTI) ratio
While the VA doesn’t have a specific credit score requirement, lenders may have their own standards. If your credit score is lower than typical mortgage standards or if you have a high debt-to-income ratio, the lender may require a down payment to offset the higher perceived risk.
This may also apply if you have past issues, such as a foreclosure or bankruptcy, in your credit history.
Do VA construction loans require a down payment?
A VA construction loan allows you to borrow money to purchase land and finance the cost of building a new home or renovating an existing home. It is possible to take out a VA construction loan without a down payment requirement if you don’t exceed your entitlement. However, the additional costs of land, labor and materials, as well as the additional risks involved with building a new home means that lenders may require a down payment to help offset the potential risk.
In summary
Whether you’re purchasing an existing home or building a new one, the ability to pay as little as 0% down can help veterans achieve their dreams of homeownership. To take advantage of these benefits and for more information on eligibility and options, talk with a home lending expert. They can help you determine what loan meets your needs.
VA loan down payment FAQs
How many times can I get a VA loan with no down payment?
You can take advantage of a VA loan throughout your life as long as you retain your status as an eligible veteran or the surviving spouse of an eligible veteran. For example, as a surviving spouse, you would lose the ability to take out a VA loan if you were to re-marry. Your down payment entitlement can also be re-used as long as the total value of your outstanding VA loans doesn’t exceed 25% of your total entitlement.
Should you make a down payment on a VA loan if you aren’t required to?
Even if you aren’t required to make a down payment on a VA loan, it may be a good idea to put some money down. A down payment helps you build equity faster, helps improve your chances of getting approved and your lender may be able to offer you a lower interest rate. A down payment of even 5% will reduce the amount of funding fee you may be required to pay.
You can reuse your VA loan entitlement as long as you have paid off the previous VA loan and sold the property, or if you have remaining entitlement available. The remaining entitlement is calculated based on the difference between the county the property is located and the amount already used.
Can I get seller assistance to help with a down payment on a VA loan?
You can get a seller’s concession to help cover the costs of your down payment on a VA loan. However, you’ll need to observe the 4% rule, which states that seller concessions can’t exceed 4% of the property’s reasonable value.
