U.S. Department of Veterans Affairs (VA) loans are available to U.S. veterans, service members, and their spouses. They are issued by qualified lenders and guaranteed by the VA. These loans also do not require mortgage insurance or have a minimum VA credit score requirement. Perhaps best of all, VA loans generally do not require a down payment. Even though you’re not required to put money down at closing, there are some advantages if you choose to do so.
There is a lot to like about VA loans. Yet, for current and past U.S. military personnel who want to buy a home, it may be beneficial to submit a down payment, even if it is not required to obtain a VA loan. Let’s take a look at some of the advantages of making a down payment on a VA loan.
Lower VA funding fee – A VA funding fee is a requirement for all U.S. military personnel who use the VA home loan guaranty benefit. The fee is a percentage of a home loan amount, and it varies based on the type of loan, a homebuyer’s military category, whether an individual is a first-time or subsequent loan user, and if a homebuyer can make a down payment. Thus, if you make a down payment in combination with a VA loan, you may be able to reduce or eliminate the VA funding fee.
Reduced loan balance and monthly mortgage payments – If a down payment is not required as part of a VA loan, you can choose how much to pay upfront for a home. As a result, you can reduce your home loan balance, which means you may be able to pay off your mortgage faster than ever before. Also, a down payment may help you reduce your mortgage interest rate, resulting in lower monthly mortgage payments.
Additional homebuying options – The median U.S. home price totaled $215,600 as of May 2018, according to Zillow. Additionally, Zillow notes U.S. home values have increased 8.7% percent between May 2017 and May 2018 and projects this figure will rise 6.5% over the next year. By submitting a down payment on a VA loan, you can gain flexibility as you search for homes in cities and towns nationwide. You may even be better equipped than other homebuyers to quickly find and purchase your dream house.
Ability to purchase a home in a high-cost county – The VA limits the maximum home loan guaranty amount to $453,100 for 2018, the Federal Housing Finance Agency (FHFA) states. In high-cost counties, the VA’s maximum home loan guaranty amount limit is $679,650. Meanwhile, the VA guarantees a home loan for houses purchased in high-cost counties if you pay 25% of the amount over the loan limit in cash. Therefore, if you want to use a VA loan to buy a home in a high-cost county, you may need to submit a down payment.
Instant home equity – A down payment provides instant equity in a new house, which may prove to be exceedingly valuable. For example, consider what may happen if home values suddenly plummet. In this scenario, the amount you owe on a home may exceed your house’s value. But if you made a down payment on your residence, you will have options if you decide to move and buy another residence. In fact, you may be able to tap into your home’s equity to obtain a home equity line of credit or home equity loan. Furthermore, you can always use your home’s equity to finance property repairs or upgrades.
There is usually no minimum down payment requirement on a VA loan. Comparatively, the median down payment for single-family homes and condos purchased in the third quarter of 2017 was $20,000, according to ATTOM Data Solutions. This total was approximately 7.6% of the median home purchase price during 3Q 2017.
Ultimately, there are several factors to consider as you debate how much to pay upfront for your home. These factors include:
Your mortgage options – A down payment and mortgage go hand-in-hand, and how much you pay upfront for a home will impact your monthly mortgage payments. As such, it is important to review all of the mortgage options at your disposal to determine how a down payment will affect your monthly mortgage costs.
Your credit score – Whereas the VA has no minimum credit score requirement for home loans, VA lenders often use credit score benchmarks. The minimum credit score requirement varies from lender to lender, but most VA lenders require a credit score of at least 620. The three credit reporting bureaus (Equifax, Experian, and TransUnion) can provide you with a free copy of your credit report annually. Take advantage of this perk, and you can review your credit score. Then, you can pay off outstanding debt to improve your credit score or ensure any issues are corrected on your credit report before you apply for a VA loan.
Your future finances – Just because you have sufficient funds available to make a substantial down payment on a house does not mean you should put all of your eggs in one basket. Instead, you should weigh your short- and long-term plans and the expenses associated with them. This will allow you to determine exactly how much of a down payment to submit without putting your finances in jeopardy in the years to come.
Determining how much to submit for a down payment on a VA loan can be tricky for first-time and experienced homebuyers alike. Fortunately, home financing advisors are available to help you analyze your down payment options. These advisors can provide calculations and insights to help you make the best-possible down payment decision.
Regardless of how much you submit for a down payment on a house, it is usually a good idea to consider all VA loan options. By doing so, you can select a VA loan designed to serve you well both now and in the future.
There are many things you can do to streamline your search for the right VA loan, such as:
Meet with a variety of VA lenders – VA lenders are happy to meet with you, provide details about VA loan options, and help you make an informed home financing decision.
Hire the right real estate agent – Selecting a real estate agent who understands all aspects of VA loans may help you find a lender to match your expectations.
Analyze all of your homebuying costs – You likely will need to pay for a house inspection, appraisal, and other upfront homebuying fees, so you’ll want to account for these expenses accordingly as you analyze your VA loan options.
Lastly, online calculators are available to help you assess VA loans. These calculators are usually available free of charge and can help you review monthly mortgage payments. If you use an online calculator, you may be able to gain VA loan insights you may struggle to obtain elsewhere.
VA loans help U.S. veterans, service members, and their spouses get the financing they need to make their homeownership dreams come true. Plus, U.S. military personnel can pay a portion of the balance of a home upfront in combination with a VA loan, and the advantages of doing so can be significant.
You might not be required to make a down payment to obtain a VA loan, but doing so may prove to be crucial. If you analyze your home financing options, homebuying budget, and other factors, you can determine if making a down payment in conjunction with a VA loan is right for you.