Veterans of the regular military or the Reserves have the option to use their VA home loan benefit if they served enough time and had an honorable discharge. In exchange for your service, you may secure 100% financing for the home you buy. This means that you don’t need a down payment.
While that sounds exciting, there are times that even with VA financing you may need to or want to make a down payment. Keep reading to learn when this may apply to you.
Do You Exceed the County Limits?
The VA sets loan limits for each county in the United States. If you happen to buy a home that costs more than your county’s limit, you may have to put money down on the home. On average, the county limits are $453,100, as that is the conforming loan limit too. This is usually enough money to buy a home without putting any money down on it.
The VA also allows higher loan amounts in high-cost counties, which include many counties in California and Washington D.C. In these counties, you may borrow as much as $679,650, as that is the highest VA loan limit in any area.
If you do happen to buy a home that exceeds the county limits, you must put money down on it. The VA requires a 25% down payment on the difference between the purchase price and the VA maximum loan limit for your area. For example, if the limit is $453,100 and you buy a home for $475,000, you would pay:
$475,000 – $453,100 = $21,900
$21,900 x 0.25 = $5,475
In this case, you would need a $5,475 down payment.
Is the Purchase Price Higher than the Appraised Value?
Sometimes borrowers bid a price on a home that ends up being much more than the actual appraised value of the property. If this is the case, the lender cannot give you a loan for more than the appraised value. The home is the lender’s collateral for the loan. If you were to default on the loan, the lender would take possession of the house and try to sell it to make their money back. If they lend you more money than the home is worth, it could leave the bank in an upside position.
If you insist on buying the home for more than it’s worth, you would have to make up the difference between the purchase price and the appraised value. In this case, you would have to put down 100% of the difference because the VA won’t let lenders take a chance on lending you more than the home is worth. Most lenders wouldn’t want to take that chance anyways.
Does Making a Down Payment Help You?
Even though the VA doesn’t require a down payment in most cases, there are a few benefits you may realize by making one.
First, you’ll pay a lower funding fee. The VA charges a funding fee on every loan written in their name. When you buy a home, you’ll pay either 2.15% if you are in the regular military or 2.4% if you were in the Reserves. This is a percentage of your loan amount. Now if you make a down payment, you could pay less. For example, borrowers that put down between 5% and 10% on a home will only pay 1.5% for the funding fee if they were in the regular military.
Making a down payment also helps you build equity in your home. Starting with no down payment means you have 0% equity in your home. It could take quite a while to build up the equity since most of your payments go towards the interest on the loan for the first few years. If your home loses value, you could easily find yourself upside down.
Finally, making a down payment may help you secure a lower interest rate. Lenders look at your credit score, debt ratio, and loan-to-value ratio to determine your interest rate. The riskier your factors are, the higher the interest rate a lender may charge you.
While you don’t necessarily need a down payment for a VA loan, it’s not a bad idea if you have the money saved. If you don’t have it, just make sure you try to pay your loan balance down quicker by making extra payments so that you gain equity in the home faster and reduce the risk of going upside down on your loan.