VA loans do not require a down payment. You can get 100% financing up to the national conforming limit. That means a loan of $453,100 with no money down.
But, this doesn’t mean you can’t put money down. If you have the money available, you may want to consider the benefits of putting your own money into the home. We cover the top benefits below.
Pay a Lower Funding Fee
Loans cost money no matter which program you choose. However, the VA loan charges a funding fee on top of the closing costs you would pay on any other loan. If you don’t make a down payment, you’ll pay 2.15% of the loan amount in a funding fee. You can pay it upfront out of your own pocket or wrap it into your loan. If you do wrap it into the loan, you essentially pay more than the 2.15% because you’ll then pay interest on the money borrowed.
If you do put money down on the home, you may pay a lower funding fee. If you put down between 5 and 10% of the loan amount, you lower your funding fee to 1.5%. If you put 10% or more of the loan amount down, you lower the funding fee to just 1.25% of the loan amount.
Let’s look at how this affects you on a $250,000 loan.
- No money down – Your funding fee would equal $5,375
- 5% of the loan amount down – Your funding fee would equal $3,750
- 10% of the loan amount down – Your funding fee would equal $3,125
The savings between no money down and a 10% down payment is $2,250. That’s a significant amount of savings.
Pay Less Interest
Every loan charges interest. But, the amount you borrow determines just how much interest you pay. If you put money down on the home, you lower your loan amount. This lowers the amount of interest you pay over the life of the loan.
Let’s look at the difference in interest over the life of the loan on a $250,000, 30-year fixed loan at 4.5%:
- No money down – You would pay $206,016 in interest over the 30 years
- 5% of the loan amount down – You would pay $195,715 in interest over the 30 years
- 10% of the loan amount down – You would pay $185,415 in interest over the 30 years
Between the 100% LTV loan and the 90% LTV loan, you would save $20,601 in interest. Granted, that means you put down $25,000 of your own money at the start of the loan. If you chose the 5% down payment, you would put down $12,500 and would save $10,301 in interest over the life of the loan.
Lower Monthly Payments
The less you borrow, the less interest you pay each month as well. It might not be a huge savings, but every dollar counts. Let’s look at the difference on the same $250,000 30-year loan at 4.5%:
- No money down – Monthly payment equals $1,267
- 5% down – Monthly payment equals $1,203
- 10% down – Monthly payment equals $1,140
Between borrowing 100% of the purchase price and putting 10% down, you could save $127 per month. If you are trying to keep your monthly payments down, this could be a good incentive.
Own Your Home Faster
When you borrow 100% of the home’s purchase price, you have no equity in the home. While it’s not necessarily a bad thing, it does not protect you against a declining housing market. If your home loses value, you could quickly find yourself upside down (owing more than the home is worth).
If you put money down, you’ll have instant equity in the home. Let’s say you put 5% down, that means you have 5% equity in your home. As you continually make your payments on time, you’ll knock the principal balance down little by little. At first, you pay mostly interest in your payments, but soon enough, you’ll pay more principal and really knock the balance down.
Having equity in your home isn’t a necessity, but it does give you a little peace of mind if the value drops. It also gives you a cushion should you need to take out a home equity loan in the future because you need the funds. In the meantime, it helps lower your payment, costing you less interest while you can be without the funds.
Get Great Rates
Sometimes putting money down on a home makes you a more attractive borrower. Lenders might try to compete for your business. Making a down payment makes your loan less risky. You have ‘skin in the game,’ which means you’ll do what you can to make your payments on time. Lenders will see this as a positive and may offer you more competitive interest rates than if you didn’t put any money down.
If that’s the case, you can use it to your advantage. You can shop around with several lenders. This allows you to see which lender offers the most attractive interest rate and fees. Sometimes lenders will even charge fewer closing costs if they know your loan is not risky.
Of course, it’s a personal decision regarding whether or not you make a down payment. It’s certainly not required. But, if you are a borderline borrower because you have a low credit score or a high debt ratio, it could work to your advantage. Anything you can do to lower the risk of your loan will help you get more attractive terms. Sometimes it can even make the difference between a loan approval and denial!