VA loans are among one of the only programs that don’t require a down payment. You can finance 100% of the home and you don’t even have to pay monthly mortgage insurance. The VA guarantees the loan for you, which takes the place of the down payment. Lenders don’t have to worry if you default, since the VA will pay them 25% of the amount you default on if it comes to that.
But does this mean you will never need to put money down on a VA home? There are certain situations when you just might need to. Keep reading to learn when this might be the case.
Buying a Home for More than the Conforming Limit
The VA usually guarantees 100% of the loan amount for loans up to the national conforming limit. Today this means $453,100. You can still buy a home for an amount higher than this; you will just have to make a down payment.
Just how much do you have to put down? It depends on the loan amount. Basically, you will put down 25% of the difference between the conforming limit and your purchase price. For example:
You want to buy a home for $500,000. You have entitlement for a loan up to $453,100. You don’t have to put any money down on the first $453,100. But, you have to put 25% down on the $46,900. So in this case, you would put down $11,725.
You must make up the difference because the VA won’t guarantee loans over the national conforming limit. This means you have to put the money down so that you can give the lender the same type of guarantee.
Using up Your Entitlement
The VA provides you with entitlement to secure a loan up to $453,100. Once you take a loan, you use your entitlement equal to the loan amount. Let’s say you took out a $200,000 loan. Then you would have used up that much of your entitlement.
The VA gives you a total of $113,275 in entitlement. Multiply that by four and you have the $453,100 limit. When you take out a $200,000 loan, you use up $50,000 of your entitlement. This leaves you with $63,275 in entitlement or a loan for $253,100.
Now let’s say paid off your original loan but you want to keep the home. You only have $253,100 entitlement left but you want to buy a home for $350,000. You won’t be able to get away without making a down payment. Instead, you will have to put down 25% of $46,900 or $11,725.
You Can Make a Down Payment if You Want To
There also isn’t a rule that you can’t make a down payment. Just because the VA provides 100%, financing doesn’t mean that you can’t put money down. If you want to get ahead on your loan and give yourself a little equity from the start, you are more than welcome to put money down on the home.
This will only work in your favor. It will lower your debt ratio and make you look like a more favorable borrower. When you have your own money invested, it helps lenders see you as less risky. Even though VA guidelines are rather lenient, it can still help matters, especially if you are trying to get the lowest interest rate available.
Making a down payment on a VA loan isn’t necessary, but it might come up in certain situations. If you want to buy a home that exceeds the VA’s limits, you’ll have to have a little of your own skin in the game in order to obtain the loan.