It’s not just the low rates that sell VA loans, their strongest points being the 0% down payment requirement and no mortgage insurance assurance. Still, there are qualified veterans who choose to make their down payments. Surely, a reason exists why they opt to save/pool their money for a down when they are not required to do so?
Here are the top reasons behind some VA loan borrowers’ decision to go ahead with down payments:
- Funding Fee
- Base Loan Amount/Payment
- Loan Qualification
Higher Down Payments, Lower VA Funding Fees
Borrowers who put a down payment of at least 5% or more of the purchase price will pay a lower funding fee than those who don’t.
This funding fee is a percentage of the base loan amount that goes to the VA so that it can continue to guarantee home loans for active and retired service personnel.
How the funding fee is calculated would depend on whether (i) you are a veteran or a reservist/National Guard, (ii) you are buying the first time or second time, and (ii) the size of your down payment.
A veteran generally pays lower funding fees compared to a reservist. And veterans with service-connected disabilities are exempt from paying a funding fee.
For example, a veteran like you getting a VA loan for the first time will be paying the funding fee as follows:
- 2.15% if your down payment is less than 5% of the purchase price.
- 1.50% if your down payment is at least 5% but less than 10%.
- 1.25% if your down payment is 10% or more.
As you can see, a down payment of at least 5% has a lower funding fee compared to that of none; make a 10%-downpayment and you’ll pay an even lower funding fee of 1.25%.
You can choose to pay the VA funding fee upfront or finance it together with your loan for as long its inclusion does not exceed the maximum mortgage amount or the statutory mortgage limit for VA loans.
Less to Borrow, Lower Monthly Payment
On a theoretical $200,000 home with a down payment of 0% and an interest rate of 3.375% for 30 years, your monthly payment is $884.19. If you finance the funding fee of $4,300 (2.15% of $200,000), your monthly payment now becomes $903.20.
However, if you put down $10,000 (5% of the purchase price) and only borrow $190,000 at the same rate and term, your monthly payment becomes $839.98. If you add the funding fee of $3,000 (1.50% of the loan amount) into the loan, your monthly payment becomes $853.25.
This leads us to the second point: by putting a down payment of 5% you are borrowing less and would thus be paying a lower monthly amortization throughout the life of your loan. The difference between the two monthly payments is proof.
More Chances of Qualifying
Making a down payment can boost your chances in qualifying for loans, in general. This down payment represents your commitment to the loan and compensates for a low credit score or a high debt-to-income ratio, as applicable.
Speaking of DTI, a lower monthly payment could figure well into your income so your housing expense ratio won’t exceed the benchmark level.
A down payment serves as your initial equity, something that you can add on as you make your monthly loan payments and count for home prices to go up. This scenario helps you sell your house faster or refinance your VA loan when the time comes.