Should I make a Down Payment?

This is a question we get asked quite a bit. Let’s look at some quick background and a couple things to consider.

Background

The great news about your VA Loan Benefit is that is comes with a no down payment option (assuming you qualify). There is no other loan product like this. This is possible because the VA guarantees part of the loan using money collected via VA Funding fees.

The table below shares the current VA funding fees for purchase or construction loans (that’s right you can build a new house using your VA Loan). The funding fee is a percentage of the loan amount. For example, the funding fee on a $300,000 loan (first time use, 0% down payment) would be $6,450. In almost all cases, you have the option of rolling this into the loan.

If you have a service-connected disability or are active duty and have a purple heart, you’re likely exempt from these fees.

Down payment considerations:

• Are you eligible for the VA Loan and do you have sufficient entitlement to allow for 0% down? You can verify this online with the VA or your lender can quickly help verify this. If this will be your only outstanding VA Loan, you likely have your full entitlement and can look at down payment options.

• If you don’t have money to make a down payment, you can keep reading for future loans, but don’t worry that’s part of why the VA Loan benefit exists --- to help you become a homeowner without making a down payment.

• Are you exempt from the funding fee? This will be listed on your Certificate of Eligibility (COE), unless it’s a new determination that’s still being processed (in this case you’d want to take a closer look to understand timelines and required documentation).

• Is this your first VA Loan or subsequent use? The funding fee changes for subsequent use, you want to be looking at the correct figures.

• If you’ve used your VA loan before, can you put 5% down? Note the decrease in funding fee from 3.3% to 1.5% with a 5% down payment.  In many cases it makes sense to put this extra money down. That’s what I did on my last VA Loan purchase.

• If you have money to put down, what is the opportunity cost and desired liquidity of your money? Putting small amounts down normally doesn’t make a large impact to monthly mortgage payments, but you can run the numbers for different scenarios.  Keeping this money working outside your house where it could be more liquid and earning greater returns might make more sense.

• Can you put at least 20% down? In most cases if you put at least 20% down you can qualify for conventional financing without mortgage insurance.  In this case, there would be a greater impact on your monthly payment and you’d be avoiding mortgage insurance. We still normally see better VA Loan rates compared to conventional financing, but you could run this scenario with your lender and take these other factors into consideration.

• Do you need to make a down payment to qualify from a debt to income or residual income perspective? If your ratios are tight, we might need you to make a down payment to qualify.

Bottom Line

If you’re tight on cash or wanting to keep as much as possible liquid for other purposes, putting 0% down can be a great option.

If you have the ability to put 5% down (especially in subsequent use situations), many veterans put 5% down to save on the funding fee. 

If you have a service-connected disability, we see many electing for 0% down and putting that money to work elsewhere.

If you have questions about what’s best for you, please shoot me a message and I’m happy to help you look at some options

Aaron Sanders NMLS 2555076

U Mortgage NMLS ID 1457759