Do VA loans require a down payment?

No. One of the biggest selling points of a home loan backed by the U.S. Department of Veterans Affairs (VA) is the lack of a down payment requirement. While buyers with conventional and FHA-backed loans need to come up with a percentage of the purchase price — some aim for as much as 20 percent of the loan to avoid mortgage insurance — those with VA loans have a much easier number to hit: zero.

It’s important to note that there are some rare exceptions to this rule. If the sales price of a property is higher than its appraised value, you’ll have to make a down payment. For example, if you make a $400,000 offer to buy a home and an appraiser determines it is only worth $380,000, you’ll need to come up with a down payment to cover the gap.

Also, if you don’t have full entitlement, you might be subject to VA loan limits and need to contribute a down payment.

Why don’t VA loans require a down payment?

Mortgages that don’t require some sort of down payment are quite unusual these days. So why the exception for VA loans? A burst of generosity towards the men and women who serve their country?

Partly that — VA loans are designed as a benefit for the United States’ past and present military members and their families — but there’s a financial reason as well. As with FHA and USDA loans, the federal government (specifically, the VA in this case) insures part of every VA loan, which are actually made by private lenders.

This federal backing alleviates the risk a lender takes on when originating a VA loan. In general with mortgages, lenders limit the amount of a home they’ll finance — demanding a down payment for the rest — to reduce their exposure: If a borrower has contributed their own cash, the thinking goes, they’ll be less likely to renege on the mortgage and abandon the house down the road.  But with government insurance — of at least 25 percent, more than the equivalent of a typical down payment — an additional contribution from the borrower isn’t necessary to reduce lending risk.

Should you make a VA down payment even though it’s not required?

Yes, maybe you should make a down payment, even if it’s not required for the VA loan. Doing so will reduce the amount you borrow today and could save you money tomorrow.

Benefits of making a VA loan down payment

Pay a lower funding fee

The funding fee is a critical part of the VA home loan program, helping to lower the cost to taxpayers. If you make a down payment, you’ll pay a lower fee.

Let’s say you’re a first-time homebuyer planning to take out a loan for $340,000. With no down payment (or a down payment of less than 5 percent), the funding fee would be 2.3 percent of that amount, for a total of $7,820. If you were to make a down payment between 5 percent and 10 percent, that fee would shrink to 1.65 percent, or $5,610. If you were to make a down payment greater than 10 percent, the funding fee would drop to the lowest available rate of 1.4 percent, or $4,760.

If this isn’t your first time using the VA loan benefit, there’s an even bigger incentive to make a down payment: The VA funding fee jumps to 3.6 percent after the first use.

Save on monthly payments

In addition to lowering the one-time funding fee, making a down payment can make a difference every time you receive your monthly mortgage bill: Since you’re borrowing less money, you’ll likely have a lower payment. Plus, you’ll save money by paying less interest throughout the lifetime of your loan. The larger your down payment, the more you could save on interest. Use Bankrate’s VA home loan calculator to estimate your monthly payments.

Build equity quicker

Making a down payment means you’ll have instant home equity — that is, an immediate ownership stake in your home (the part you financed technically belongs to the bank). It also means you’ll owe less on your home than it’s worth. Without an equity stake, if your home’s value drops drastically, your property could be “upside down,” meaning you might owe more on your mortgage than the property’s worth. If you need to move and can’t make enough on the sale to pay off the loan, you could be in financial trouble.

Also, building equity faster means you can tap into it if the need arises by taking out a home equity loan or home equity line of credit (HELOC). These types of secured loans, which use your home as collateral, can cost less, saving you money when you need cash for major home upgrades or repairs.

Become more competitive in the market

Putting down some money upfront can indicate to sellers that you’re a more serious buyer. Some of your funds could be put down as earnest money — cash you have in escrow to show the seller you want to purchase the home. It could make you more competitive, especially in heated housing markets: In fact, recent data from the National Association of Realtors shows that the average home is receiving more than three offers.

Also, your VA loan application won’t automatically be approved. While there aren’t strict requirements for credit scores, you might want to make a down payment to strengthen your application and chances for approval. Making a down payment could also improve other factors lenders look at, such as your maximum debt-to-income (DTI) ratio.

Drawbacks of making a down payment on a VA loan

Though down payments can be a good thing in some cases, you do need to consider the drawbacks before committing to making a VA loan down payment.

You might have to wait

If you need a few extra months to save up enough money for a down payment, you’re wasting precious time — with rates rising, you could end up with a much more expensive mortgage the longer you hold off. Moving right away and putting zero down means you don’t have to rent any longer and can start building equity immediately with lower borrowing costs.

You could drain your savings

Perhaps you have enough cash reserves for a down payment but using it will put your bank account in dangerously low territory. Rather than tying your money up in a home, it’s probably a better idea to maintain this cash reserve in case of unforeseen circumstances and financial emergencies, like a job loss, or other large expenses.

You might need the money to fix up your new place

Having cash reserves on hand also helps to pay for related costs of home purchases. Maybe you found a home in a neighborhood you love but it needs a new HVAC system, or you want to purchase new furniture. In cases like these, freeing up cash flow can be a smart choice.

When do VA loans require a down payment?

There are some scenarios in which you will have to make a down payment, after all. They include:

• Purchase price is higher than the market value: VA loans can only offer up to the home’s market value. If you are paying more than the home appraises for, you’ll have to make up the difference. For example, if you’re buying a home for $275,000 and it appraised for $250,000, you’ll need a $215,000 down payment.
• The VA loan amount is higher than the VA loan limit: Some borrowers face limits on how much they can borrow. Typically, these limits only apply to people who have defaulted on VA loans in the past or who already have a VA loan they’re paying off. If you’re trying to borrow more than the VA loan limit, which is the same as the FHFA conforming loan limit, you’ll need a down payment.
• You have partial VA loan entitlement: To get a VA loan, you must have a VA loan entitlement that states that the government guarantees your loan. Most veterans and service members will have a full entitlement. However, if you’ve defaulted on a VA loan previously, currently have a VA loan, or still own a home that was paid for with a VA loan, you’ll only have a partial entitlement. If the home costs more than your entitlement amount, you’ll need a down payment.

Bottom line on VA loan down payments

VA loans are a great opportunity for service members and veterans to buy a home with no down payment. However, just because a down payment isn’t required doesn’t mean it’s not worth making one. Think about your financial situation to decide whether a down payment is right for you.