Why You Should Consider a Down Payment On a VA Mortgage
VA Loan: Where a Down Payment May Make Sense
Why should you consider making a down payment on a VA home loan? The zero-down option is one of the most appealing parts of the VA home loan program; most borrowers are thrilled to have no downpayment requirement to budget for. But there are definite advantages to making a downpayment.
Do you know the scenarios where you may want to (or have to) make a down payment? They include situations where the borrower just wants a lower loan balance to start with, a need to reduce the VA loan funding fee and even cases where the sale price of the home is higher than the fair market value of it.
And in some cases, depending on the borrower’s credit and other factors, the lender may actually require a down payment as a compensating factor for lower credit scores or for a less-than-ideal loan repayment history. This factor may vary depending on the lender, the applicant’s financial history, and other factors.
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Those who don’t have to make a down payment but are tempted to do so should consider one important factor before deciding; how long to stay in the home?
If you are buying a starter home or anticipate a change in family size down the road that may make you reconsider keeping the house long-term? A down payment may not necessarily be the right decision in those cases. It really does come down to your financial goals and needs in many cases.
VA Loan Down Payments: Lower Principal Balance
The first major advantage of making a down payment is the lower principal loan balance. You’ll ideally pay less for the loan over time by starting out with that lower balance. Some VA loan applicants have a goal of saving as much over the lifetime of the loan as possible; for these applicants, a down payment is an excellent idea.
Some even choose a shorter loan term in addition to putting money down on their VA mortgage, making their savings potentially larger because the term of the loan is shorter and the interest rate could be lower under the right circumstances. Basically, a shorter term means reduced risk or the lender, and a lower interest rate could be a possibility as a result.
VA Loan Downpayments: Reduced VA Loan Funding Fee
The VA loan funding fee is required for most VA purchase loan transactions unless the borrower is exempt from paying it due to receiving or being eligible to receive VA compensation for service-connect disabilities.
The funding fee varies depending on whether you are applying for your first VA loan or are a second-time applicant. The VA loan funding fee is lower for first-time use and higher for subsequent use. But those who make a downpayment on their VA mortgage will get a reduced fee. How much your fee gets reduced depends greatly on the percentage of the down payment.
For those making a downpayment of five percent or less, the VA loan funding fee for first-time use is 2.3%. Subsequent use for the same down payment is 3.6% Those putting more than 5% down but less than 10% for first-time use or subsequent use pay a VA loan funding fee of only 1.65%. Paying 10% down gets you a VA loan funding fee of 1.4% for first-time and subsequent use. These rates apply to veterans, active-duty service members, and National Guard / Reserve members.
VA refinance loans don’t feature a reduced funding fee option, the funding fee for VA refi loans is either 2.3% (first-time use) or 3.6% (subsequent use).
VA Loan Down Payments: When the Asking Price Is Higher Than the Appraisal
In cases where the seller’s price turns out to be higher than the appraised value of the home, the borrower has some choices. One is to renegotiate with the seller to bring the asking price down.
Remember, VA borrowers cannot be compelled to close the deal on a VA mortgage where the appraisal is lower than the sale price–this is sometimes known as the VA loan “escape clause”. Basically, you are free to walk away from such a situation without penalty. You can’t be required to forfeit earnest money and you cannot be compelled to purchase.
If you don’t renegotiate with the seller, you have the option of moving forward with the mortgage anyway. But in such cases, your lender will require you to come up with the difference between the asking price and the appraised value in cash at closing time.
This amount must be paid upfront and cannot be financed into the loan amount. There is sometimes a difference of opinion as to whether this actually constitutes a down payment in the technical sense, but the result is basically the same. You pay a certain amount at closing time without rolling it into the mortgage loan.
VA Loan Downpayments for Partial Entitlement
You may or may not use up all your VA loan entitlement when you get a VA mortgage. Borrowers who use some but not all of their entitlement are free to use it again even if it’s not at the 100% mark. But doing so will definitely require some form of money down on the transaction to offset the lack of the full VA loan benefit.
Who does this rule potentially affect? A number of circumstances may apply when it comes to having partial VA loan entitlement:
- You have an active VA loan and it’s not fully paid off;
- You paid a previous VA loan in full and still own the home and have not applied for entitlement restoration;
- You refinanced a VA loan into a non-VA loan and still own the home;
- You had a short sale on a VA loan but did not repay the VA in full;
- You had a foreclosure or deed-in-lieu of foreclosure on a previous VA loan;
- You had a foreclosure on a previous VA loan and didn’t repay the VA in full.
The list above implies that the borrower, in each of these circumstances, has some amount of the VA loan benefit remaining but not 100%. You’ll need to work with a loan officer to discover how much money down might be needed for a specific VA loan transaction under such conditions.
VA Loan Downpayments As a Compensating Factor
Another situation where a down payment might be required on a VA loan? When the borrower’s credit qualifying information, FICO scores, or other financials require a “compensating factor” in order to justify approving the loan.
Borrowers who have strong credit may not deal with this issue, but those who are working on fixing the financial mistakes of the past may (depending on how far along the credit repair journey might be) require the lender to ask for a downpayment.
This is something that is basically left up to the lender. The VA does not have a set FICO score range indicating an “ideal” applicant. Instead, the VA defers to the participating lender’s standards.
What to Consider About a VA Home Loan Downpayment
It’s easy to give generalized advice here. A downpayment that reduces your loan principal is never a bad thing for those who can afford to make that choice. Some don’t have a choice and must put money down in order to make their purchase a reality. Either way, a lower VA loan funding fee might be the result.
The complicating factor for some borrowers is the other expenses associated with the loan getting in the way of having enough money left over to make a down payment.
There are closing costs to deal with such as appraisal fees, compliance inspections, issues related to the title, even relocating expenses like movers or moving truck rentals. Not everyone can afford to put money down, but if you can afford to do so there are enough advantages that doing so may be well worth the expense.
>> Interested in a zero down payment possible home loan with no PMI? For a no-obligation, free consultation regarding your VA Loan eligibility, please go here.
- Getting Started With VA Loan Benefits
- VA Loans, Investment Properties, and Deployments
- VA Loan Occupancy Rules: What You Need to Know
- The VA Loan Certificate of Eligibility