The VA home loan offers veterans many benefits including 100% financing. This means that you don’t need a down payment. There isn’t a certain credit score that you need or other qualifying factors that make you eligible for the lack of down payment.
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If you do want to make a down payment, you can. It will help lower the amount of the funding fee that you will owe. We discuss this in detail below.
The VA Down Payment
You can get approved for a VA loan with no down payment. As long as you meet the following requirements, you are in good shape:
- 620 credit score
- Maximum 43% total debt ratio
- Stable income
- Stable employment
- Proof that you will live in the home as your primary residence
- Enough disposable income to support your family in the area that you live
Of course, you also need entitlement for the VA loan. You get entitlement when you serve at least 90 days during wartime or 181 days during peacetime. If you serve in the National Guard or Reserves, you must serve at least 6 years.
If you meet these requirements, you’ll be eligible and possibly qualify for a VA loan with no down payment. This means that you borrow 100% off the purchase price of the home.
The VA Funding Fee
If you don’t make a down payment, you’ll pay 2.15% of the loan amount if you were a member of the regular military and 2.4% of the loan amount if you were in the National Guard or Reserves.
Now, if you make a down payment, you may be able to decrease this fee.
- If you make a down payment between 5% and 10%, you reduce the funding fee to 1.5% of your loan amount
- If you make a down payment of 10% or more, you reduce the funding fee to 1.25% of your loan amount
The down payment can help you decrease your funding fee, which you typically pay upfront unless there is enough value in the home for you to wrap the fee into the loan.
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How Making a Down Payment Helps
Let’s look at how you can make things a little better by making a down payment by using a $200,000 loan as an example.
If you don’t make a down payment, you’ll borrow $200,000 and pay a funding fee of $4,300. That $4,300 has no effect on your loan.
Now let’s say you make a $10,000 down payment. You would lower your funding fee to $3,000. That’s still a lot of money, but you have 5% equity in your home now. As you make payments, your equity will increase a little faster than if you started at 0% with no down payment.
If you made a $20,000 down payment, you’d pay a funding fee of $2,500. You’d also have 10% equity in the home. You’d have the lowest mortgage payments with this option and pay the least amount of interest.
While you might want to take advantage of the VA’s no down payment requirement, it may cost you more in the end. While you don’t have to pay mortgage insurance, you have to come up with the funding fee to pay at the closing. If you wrap it into your loan, you increase the amount of interest you pay over the life of the loan because you increase your loan amount.
It helps to look at the big picture when deciding which route to take. If you don’t have the money to put down, then obviously you should take the 0% down payment loan. You can gain equity in the home by making extra payments towards the loan’s principal if you can. This will have a slower effect than if you put money down on the home, but it can help. The larger amount of principal that you pay early in the loan cycle, the less interest you’ll pay over the life of the loan. It’s important to look at the big pictures so that you have an understanding of how much the loan will cost you in its lifetime.
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