Why Veterans Make A Downpayment When None Is Required

Mark Henricks
Mark Henricks
The Mortgage Reports Contributor
November 4, 2019 - 4 min read

Veterans Have A Choice About Their Downpayment

Military home buyers are enjoying the benefits of the VA home loan.

Eligible veterans and active military never pay mortgage insurance, a cost that can run hundreds of dollars per month on FHA mortgages and conventional loans.

VA applicants can qualify with lower credit scores, too.

But they don’t pay higher mortgage rates in return for these loan advantages. The average VA borrower will receive an interest rate about 29 basis points (0.29%) lower than a conventional borrower, according to loan software company Ellie Mae.

Even in light of all these benefits, the most attractive feature of a VA loan is that they require no downpayment. Other loans types require downpayments between three and 20 percent of the purchase price.

VA loans require a downpayment of zero percent, and zero dollars.

But this does not mean that a VA borrower can’t choose to put money down. About 10% of veterans choose to do so. There are good reasons to make a downpayment on a VA loan, among them qualifying for reduced costs and easier loan approval.

Today’s market sees about one in ten veterans choosing a VA loan downpayment, even though it’s not required.

VA Loan Downpayments Reduce The Funding Fee

VA funding fees help keep the program self-sustaining and available for future homebuyers.

For VA loans, the funding fee for veterans making no down payment is 2.3 percent of the loan amount.

But this amount does not apply to every VA borrower.

Veterans who are receiving service-connected disability payments do not pay funding fees. The VA says about 35 percent of veterans who use the VA loan program do not pay any funding fees for this reason.

But the fee can be reduced by making a downpayment of as little as 5 percent. A larger down payment of 10 percent can reduce the funding fee even further.

VA says about 12 percent of VA loan program users make some sort of downpayment.

VA Funding Fee Reduction, In Dollars

On a $250,000 mortgage, a typical VA funding fee equals $5,750 which can be wrapped into the loan amount.

But the funding fee goes down to 1.65 percent when the veteran makes a five percent downpayment. In dollars, the savings would be $1,625 in this case.

Making a ten percent downpayment would save the typical VA buyer $2,250.

A down payment does not reduce the funding fee on a VA cash-out or VA streamline refinance. But home-buying veterans can utilize a downpayment to reduce their principal balance and overall loan costs.

Greater Funding Fee Savings For “Subsequent Use” Buyers

Veterans who have used a VA loan before can stand to save the most in funding fees by making a small downpayment.

Using a VA loan for the second or additional time requires a “subsequent use” VA funding fee.

This funding fee is equal to 3.6 percent when the veteran who is using a VA loan again makes no downpayment.

The fee is reduced to just 1.65 percent for a borrower with a 5 percent down payment. The funding fee drops to 1.4 percent with ten percent down.

The below shows funding fee savings examples at common loan amounts when the veteran puts five percent down.

  • For a $250,000 VA loan: $4,875 in savings
  • For a $300,000 VA loan: $5,850 in savings
  • For a $350,000 VA loan: $6,825 in savings

It can be a smart decision to make a down payment on a VA loan, especially for veterans who have used the program before.

These veterans may be selling their current home and have cash proceeds on-hand from the sale. Making a small downpayment can give you the benefits of a VA loan — like no mortgage insurance and easier qualifying – without the entire cost of the funding fee.

A larger down payment means a lower loan balance and reduced monthly payment. Over the life of a loan, this can come to considerable savings.

For example, consider a veteran who is purchasing a $300,000 home and using a VA loan for the second time.

By making a 5 percent downpayment, this buyer could cut his total loan balance by about $20,000 and while reducing his monthly payment by $90 per month.

There are significant savings available for veterans who can make a down payment.

Making A VA Loan Downpayment To Increase Chances Of Approval

There’s another benefit to making a downpayment on a VA loan besides cost savings: easier approval.

VA buyers who are not initially approved should ask their lender to run their scenario assuming a small downpayment.

Just 1-2% down wouldn’t reduce the buyer’s funding fee, but it might turn a denial into an approval.

Across all loan types, downpayments are one of the leading indicators of the borrower’s commitment to repay the loan. Making a small downpayment can tip the scales for VA buyers who are “on the edge” of an approval.

This strategy works especially well for VA buyers with lower credit scores or past credit blemishes. Sometimes a downpayment can “make up” for a less-than-perfect credit profile.

Around 90 percent of veterans make no down payment whatsoever, and most are approved. But those who are not should consider a scenario that involves a small downpayment.

What Are Today’s Rates?

The VA loan program makes home buying affordable for millions of veterans and their families. While VA borrowers don’t have to make down payments, sometimes it makes sense.

Get a VA loan eligibility whether or not you can make a down payment. Start now.

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