One of the most important things a borrower can do when considering the purchase of a new home is to compare lenders and loan types.
Once you begin making these comparisons, it's easy to see why many Veterans choose a VA-guaranteed mortgage as opposed to a Federal Housing Administration loan or conventional mortgage. VA loans feature some of the best down payment options for eligible borrowers.
Do VA loans require a down payment?
VA mortgages are available for no money down for eligibile borrowers and never have any private mortgage insurance (PMI). The no-money-down VA-insured mortgage gives borrowers with tight budgets more flexibility in the important early years of the home loan.
Comparing VA to Conventional and FHA Loan Down Payments
Unlike VA loans, conventional lenders require down payments of at least 3-5 percent down or more. A mediocre credit history can negatively affect interest rates and other loan terms available through conventional mortgages. Borrowers may need excellent credit and to make a down payment in the 20-percent range to get terms comparable to VA loans. Unless borrowers put down a large sum of money, their conventional loan will feature private mortgage insurance (PMI). VA loans never have PMI, even if the borrower puts $0 down at closing.
FHA loans provide a much better down payment minimum of 3.5 percent compared to conventional loans. But mortgage insurance for FHA loans is usually the highest in the housing market. Mortgage insurance figures into the monthly payments for the life of a loan, and it can make the loan substantially more expensive in the long run than a similar VA loan.
Can I put money down on a VA loan?
Yes. Although about 90 percent of borrowers use VA loans with no down payment, there's a perk to putting as little as 5 percent down. Once a VA loan borrower puts down at least 5 percent down, the VA Funding Fee shrinks. For a first-time VA loan borrower, the funding fee is typically 2.3 percent with no money down. But if that borrower makes a 5 percent down payment, the fee drops to 1.65 percent of the loan's value. The fee dips again if borrowers pay down 10 percent or more.
If you put money down on a VA loan, it may also lower your monthly mortgage payments, meaning you will be paying less interest over time.
Do VA loans ever require a down payment?
There are some cases where you are required to make a down payment on a VA loan. If you don’t have your full VA entitlement, VA loan limits apply. Loan limits vary by county and determine how much can be borrowed before a down payment is required. Again, this only applies to borrowers who don’t have their full VA loan entitlement such as borrowers who are buying a second home.
Learn more: What is VA Entitlement & Why It’s Important
Using Gift Funds for a Down Payment
VA loans allow borrowers to use gift funds toward down payments and closing costs. The gifted money needs to come from someone close to the borrower. Lenders will want paper trails for the gift money too, which means you can't just have a family member hand you a bunch of cash to cover your down payment right before closing.
Your lender may request a letter when gift funds are used for down payments and closing costs. The letter needs to include the donor's information, relationship to the borrower, details about the gift amount and transaction, plus legal phrasing that specifies no repayment is necessary.
Lenders may have their own guidelines and requirements for gift funds. Talk with your loan officer for more information.