The VA Loan is the unquestionably the best mortgage option for all service members. It has awesome benefits including:
- No Private Mortgage Insurance (PMI). No matter how small your down payment is you will never have to pay costly private mortgage insurance. For traditional home buyers a down payment of less than 20% requires PMI.
- The best interest rates. VA loans are backed by a federal guaranty which means that the lender (bank, credit union etc.) is taking on less risk when they lend to veterans. If a veteran defaults on their mortgage, the federal government steps in to pay a portion of it. This translates to a .5-1% interest rate savings for veterans using the VA loan. It is simply cheaper to buy a home with the VA loan than with a traditional mortgage.
- No pre-payment penalty. Unlike some mortgages the VA loan does not have a pre-payment penalty. If you choose to pay off your home early it won’t cost you anything extra.
This is a tremendous list of benefits but we have intentionally left out one, which is the subject of our post today
VA LOANS DON’T REQUIRE A DOWN PAYMENT!
This is the best benefit of VA loans, hands down. If you qualify it allows you to purchase your primary residence with $0 down. No other mortgage product offers this. The question is should you take advantage of this benefit or not?
Why You Should Put 0% Down
If you choose to purchase a home with a VA loan and put 0% down, you are far from alone. In fact 9 out of 10 homes purchased with the VA loan have no down payment. Even considering this the foreclosure rate for VA loans is the lowest in the country, only about 1.98%. This is 1% less than other types of mortgages.
With these things in mind it would seem that putting $0 down makes perfect sense, and many veterans would agree. The benefits of putting no money down are substantial:
- You can purchase now. Mortgage interest rates are increasing slowly and being able to purchase now may allow you to lock in a lower interest rate for the life of your loan. That can lead to pretty significant savings over the lifetime of your mortgage. Purchase a home when you are ready. However if you are waiting for interest rates to decrease before you buy, that isn’t likely to happen.
- Your cash is free. You may have the cash in savings to afford a down payment but don’t want to put it toward your home purchase. That money can be kept in your savings account, or put toward other goals. You don’t have to take your cash and put it into your home.
- You can invest your extra money. Without the burden of a down payment, you can take your extra funds and invest them for other long term goals.
Looking at this list it would seem like you’d be crazy to put even a dollar down on your VA loan financed home, but there are some other factors to consider. So before you head down to your bank to talk to a mortgage officer, keep reading.
Why You Should Put More than 0% Down
There are some very compelling reasons you want to consider putting more than $0 down. Including:
- The funding fee. Every VA loan requires a funding fee, regardless of your down payment. This fee is collected to help continuously fund the VA loan program. The percentage rate of the fee depends on a variety of factors including military experience (regular, reserve, retired), if you are VA disabled (10% or more leads to a waiver of the fee), and most importantly the size of your down payment. For a non-disabled regular military member with a $0 down payment the funding fee is 2.15% of the purchase price. For a $200,000 home that would amount to $4300. If you put 5-10% down ($10,000-$20,000) your funding fee drops to 1.5% or $3000. If you put more than 10% down the funding fee drops to 1.25% or $2500. Putting down extra cash up front can lead to some significant savings for you in the long run.
- Housing security. Although the VA loan default rate is very low, having a lower down payment puts you at a greater risk of foreclosure. Your monthly payment is going to be higher if you put $0 and you do not have any equity to access in case of emergencies.
- Saving on interest. The larger your down payment, the less you will pay in interest over the life of your loan. If you buy a $200,000 home with no down payment at 3.5% interest you will pay $323,000 total ($123,000 in interest) for your loan. If you put 10% down your loan will be for $190,000 and you will pay $307,000 total ($117,000 in interest) for your mortgage. Putting that extra $10,000 down helped you save $16,000 in total. That savings could be worth delaying your purchase until you have a down payment.
The Choice Is Yours
Whether or not you choose to put a down payment on your home is ultimately up to you. We hope that these pros and cons will help you make an informed decision. If you have further questions about the VA loan or the home buying process feel free to leave a comment below.