While it’s not required, it’s something to consider.
One of the primary benefits of a VA loan is that borrowers don’t need to put cash down or bring cash to closing. This allows veterans to purchase a home more easily than with other conventional mortgage loans. However, is no money down a good idea?
With conventional mortgage loans, if a borrower doesn’t put down 20%, they would have to pay Private Mortgage Insurance (PMI), which is added to your monthly payment separate from the mortgage and needs to be paid until you own 20% of the home.
For VA loans, while there isn’t PMI, there is a funding fee that kicks in when you buy a home with no down payment. The funding fee is used to help the Veterans Administration cover any losses on loans that may default in this program. There are a few groups who are exempt from paying the fee, but generally the more you put down, the less money you must pay. It also needs be paid on subsequent VA loans after your first-time use. Learn more about the VA funding fee.
For example, on a new home, if you do not put any money down, you will pay a 2.15% fee. On a house costing $250,000, that’s $5,375. If you able to gather 5% down for that house, then that fee drops to 1.50% with a cost of $3,750. You can roll that amount into your loan, so you don’t need to pay cash. However, the more you put down, the lower your mortgage payment, the less you would need to finance and pay interest on, but you don’t want to empty your bank account either. Make sure you have cash in reserve to pay for any unforeseen purchases or emergency repairs or to pay down other high-interest debt.
A down payment also starts you on a path to build equity in the home, which helps if you don’t plan on staying long in your home and want to sell in a few years. It also gives you options down the road to tap into your home’s equity to pay for expenses or make improvements.
To pay or not to pay a down payment is a question that you’ll need to consider. Weigh the pros and cons and what is financially feasible for you. Do the math on the monthly payments and interest to make sure you’re not stretching your wallet too far.