One of the primary benefits of a VA loan is that borrowers don't need to make a down payment. This allows veterans to purchase a home more easily than with conventional mortgage loans. However, is buying a house with no money down a good idea?
With conventional loans, if a borrower does not make a 20% down payment, they have to buy private mortgage insurance (PMI). The cost of this insurance is added to their monthly mortgage payment and they must keep paying PMI until they have 20% equity in their home at which time they may request to cancel PMI.
There is no private mortgage insurance with VA loans. There is, however, a VA funding fee most veterans must pay when they buy a home. The funding fee is used to help the Veterans Administration cover any losses on loans that may default in this program. A few groups are exempt from paying the fee but a majority of veterans have to pay it. And the smaller your down payment, the higher the funding fee.
For example, if you are a regular military veteran who is buying your first home with a VA loan and you make no down payment, you will pay a funding fee equal to 2.15% of the purchase price of the home. On a house costing $250,000, you will pay a fee of $5,375. Note you can roll this funding fee into your loan so you don't need to pay it when you close on your house.
If you able to gather 5% down for that same house then the funding fee drops to 1.50% with a cost of $3,750. And the funding fee drops to 1.25% when you make a down payment of 10% or more.1
The funding fee for individuals in the reserves and National Guard is a little higher than for regular military veterans. And the funding fee can be higher the second time you use a VA loan to buy a house if you do not make a down payment.
There are other advantages to making a down payment when you buy a house with a VA loan besides reducing your funding fee. A larger down payment reduces the amount you need to borrow, which can save you money on interest payments. A down payment also starts you on a path to building equity in the home.
Look at the big picture of your finances before you make your decision about a down payment. You may want to keep cash in reserve to pay for unforeseen expenses or emergency repairs. If you have high interest debt, it may make more sense to pay down this debt rather than to put cash down on your house.
- Information about the VA loan funding fee can be found on the U.S. Department of Veterans Affairs website and in their Funding Fee Tables document.