Do You Need a Down Payment for a VA Loan?

The charm of VA loans is that the U.S. Department of Veterans Affairs (VA) does not require a down payment. Some lenders may require you to make a down payment on a VA loan if you’ve used your VA benefit before and have yet to restore your entitlement status. Others may require a minimum VA loan down payment when financing an amount higher than the conforming loan limits in the area.

According to the Home Mortgage Disclosure Act (HMDA) dataset, about 46% of all VA loans in 2023 came with no down payment, and 15% of all VA loan borrowers in 2023 put down at least 3%. Even though a down payment is generally not required, you may choose to make a down payment on a VA loan to lower the amount you’re borrowing, reduce your funding fee, or qualify for better interest rates.

Why VA home loans don’t usually require a down payment

The VA insures up to 25% of the loan amount to make VA home loans more readily available to eligible service members. This insurance is known as the VA Guaranty. While conventional mortgages typically require mortgage insurance when you make a down payment of less than 20%. The VA Guaranty acts as a similar insurance policy for VA lenders, protecting them if the borrower defaults on the loan. Since the insurance is greater than 20%, VA lenders can offer more favorable terms compared to other non-VA loans.

When do VA loans require a down payment?

The property price exceeds county loan limits

The VA guarantees up to 25% of the loan amount. Even though the VA does not limit the amount you can borrow, VA lenders use the county’s conforming loan limit as a guide to determine how much they’re willing to lend you without a down payment. Lenders typically only approve no down payment mortgages less than $417,000. Anything appraised higher may require a down payment to cover the portion of the loan not guaranteed by the VA, so that 25% of the total loan amount is insured.

For instance, if your loan amount is $500,000, you’ll be required to put down $20,750 (4% of the loan amount) to cover the difference between the 25% of $417,000 ($104,250) that the VA will guarantee and the remaining portion (25% of $500,000) the VA does not guarantee.

You have a remaining entitlement status

Remaining entitlement status means you have an active VA loan that you’re still repaying. The VA will insure the lender for up to 25% of the loan amount, minus the amount of entitlement already used. When you have remaining entitlement, your lender may require a down payment to cover the difference between your remaining entitlement and 25% of the loan amount. You can restore your entitlement by selling the property to repay your current VA loan in full before taking out a new VA loan. Typically when this is done, borrowers will use the money from their home sale to make a down payment and lower their borrowing amount.

Can I avoid paying a VA funding fee by making a down payment?

While you can’t avoid paying a VA funding fee by making a down payment on a home purchase, you can reduce the fee by making at least a 5% down payment. The more money you put down on a VA loan, the less you’ll pay in funding fees. Funding fees are calculated as a percentage of the total loan amount. Here’s the funding fee amounts based on the size of your VA loan down payment:

Regardless of your down payment amount, service members who qualify for an exemption can avoid paying a VA funding fee. Funding fee exemptions include:

• You received VA compensation for a service-related disability
• You receive retirement or active-duty pay in place of service-related disability compensation
• You’re a surviving spouse of a service member receiving Dependency and Indemnity Compensation (DIC)
• You’re a service member with a proposed or memorandum rating due to a pre-discharge claim
• You’re an active duty service member with a Purple Heart

Why make a down payment for a VA loan?

To lower your monthly mortgage payments

Making a down payment on a VA loan allows you to borrow less. A smaller total loan balance means lower monthly payments and less interest to pay over the life of the loan, saving you money. 

To reduce the VA funding fee

VA funding fees are a one-time payment made at closing that you can choose to roll into your mortgage. This adds the cost to your monthly payment to reduce the amount you pay at closing. You can also decrease your VA funding fee by making at least a 5% down payment. Funding fees often range from 0.5% to 3.6% of the total loan amount, but with a down payment of 5% or more they’re often 0.65% to 1.95% lower than if you had no down payment.

To gain equity faster

Home equity is the share of a home you own versus what you owe on your loan. You can gain instant home equity by making a down payment rather than slowly building it by paying down your mortgage principal. The more equity you have in a home, the more you own. You can also use those funds to borrow against the portion of your home you own if you ever need extra funds for home improvements or unexpected expenses. 

To get better interest rates

While lenders consider several factors when determining your VA home loan interest rates, making a down payment gives you more equity in the property. This demonstrates that you’re less of a lending risk, which can help you qualify for a better interest rate.

A no down payment requirement is one of the many advantages of choosing a VA loan over other mortgage options. However, making a down payment on a VA loan can positively impact closing costs, funding fee amounts, interest rates, and ultimately save you money over the course of your loan term.

Have more questions? Reach out to a VA lender near you.