VA Loan Down Payment

By Liz Clinger Updated on 7/31/2017

Unlike FHA home loans and Conventional Loan programs, VA mortgage loans offer qualified borrowers the option of a zero down payment. However, other fees and restrictions apply.

VA Down Payment Guidelines:

All borrowers may not have the option of omitting a VA down payment. Rather, the VA offers a zero down payment mortgage because VA mortgage loans only cover the “full reasonable value” of the property. FHA loans and conventional loans may not cover this value.

When is a down payment required on a VA loan?

• When the purchase price exceeds the appraised value. According to the VA regulations, “No down payment is required by VA unless the purchase price exceeds the reasonable value of the property, or the loan is a Graduated Payment Mortgage (GPM).” When determining the amount to loan to a borrower, the lender will only provide funds corresponding to the lesser of either the purchase price or the appraised value. As such, if the borrower agrees to a purchase price which turns out to be higher than the determined value, he or she must pay the difference, and the seller cannot offer funds to cover this deficiency, as either a concession or other incentive to accept the purchase.

• When additional compensating factors are necessary. Additionally, a down payment of a VA loan may be required by some lenders if the borrower does not meet the basic criteria to qualify for the mortgage loan. VA loan guidelines provide flexibility for lender underwriting; however, veterans must meet criteria regarding credit history, income, and debt ratios. If these cannot be met, the borrower may need to provide a down payment as a compensating factor to outweigh the deficiencies in any other area of qualification.

• When you are purchasing above the maximum loan limit. For example, in Denver, the maximum loan limit is $417,000, and if you have full entitlement, you can borrow up to 100% of the $417,000 price. However, if you purchase price was $450,000 you are required to pay 25% of the difference between the max loan limit for that county and the purchase price. $450,000 minus $417,000 = $33,000 x 25% = $8,250 required down payment. Some lenders will also require you to pay 25% of the VA funding fee. So check with your loan officer for specifics. 

For a complete list of the county VA loan limits visit the official site. 

Advantages of a VA Down Payment

Although borrowers may have the option to forego making a down payment for a VA loan, doing so can be a prudent decision in many cases. For instance, borrowers who put forth a larger down payment will have access to more beneficial interest rates, as a greater down payment translates to less risk for the lender. 

While often amounting to fractions of a percent, this small discount can save a borrower thousands over a mortgage’s lifetime.

Also, borrowers who put down a sufficiently large down payment can reduce the cost of the mandatory VA Funding Fee. With a down payment between 5% and 10%, regular military borrowers can reduce the first-time funding fee from 2.15% of the loan balance to 1.5%, a significant reduction for larger mortgage loans. 

For borrowers of a VA loan who put forth more than 10% for a down payment, the VA funding fee will be reduced even further to 1.25%. Likewise, this reduction becomes even more practical for second-time VA borrowers, in which the funding fee with no down payment amounts to 3.3% of the total loan cost, nearly matching the 3.5% down payment requirement of the FHA.

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