VA Home Loan Downpayment Facts
When comparing three different types of home loans, it’s easy to see why veterans often choose a VA insured mortgage over an FHA loan or conventional mortgage. The down payment issue is one area where VA loans have a clear advantage over FHA, and conventional loans.
The conventional lender may require ten percent or more down on a home–more if the borrower has credit issues and can’t qualify for the most competitive terms.
FHA loans offer an advantage over conventional mortgages–the FHA insured loan requires a much lower minimum of 3.5%. But VA mortgages can be had for no money down under the right circumstances, which gives borrowers dealing with tight budgets more flexibility in the crucial early days of the mortgage.
Why does the VA allow borrowers to apply for a loan with no money down? As the VA lender’s handbook states, “…because VA loans can be for the full reasonable value of the property, no downpayment is required by VA.” By comparison, FHA loans require a 3.5% down payment because the loan does not cover the full reasonable value of the property.
But VA loans aren’t automatically offered as a no-money-down transaction. The buyer must have the home appraised by a VA-assigned appraiser so a notice of value or NOV can be issued. If the NOV comes back with a value that is lower than the purchase price of the home, the buyer is required to make up the difference if he or she still wants to purchase the home.
The difference can not be financed, the borrower must provide the extra money–the seller cannot pay the difference as a concession or incentive to buy. A downpayment is also required for all graduated payment mortgage loans, and in cases where the borrower applies for a VA loan but does not have full entitlement available to use for the purchase.
In such cases, VA rules state, “If a veteran has less than full entitlement available, a lender may require a down payment in order to make the veteran a loan that meets GNMA or other secondary market requirements. The “rule of thumb”(…)is that the VA guaranty, or a combination of VA guaranty plus downpayment and/or equity, must cover at least 25 percent of the loan.”
In cases where the borrower is fully qualified to get a no-money-down VA home loan, it may still be a good idea to consider a down payment. Borrowers who put down enough money pay a reduced VA loan funding fee, which is required to get a VA insured home loan. The lower fee can save the borrower money up front and help pay down part of the mortgage at the same time.