It’s true, the vast majority of VA borrowers don’t need a down payment. But, how’s that work and what’s the catch?
It’s far and away one of the most notable VA loan benefits: VA loans don't require a down payment.
But it’s also a perk that arouses skepticism. “What’s the catch?” “How much is that going to cost me?”
Let’s put those suspicions to rest with a thorough discussion of the VA loan program, and an explanation of some why some VA borrowers can get a VA loan with a $0 down payment.
VA loans are made by private lenders. Banks, mortgage companies and other lenders are the ones who put up funds for service members to purchase a home.
But a portion of every VA loan is backed by the federal government. As long as lenders follow VA guidelines, a piece of every VA loan is guarded by a federal safety net. If a service member defaults on a loan, the federal government agrees to pay the lender back for at least a portion of the loss. This backing is known as the “VA Loan Guaranty.”
Lenders typically require a down payment as a safety deposit. It’s a tidy sum that a lender can hold onto in case a buyer goes into default. But on VA loans, the federal guaranty takes the place of the down payment. Since a portion of the loan is backed by the government, there’s no need for an additional down payment.
The VA loan guaranty has a limit, which varies based on location. For a look at the limit for your area, check with the Department of Veterans Affairs.
The VA loan program was part of the sweeping reform encompassed by the G.I. Bill of 1944. This bill introduced numerous benefits to the millions of service members returning from World War II.
Fortunately for military members, those benefits aren’t watered down into a mediocre financing option. As FDR stated, our veterans are “entitled to definite action” and “special benefits.” The VA loan program truly delivers on that promise, with flexible credit standards, low closing costs, and no-down-payment financing.
It’s a special loan option restricted to some of the country’s most selfless citizens: service members and veterans.
Especially when compared to the flexibility of a VA loan, the conventional loan market is tough. VA loans don't charge mortgage insurance like FHA and conventional loans. To avoid paying mortgage insurance on FHA or conventional loans, the buyer would need to put down 20% of the loan amount. If a buyer puts down less than 20 percent they would have the additional cost of mortgage insurance added to their monthly payments. The median sales price of new homes as of February 2017 was $296,200 according to the Census Bureau. A 20 percent down payment on a home priced at $296,200 would be $59,240. That's a large chunk of money.
Veterans sacrifice their safety on a daily basis. They deserve the special benefits afforded by VA loans.
Fortunately for military buyers who may be short on cash, the VA loan program does not require a down payment and buyers aren't charged mortgage insurance. In combination these two benefits can save homebuyers a significant amount money. It’s a benefit that military buyers love, and one that’s tough to locate outside of this exclusive financing program.
The VA loan program can unlock numerous benefits for military buyers, but it can be a complex program to navigate. Let us know if you have any questions regarding VA loan benefits or eligibility. Contact Veterans United Home Loans at 855-870-8845.
If you'd like additional information on the VA mortgage process check out this helpful guide.
Your Certificate of Eligibility (COE) verifies you meet the military service requirements for a VA loan. However, not everyone knows there are multiple ways to obtain your COE – some easier than others.
Midway through Fiscal Year 2021, the VA loan program is on pace to blow past last year's record-setting 1.2 million loans. See which cities are seeing the most growth compared to last year.