19 Jun VA Home Loan Down Payment Facts
It is essential for borrowers considering the purchase of a new home to compare loans, loan types, and loan options.
Once you compare and evaluate you will realize why many veterans opt for a VA guaranteed mortgage instead of a Federal Housing Administration mortgage loan or conventional mortgage. VA loans offer the best down payment options for eligible borrowers.
Conventional and FHA Loan Down Payments
Standard lenders demand down payments of at least 3 percent, and more commonly, lenders need 5 percent down or more. Borrowers with poor credit often struggle to qualify for conventional financing. Mediocre credit history negatively impacts interest rates and loan terms offered through traditional mortgages.
Ideally, to get the best terms for the life of a traditional mortgage loan, borrowers must meet excellent credit scores and provide a down payment in the 20-percent range. Unless borrowers can put down such a huge sum of money, their conventional loan will feature private mortgage insurance (PMI).
If you compare FHA loans to conventional mortgages, you will see that the government-insured loan does provide a much better down payment minimum of 3.5 percent. But mortgage insurance for FHA loans is usually the highest in the housing market. Mortgage insurance figures into the monthly payments for the life of a loan, and it can make the loan substantially more expensive in the long run.
VA Loan Down Payments, or Lack Thereof
VA mortgages allow no money down loans to qualified borrowers, and never include any private mortgage insurance (PMI). The no-money-down VA-insured mortgage provides borrowers struggling with tight budgets more flexibility in the all-important early years of the home loan.
Although about 90 percent of borrowers prefer VA loans with no down payment, there’s a perk to paying down as little as 5 percent.
If a VA loan borrower puts down at least that amount, the VA Funding Fee narrows. For a first-time VA loan borrower, the funding fee is generally 2.30 percent with no money down. But if the borrower does a 5 percent down payment, the fee falls to 1.65 percent of the loan’s value. The fee dips over if borrowers pay down 10 percent or more.
Conventional, FHA, and VA loans permit borrowers to use gift funds toward down payments and closing costs. The gifted money needs to come from somebody or some entity close to the borrowers. Lenders need paper trails for the gift money, which implies you can’t just have someone hand you a bunch of cash for your loan closing. Nobody involved in the VA loan process can gift you money for such purposes.
Most lenders need a letter when gift funds are applied towards down payments and closing costs. The letter must provide the donor’s information, relationship to the borrower, details about the gift amount and transaction, plus legal phrasing that mentions no repayment is necessary.
Lenders may have their guidelines and requirements for gift funds. Talk with your loan officer for more information.