AAFMAA Blog

Should You Put Money Down? (Even If You Don’t Have To)

2021-03-22

One benefit of a VA Home Loan is that you don’t have to make a down payment — a feature that helps make homeownership possible for many active-duty servicemembers, Veterans, surviving spouses and other VA-eligible buyers. But that doesn’t mean you should (or have to) put zero money down. In fact, there are some financial benefits to making a down payment, including the opportunity to pay a lower VA funding fee and more affordable monthly mortgage payments.

Still, does it make sense for you to put money down?

“That depends on how long you expect to stay in the home, your cash on hand, and other financial considerations,” says Grant B. LaClave, Military Mortgage Advisor (MMA) — a licensed Mortgage Loan Originator at AAFMAA Mortgage Services LLC (AMS) in the Greater Houston area.

Note: If you’re using a conventional mortgage and can put 20% or more down, it will alleviate your need to pay for private mortgage insurance (PMI).

“The best idea is to talk with an MMA early on so we can run the numbers and talk with you about various options, including if a VA Home Loan is right for you and whether or not you should consider making a down payment.”

Here are 3 pros — and 2 cons — to making a down payment on your VA Home Loan.

Pro: Lower Your Funding Fee

The VA funding fee varies by how many times you’ve used the entitlement and how much you’ll be putting down. The table below shows the fees set in 2019 that are expected to continue until 2022.

	If your downpayment is...	Your VA funding fee will be...
First Use	Less than 5%	2.3%
	5% or more	1.65%
	10% or more	1.4%
After first use	Less than 5%	3.6%
	5% or more	1.65%
	10% or more	1.4%

There are other conditions that could turn this pro into a con, warns LaClave. For example, if you’re borrowing $100,000 and you put 10% down, you would pay $10,000 upfront plus the 1.4% VA funding fee. Or, if you opted for no down payment on the transaction, you would just pay the 2.3% VA funding fee.

“So if you get PCS orders and have to sell, you would lose less of the money you paid upfront with the no-down-payment option,” says LaClave.

Pro: Save on Monthly Payments

Putting money down could result in a lower monthly mortgage payment because you’re borrowing less money. In addition, you’ll save money by paying less interest throughout the lifetime of your loan. “If you’re financially able to, and plan to stay in the home for a while, put as much money down as you can,” advises LaClave. “The larger your down payment, the more you could save on interest.”

Pro: Start Building Equity Faster

Putting 5% or 10% down on your home gives you instant home equity, which will continue to build over time as you make your monthly mortgage payments. Building equity faster also means you can tap into it if the need arises by taking out a home equity loan or home equity line of credit. These types of secured loans, which use your home as collateral, can cost less, saving you money when you need cash for major home upgrades or repairs.

Con: Can Wipe Out Your Cash Reserves

Perhaps you have enough cash reserves for a down payment but want to keep that cash in an accessible account in case of emergencies. Rather than tying your money up in a home, it may be a better idea to maintain your cash reserves in case of unforeseen circumstances and financial emergencies, such as a major car repair or other large expense.

Having cash reserves on hand also helps to pay for related costs of home purchases. Maybe you found a home in a neighborhood you love but it needs a new roof, or you plan to purchase new furniture. In cases like these, keeping some cash on hand can be a good idea. Besides, VA mortgages don’t have prepayment penalties — you can always make a large lump-sum payment later on once you have adequate cash reserves for emergencies.

Con: You Just Haven’t Saved Enough

Maybe you’ve decided not to put any money down — then find out you have to because the home you want to purchase appraises for less than your loan amount or the purchase price is more than the VA Loan Limits in your county. In situations like these, you’ll also need to make a down payment before the VA will guarantee your loan.

Otherwise, you’ll need to back out of your purchase.

Best Advice

The decision on whether or not you should make a down payment on a VA mortgage depends on your financial situation. If you can afford to do so, then making a down payment could save you thousands of dollars over the life of the loan. However, if putting money down toward your home comes at the expense of having an emergency fund or freeing up cash flow for moving-related expenses, then it’s better to wait or purchase the home without a down payment.

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