VA vs. Conventional: Down Payments
Saving up the money for a down payment is one of the largest (if not the largest) obstacle that first-time home buyers face. Once you’ve bought a house and begun to build up equity, a down payment isn’t as much of an obstacle, but is still present, especially if you’re looking to move to a more expensive house. Unfortunately, a down payment is just a part of buying a house and there’s nothing you can do about it – or is there? The VA loan program is designed to directly address the obstacle of a down payment that veteran home buyers face. In this article, we’re going to show how the VA loan program offers a more borrower-friendly package, especially when it comes to the down payment requirements.
Down Payments on Conventional Loans
To give us a baseline, let’s talk about what you should expect as far as down payments go on conventional loans. You may have heard that semi-recently, federal restrictions on down payments were eased up all the way to allow as little as 3% of the loan amount to be sufficient for a down payment. While that’s technically true, you won’t be happy with how few lenders you have to choose from if that’s all you’re paying, and you definitely won’t be happy with the terms offered you. You’ve probably heard that a 20% down payment is required on conventional loans, and that’s true in a sense. Making a 20% (or more) down payment is the only way you can avoid having to purchase private mortgage insurance. Mortgage insurance adds to your monthly payment, sometimes as much as hundreds of dollars each month, and for no other reason than because you didn’t pay enough for a down payment. Most lenders will take borrowers making at least a 10% down payment, but your options start to get more scarce as you get lower than that. Unless you have $50,000 just sitting in the bank, you will probably have to pay mortgage insurance for your first home.
The VA Loan Offering
The VA recognizes that down payments constitute the single greatest obstacle to home ownership for first-time buyers. With that in mind, the VA loan program does not require a down payment of any kind. If you are getting a VA loan, you don’t have to put in a dime on a down payment. Why? Because the VA guarantee to the lender acts as your down payment and gets you the good loan terms (with no mortgage insurance) without forcing you to make a down payment. You can, of course, still make a down payment, and if you do you’ll be rewarded by getting a discount on the VA Funding Fee as well as better terms from the lender, but it’s not required and you don’t have to pay mortgage insurance if you don’t make a down payment. This is one of the greatest benefits of the VA loan program – the ability to buy a home without having 20% to make a down payment. It’s important to remember, though, that you’ll still need to have enough saved up to pay closing costs, which can be thousands of dollars. You can roll the Funding Fee into the loan amount if you wish, but none of the other closing costs can.
Why the Difference?
The biggest factor in play here is the VA guarantee – it’s because of the guarantee that VA lenders are willing to make good loans to borrowers who are not making a down payment. The VA offers the guarantee as a benefit to those who have served in the armed forces. Where the conventional loan market is just that – a market – the VA loan program is a specialized benefit made for active service members and veterans to reward them for their service. If you are eligible for the VA loan program, you should definitely use it to purchase your home, and not just because of the superior down payment requirements. The VA loan program also boasts some extremely beneficial loan types and options, as well as protections that the conventional loan program does not offer. And you don’t even have to deal much with the VA when you get a VA loan – you’ll need to get your Certificate of Eligibility, but that’s pretty much it; any other dealing with the VA is taken care of by the lender, and most lenders don’t need to submit their loan packages to the VA before closing. You can get your VA loan quickly, efficiently, and easily.