Down Payment Requirements for VA Loans in 2022

The Department of Veterans Affairs (VA) offers several benefits to veterans and active duty service members, one of which is the VA home loan. VA loans help thousands of veterans and military servants to finance the purchase of a new home with favorable loan terms.

In addition to veterans and active service members, VA loans are also available to a former or discharged member of the national guards, surviving spouse of a veteran who died in active duty, or a veteran who has a service-related disability. One of the most significant advantages of a VA loan is that no down payment is required.

Why does a VA loan not require a down payment?

No down payment is required for a VA loan because the government guarantees the loan.

VA loans are backed and insured by the U.S. Department of Veterans Affairs, which means the government guarantees that the loan will be repaid even if the borrower defaults. The federal government guarantee offers a safety net to mortgage lenders. They are assured that the government will pay them at least a portion of the loss if the borrower defaults. Thus this extra security, in turn, allows mortgage companies to offer more precise qualification requirements and better terms like a $0 down payment to veterans.

However, borrowers are still responsible for paying closing costs, ranging from 2% to 5% of the loan amount. Additionally, the VA charges a funding fee, which is used to help cover the VA home loan program costs. VA funding fee is a one-time payment that applicants make when taking out a VA loan. As of 2020, the funding fee remains the same and ranges from 0.5% to 3.3% of the loan amount and is based on whether the borrower has used a VA loan before and whether they are a reservist or active-duty service member.

For first-time users of the VA loan program, the funding fee is 2.3% of the loan amount for most borrowers. However, it is only 1.65% for those with a service-related disability and exempts for surviving spouses of veterans who died in active duty or from a service-related disability. Also, purple heart recipients on active duty are exempt from the funding fee.

The funding fee can be paid upfront or rolled into the loan.

Why should you make a down payment even when it is not needed?

However, even though Missouri VA loans do not require a down payment, it is still recommended.

• A down payment can help to reduce the amount of interest you pay on your loan. Making a down payment reduces the risk for the Missouri mortgage lenders, and they may offer you a lower interest rate.
• It increases your chances of qualifying for Missouri mortgage loans and speeds up the process of loan approval. A down payment assures the lender that you will continue paying your monthly installments as you have already invested a handsome amount in down payment.
• A down payment also allows you to avoid paying for private mortgage insurance (PMI). PMI protects the lender in case of borrower default but is not required on VA loans.
• Making a down payment also reduces your loan's principal balance. The lower your loan's principal balance, the less you will pay in interest over the life of the loan. Additionally, your monthly installments will also reduce.
• A lower principal balance will also lower your loan closing cost. Closing cost is the amount you pay to the third party, such as the loan originator, the appraiser, and the title company and real estate attorney who help you close your loan.
• A down payment can also help you build equity in your home more quickly. Equity is the portion of your home's value that you own outright. It builds as you pay down your loan's principal balance, and your home's value increases.
• You may also be able to negotiate a lower sales price if you are willing to make a larger down payment.

Circumstances when a VA loan requires a down payment

One of the main attractions of VA loans in Missouri is that it usually doesn't require a down payment. However, there are some exceptions to this rule. The VA may require a downpayment for a VA loan in some instances.

1. VA loan limit: The Department of Veterans Affairs formerly imposed loan limits on the amount they will insure. But in 2020, they did away with these limits for active duty militants and veterans with full VA loan entitlement. However, VA loan limits still exist for veterans who have defaulted earlier or are still paying an existing VA loan. So such veterans will have to make a down payment if they require a loan higher than their county's VA loan limit.

2. Credit score: Borrowers with lower credit scores may have to make a down payment. The VA doesn't have a minimum credit score requirement, but most lenders will require a minimum score of 580.

3. Loan type: The VA offers adjustable-rate mortgages (ARMs) and fixed-rate mortgages. With an ARM, your interest rate can change over time. If you're considering an ARM, you may have to make a down payment.

4. Fewer Funds: The VA may also require a down payment if the borrower has a limited income or insufficient funds to cover closing costs.

5. Loan entitlement: The amount of your loan that the VA will guarantee is called your "entitlement." Veterans and active militants can qualify for full entitlement if they've never used their VA loan benefits before. However, if you've already used your entitlement to get a VA loan in the past and still owe money on that loan, or if your entitlement has been reduced because of a foreclosure or short sale, you may have to make a down payment.

6. Second-tier entitlement: Veterans who have already used their full entitlement may still be able to get a VA loan without making a down payment. This is called "second-tier entitlement." To qualify for second-tier entitlement, the veteran must have sold their previous home for less than the outstanding balance on loan. The difference between the sale price and the loan balance is the "unreimbursed debt."

Bottom Line:

The good news is that you don't need a down payment for most VA loans. So, if you meet all the eligibility criteria, get ready to move. Contact mortgage lenders near you and get a VA loan pre approved today and fulfill your dream of homeownership.