How Much Should You Put Down?

Conventional wisdom says that you should put down 20% for a down payment when purchasing a home. Even when it comes to conventional loans, this is no longer necessarily true as there are homeowner’s assistance funds to help cover the cost of a down payment. 

The main deterrent so far to not putting down 20% on a home has been the need to purchase private mortgage insurance (PMI) if you are unable to gather the necessary funds. However, a break-even point can be reached when comparing what you would pay in PMI on an appreciating home in comparison to the missed opportunity if you are waiting to save 20% to put a down payment on a home.

One of, if not the greatest, perks to purchasing a home through the VA’s loan program is that you are still able to qualify for great rates and terms on your home with no down payment necessary. That is because a portion of your loan—equal to roughly the cost of the down payment—has a federal-backed guarantee. Essentially, purchasing a home with a VA loan is like having a down payment already built into your mortgage loan. 

Hero Loan is here to break down how different conventional loan types calculate a down payment and how a down payment can affect your VA loan.

How Do Down Payments Compare Across Conventional Loan Types?

Down payment requirements vary across other loan types. Here’s what some of them look like in comparison to VA loans:

• FHA Loan (backed by the Federal Housing Administration): 3.5% down payment minimum
• VA Loan (backed by the Department of Veterans Affairs): No down payment required
• Fannie Mae HomeReady Loan: 3% down minimum
• Conventional Loan (with PMI): 3% minimum
• Conventional Loan (without PMI): 20% minimum
• USDA Loan (backed by the U.S. Department of Agriculture): No down payment required
• Jumbo Loan: 10% down

The amounts only represent the minimum down payment required. Homeowners are able to put down a larger down payment.

Is It Better to Put Down a Larger Down Payment Even if I Don’t Have to with a VA Loan?

Waiting to buy your home until you have 20% to deposit on your down payment could come at an opportunity cost to use your home to build wealth. Owning your own home provides you with housing security and the chance for an investment opportunity. This is because, if you choose a home in good condition in a good location, the odds are it will significantly appreciate in value. 

Conversely, there is also the risk that you could end up with an underwater mortgage where the principal on your loan equates to more than your home is worth. This is part of the reason why home selection in a good location matters. For VA loans, more rigid Minimum Property Requirements (MPRs) evaluated during the appraisal process help ensure that you won’t find yourself with an upside-down mortgage. 

Additionally, your home becomes an asset with the equity you build into it over time as you make regular monthly payments. You can later leverage your home’s built-in equity to put yourself in a better position financially by taking out a line of credit, a home equity line of credit (HELOC), choosing to do a  cash-out refinance, or a debt-consolidation loan. A larger down payment means you will have more immediate built-in equity available from your house. 

Putting down a larger down payment will allow you to save in the long run on monthly payments by shortening the life of your loan. A shorter life loan means less interest paid, which can save you thousands of dollars. 

Last, having the capacity to make a down payment shows your lender that you are at less risk for defaulting on a loan. This will strengthen your loan application during the approval process. This does not necessarily mean you are required to put down 20% to increase your loan approval likelihood. Discuss further with your lender the impact that different down payment amounts could have on your loan application, from approval to the negotiated rates and terms. 

Everyone’s financial situation is unique. Regardless of your ability to make a down payment, there is flexibility from the myth that says you must be in a position to put down at least 20% on a home. For those with enough financial bandwidth, buying your own home is a great opportunity to build wealth and peace of mind.

Do I Need to Use a Down Payment Calculator for my VA Loan?

Homes purchased through the VA loan program typically do not require a down payment to qualify from more advantageous rates and terms without having to invest in PMI. You may want to consider a down payment to reduce the VA’s funding fee, a fee set by the VA to ensure the continuity of this program so that future military service members may benefit from the entitlements it provides. Currently, the VA funding fee is set at 2.3% for homebuyers using a VA loan for the first time to purchase a home. Subsequent VA home loan usage charges a higher funding fee rate set at 3.6% but can be reduced with a down payment of 5% at the closing. 

Something to be aware of if you are an eligible military service member is the VA loan limits set in your county. If the purchase price exceeds that amount, you’ll need to make a down payment before the VA will guarantee your loan.

How Can Hero Home Loan Help?

Hero Loan is dedicated to helping our veteran and active-duty military service members create a financial plan of action that will get them the best deal possible on their dream home. Our team of friendly lending Experts, coming from the same communities we serve, is available to support you in determining how a down payment will affect your pathway to homeownership. 

We are on a mission to support our military service members and their families both on the lending front and by supporting veteran-owned businesses and events. We are happy to contribute to the efforts of the Fisher House project, which helps to provide complimentary accommodation to the families of veterans undergoing medical procedures. Our in-house underwriting service can get you approved quickly and painlessly on your loan, with closing times in as little as two weeks!

So give us a call today at 800-991-6494 to speak with a representative who can help you understand how a down payment will affect the strength of your loan application and the rates and terms you can receive. You can also reach out to us through our application to get started on the process of finding your dream home today!