VA loans have many benefits which include no down payment, flexible credit guidelines, no monthly mortgage insurance, competitive interest rates and easier to qualify. Among all these benefits, there is the ultimate which is the room for acquiring the loan in the absence of a down payment. Despite how practically impossible it is these days to get a loan without upfront payment, the VA loan still creates room for that.
This is possible due to Veteran Affairs purchases for qualified veterans. Mortgage lenders are therefore able to offer such loans with no upfront payment. This makes VA loan the easiest way to acquire your first property without excellent credit. While this may seem to be an astonishing benefit, there appear to be some advantages which one can help by making an upfront payment.
Benefits of Making An Upfront Payment on VA Loan
1. Payment of Lower Funding Fee - Funding fee is a prerequisite to obtaining a VA mortgage, whether a down payment is made or not. The one-time funding fee is reduced if the borrower makes a down payment. According to Mark Connors who is VA lender liaison, the fee for funding has points, where it has been reduced to a 5% to 10% down. For instance, a first-time VA loan borrower with no upfront payment would pay a fee of 2.15% of the value of the loan. But the fee will drop to 1.5% with an upfront payment of 5% or more. With a higher down payment of 10%, the fee can be further reduced to 1.25%.
2. Lower Monthly Payment - Down payments automatically lower your monthly payment. For instance, considering the interest rate at 3.5% on a 30-year, based on a mortgage of $250,000. The monthly payment without a down payment would be $1,122.61, but with a down payment of 5%, it reduces to $1,066.48. While an upfront 10% payment will reduce your monthly payments to $1,010.35; this will save you over $100 in monthly payment.
3. Less Lifetime Cost - Apart from lowering your monthly payment, another advantage of making down payments are that it lowers your lifetime cost. It can save you a lot of money during the lifetime of the loan. This can be explained using the example below.
Considering a 3.5% interest rate on a 30-year, $250,000 mortgage, the lifetime cost without down payment would be $159,515. But with 5% upfront payment, this would amount to a lifetime cost of $149,996. It also reduces further to $141,539 when 10% of the total cost is made which saves you over $15,000 in interest charges.
4. Better Opportunity to Navigate Competitive Market - There are many challenges which accompany a no-down payment plan while living in a competitive housing market. Some places such as Columbus, Ohio, Dallas, San Diego among others have many buyers chasing limited sellers. Making an upfront payment presents you as a serious buyer to the sellers and lessens the hostility of the competition on your end. In some cases, the borrower may be required to keep payments at a certain amount when qualifying for a loan. Making an upfront payment in a circumstance like this can help the borrower to qualify for a loan and also ends up with lower monthly and lifetime cost as well.