Fact: A 20% Down Payment Is Not Needed for a California VA Loan

A new survey showed that there are many misconceptions regarding the VA loan program. For instance, many veterans and active-duty military in California believe they have to put down at least 20% when using a VA-guaranteed mortgage loan.

These misperceptions might actually prevent some would-be home buyers from entering the real estate market, over concerns that they might need to invest a lot of cash.

So let’s start with some important points all borrowers should know:

• In most cases, home buyers in California who use the VA loan program don’t need to make a 20% down payment.
• In fact, most borrowers who use this program will either avoid the down payment altogether or make a relatively small investment.
• By design, the VA program allows home buyers to finance up to 100% of their purchases, removing what is often the biggest obstacle for borrowers.

20% Down Payment Not Required for VA Loans

Apparently, a lot of military folks don’t fully understand how VA loans work and what benefits they offer. That’s a serious problem, because the program was created to benefit our brave servicemembers and veterans.

Navy Federal Credit Union (NFCU) recently surveyed a large number of active-duty military members and veterans from California and around the U.S. The goal was to find out how much they knew about the VA loan program, from a borrower’s perspective.

Among other things, this survey showed that a significant portion of military folks believe the VA loan program requires at least 20% down. Here are some of the key findings…

• Down payments: Mortgage loans guaranteed by the VA loan do not require a down payment. But as this report showed, only “32% veteran respondents and just 12% of active-duty respondents know about this major financial benefit.” Even worse, 17% of veterans and 45% of active-duty military folks believe a down payment of more than 20% is necessary.
• Paperwork: Numerous reports have shown that VA loans have a similar processing and closing timeframe, when compared to conventional or “regular” mortgages. Despite this truth, 58% of active-duty members and 40% of veterans think that VA loans commonly have delays due to paperwork.
• Awareness: 29% of homeowners who were eligible for the VA loan program but didn’t use it said the main reason they chose not to “was either they did not know about VA loans or did not think to use one.”

Here at Bridgepoint Funding, we are doing our part to educate California’s military population on the requirements and benefits of the VA loan program. The main point we want to drive home with this guide is that a down payment of 20% is not needed for a California VA loan.

Times When a Down Payment Might Be Needed

Many (if not most) borrowers who use the VA loan program to buy a house qualify for the no-down-payment option that makes the program so popular. This is true for those with “full entitlement,” which includes people who have never used the program before.

But there are scenarios where a person who uses a VA loan in California might have to put some money down.

If you have an existing VA loan that you’re still repaying — or you paid it off but still own the home — you likely have “remaining” entitlement in the program. In this case, you could encounter a down payment requirement.

Here are the general rules for borrowers with remaining entitlement:

• If you purchase a home below your county’s conforming loan limits, you could finance 100% of the purchase price.
• But if you buy a house that exceeds those limits, you might have to make a down payment based on the difference.

This part of the program can be a bit confusing. So we’ve created an expanded article to help explain it. And again, feel free to contact our staff if you’re in California and considering the VA loan program.

Clearing a Path to Homeownership

The VA loan program is designed to remove some of the biggest obstacles along the path to homeownership, including the down payment.

As the U.S. Department of Veterans Affairs explains in their official guide for home buyers:

“Created by the original G.I. Bill, the VA-Guaranteed Home Loan program has helped generations of veterans, servicemembers, and their families enjoy the dream of homeownership…”

Without this program, most military members and veterans in California would have to make a down payment of at least 3% — and up to 20% in some cases. And that could add up to a large sum of money.

The median sale price for homes in California is currently around $850,000. The table shows how much the down payment would be at several common thresholds, for a median-priced home.

• 3% (minimum down payment for conventional loans): $25,500
• 3.5% (minimum DP for the FHA loan program): $29,750
• 8% (average DP among first-time buyers): $68,000
• 20% (DP needed to avoid mortgage insurance): $170,000
• 0% (DP needed for most VA loans): $0

As you can see, a 20% down payment for a typical home purchase in California would amount to well over $100,000. Even the smallest down payment allowed for conventional loans (3%) would produce a down payment of around $25,000.

Other Benefits of Using a California VA Loan

The ability to buy a house without putting any money down appeals to many home buyers, especially those with limited budgets. That’s the biggest benefit offered by the Department of Veterans Affairs home loan program.

But it’s not the only benefit.

This program also allows borrowers to avoid mortgage insurance. Typically, borrowers who make a relatively small down payment on a home purchase in California have to pay for mortgage insurance. This increases the size of the monthly payment. But that kind of insurance is not required for VA loans.

This program also has some of the most flexible and “forgiving” qualification criteria of any type of home loan. That’s because the federal government partially guarantees them, reducing risk for the lender.

And then there’s the fact that you can use the program more than once. That’s another big advantage for borrowers.

Summary of Key Points

This is an important subject for borrowers, especially due to the confusion and misconceptions mentioned earlier. So let’s revisit some of the key points covered thus far:

• Some military members and veterans in California believe they have to make a down payment of 20% or more when using a VA loan.
• The truth is, most borrowers who use this program can finance 100% of the purchase price, with no down payment whatsoever.
• This program allows eligible home buyers to purchase a home much sooner, without having to spend several years saving for a down payment.
• VA loans offer other benefits as well, including flexible qualification criteria and the ability to avoid paying mortgage insurance.