Can You Use Down Payment Assistance on a VA Loan?
Since VA home loans don’t require a down payment, can buyers use down payment assistance?
Yes, VA loans allow down payment assistance (DPA). Plus, most DPA programs that work with FHA and conventional loans can also be used for VA loans.
Down payment assistance can help you make an optional VA loan down payment. Or, these funds can be applied to closing costs.
Here’s how down payment assistance on a VA loan can help.
Check your VA home loan eligibility by speaking with a lender.
Types of Assistance Available for VA Loans
The upfront costs of buying a home can be out of reach even with a zero-down mortgage like the VA loan.
Closing costs have skyrocketed along with inflation. Fortune estimates homebuyers will pay $1,000 more in closing costs than before the pandemic.
Because closing costs now range between 2% and 4% of the loan amount, VA home loan users can use a combination of the following strategies to help reduce out-of-pocket costs.
DPA Programs
Plenty of states, counties, and cities across the U.S. offer special down payment assistance programs to active-duty and veteran homebuyers.
For example, the North Carolina Housing Finance Agency offers a forgivable loan of up to 3% of the primary loan amount to eligible veterans for down payment or closing costs.
DPA programs are often local or at the state level. There could be similar programs in your area.
Check these seven sources of DPA you may qualify for.
See Also: DPA for Teachers, Police, Firefighters, & Veterans
Seller Concessions
VA allows the seller to pay all or part of your reasonable closing costs.
Ask your real estate agent whether the seller might agree to seller-paid closing costs when you make an offer.
For example, you might offer full price for the home asking $2,500 in closing cost assistance. If the seller agrees, your closing costs are reduced by that much.
Sellers won’t always agree, but it’s worth asking your agent.
A Lender Credit
The lender can also help with your closing costs.
It can often give you a slightly higher-than-market interest rate and credit you back funds for closing costs.
You end up with a slightly higher payment. But in exchange, you decrease your upfront expenses.
Advantages of Down Payment Assistance on a VA Loan
While VA loans don’t require a down payment, making one can help.
Lower VA Funding Fee
VA loans require any buyer not eligible for VA disability benefits to pay a funding fee.
This fee can be pricey. First-time VA loan users must pay it in cash at closing or by wrapping it into their loan.
Down Payment | VA Funding Fee |
0-4.99% | 2.15% |
5-9.99% | 1.5% |
10%+ | 1.25% |
On a $300,000 loan, you’ll save $1,950 by putting down at least 5%, thanks to a lower funding fee.
Better Chances of Loan Approval
VA loan borrowers have a much better chance of getting approved even if they make a small down payment.
Buyers with high debt-to-income ratios, little savings, and low credit score can often flip their denial to an approval with just a 1% or 2% down payment.
Preserve Emergency Funds
Even if you have funds for a down payment, you could benefit by hanging onto them.
VA loan underwriters like to see that you’ll have cash in the bank after closing. While financial “reserves" are not required, they help you secure a loan approval.
Plus, you’ll have more runway if you lose your job or experience another financial setback after closing.
Smaller Payment
You’ll have a slightly smaller payment when you use down payment assistance. This assumes you’re using a deferred loan or grant – or a down payment assistance loan without a monthly payment.
If You Can’t Get Assistance, Can You Roll Closing Costs Into a VA Loan?
There is much confusion online about whether you can roll closing costs into a VA home loan.
The answer is no, you cannot roll closing costs into a VA loan. You can, however, roll your funding fee into the loan. Closing costs and the funding fee are different things.
Funding fee: the one-time fee required on VA loans. It’s paid to the VA to defray costs of the program.
Closing costs: Other borrower costs of opening the loan, such as the appraisal, title, lender points, prepaid property taxes, and more.
Some home buyers claim they rolled closing costs into the loan. But what really happened is they offered a higher price, then requested the same amount back in closing cost assistance.
For example, you offer $255,000 for a house offered at $250,000. Then you request $5,000 back in closing costs.
This strategy isn’t the same as rolling closing costs into the loan. It’s a seller concession, which VA allows. But the appraisal must support this higher value. If the appraisal comes back low, you could lose valuable time or even miss your closing date.
It’s best not to count on this strategy. Try it, but also look into other ways to cover closing costs.
See What You Qualify For
If you have current or former military service, you already have a leg up on most buyers. The VA home loan is the best homebuying program available in the market today.
See how much home you qualify for by speaking to a reputable lender.
