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Three facts about zero-down VA home loans

The VA home loan is one of the best mortgage deals around, partly because these loans available to service members, veterans and some military spouses are “zero-down.”

You heard that right. No down payment is required for a Veterans Affairs mortgage.

Most home loans require a borrower to put at least 3 percent down. Buyers who want to avoid paying for private mortgage insurance, which protects the lender’s interest in the home, need a down payment of at least 20 percent.

Not needing to put anything down makes homebuying easier, because you don’t have to have a portion of your purchase price saved up as cash. Instead, the entire purchase can be financed.

Zero down for any borrower

All VA borrowers are eligible for the zero-down option. “It’s not a sliding scale,” says Michael Dill, vice president of mortgage lending at Guaranteed Rate in Tampa, Florida. “The VA is fine with anybody doing zero down.”

But most VA lenders will draw the line if your credit score is too low, and there can be restrictions for more expensive homes.

If you go over what’s known as the county loan limit — which is $424,100 in most U.S. counties but up to $636,150 in most higher-priced areas — you must make a down payment equal to 25 percent of the difference between your purchase price and the limit. So, if you live in a typical part of the U.S. and buy a home for $524,100, you’ll have to put down $25,000. That’s 25 percent of the $100,000 difference between the sale price and the county loan limit.

VA refi loans are zero-down, too

Homeowners can refinance into a new zero-down VA loan and cash out some or even all of their equity.

“If your house appreciates in value, there’s nothing wrong with doing a VA cash-out refinance and pulling every dollar of equity from that house,” Dill says.

While a zero-down cash-out refi can be very tempting, there’s a downside if you tap your equity too much, cautions Chris Pollard, a certified financial planner professional at Great Path Planning in Monroe, New York.

“If you keep restarting your loan, you’ll pay a ton of interest, and you’ll never make a dent in it because you keep cashing out,” he says.

And if you’re borrowing against your house to invest the money, that’s “a pretty bad idea in general,” Pollard says.

You will have to pay a funding fee

Though a zero-down VA home loan won’t stick you with costly private mortgage insurance, you will be required to pay an upfront funding fee. It can be financed in addition to the loan amount.

Borrowers serving or who have served in a regular branch of the military must pay a funding fee of 2.15 percent of the loan amount of their first VA loan with no down payment. Reservists and National Guard members pay slightly more.

The funding fee for subsequent zero-down VA loans is 3.3 percent.

If a borrower makes a down payment of 5 percent, the funding fee drops to as little as 1.5 percent for a first or subsequent VA loan. And those getting a VA Interest Rate Reduction Refinance Loan (IRRRL) pay just 0.5 percent.

Funding fees are waived for borrowers who have a service-connected disability and for surviving military spouses.

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