In part 1 of this 2-part series, we went over VA loan eligibility, the process to apply, and what the loans can be used for. In this second part, we’ll review the pros and potential cons of VA loans.
What are the Advantages of a VA Loan?
The advantages of a VA loan are numerous. Most civilians can only dream of having such ideal lending terms available to them when shopping for a mortgage.
- No down payment required
In almost all cases, no down payment is required on a VA loan. One can become a homeowner under this program with far less cash in hand than is necessary for non-VA loans. However, it may still be financially wise to put down a payment.
- No private mortgage insurance
Because VA loans are backed by the government, there isn’t a need for the borrower to pay private mortgage insurance (PMI), which can easily result in savings of thousands of dollars over the life of the loan.
- Competitive rates
Mortgage rates on VA loans are highly competitive and may often be lower than those found on other types of loans.
- Easier to qualify
It may often be easier to get a VA loan, because the government guarantees some of the mortgage, meaning the bank is at less risk. Borrower’s credit scores may not have to be as high. Borrowers do still need to qualify based on credit and income, however.
- No prepayment penalty
Under the legal terms of VA loans, borrowers cannot be penalized for paying off their mortgages early. This is a great benefit for anyone who would like to concentrate on early retirement with a fully paid-for house (for instance).
- Assistance with avoiding foreclosure
If at some point a VA borrower begins to have difficulty paying his or her mortgage, the VA has special staff dedicated to helping these borrowers make their payments. However, due to the process used to ensure that borrowers have enough funds, VA loans actually have a very low default rate.
- Closing costs are limited
The VA limits closing costs for these home sales. Sellers may also help with these expenses. In many cases, no money will be due at closing.
What are the Disadvantages of a VA Loan?
- One-time funding fee
One expense all VA borrowers should know about is the one-time funding fee that accompanies every loan. This fee is somewhat variable, but is typically about 2-3% of the loan, and is used to ensure the stability of the VA loan program for the future. Some borrowers with service-related disabilities are exempt. This fee can be “rolled into” the overall loan so that it is included in monthly payments.
If a borrower has enough money to put down a down payment and therefore does not need the benefits of not having to pay PMI or put money down, the cost of this funding fee may be reason to skip a VA loan.
- Can only be used for a primary residence
VA loans are intended to help people become homeowners, so they can’t be used to buy vacation or investment properties. However, if a borrower already has a VA loan, he or she can typically buy another home with a VA loan and keep the first one as a rental, if they’ve lived in it for some time already. This makes sense for military members who may need to move due to a PCS.
- Some perceive the loans negatively
Some sellers and agents may be less eager to sell when a VA loan is involved due to the incorrect perception that these loans are more complex or take more time to deal with. It may also be the case that inspection requirements are stricter.
What Else Is There to Know?
- Typically, borrowers are approved to borrow amounts of up to $424,000 with no down payment, and can borrow even more with a down payment. Of course, this doesn’t mean borrowers have to borrow this much, but they can. In some counties, the maximum no-down-payment loan is higher due to a higher cost of real estate in that area.
- Borrowers can get a VA loan more than once, and the benefit is good for life. If a borrower has paid off their first VA loan, they can get another VA loan—it is not a “one-time” benefit. (However, the funding fee is higher when used a subsequent time.) And the benefit does not expire. It can be used at any time.
- Service members must have been honorably discharged to qualify for a VA loan.
- Those serving overseas can still get a VA loan if their spouse will be in the home or if they will return within a year.
- VA loans are fully assumable by any qualified borrower.
- On average, it takes no more time to close on a VA loan than on a non-VA loan.
Being empowered with knowledge about the VA loan program is key for all service members and veterans. For more, visit the resources below.
Birk, C. (2015). VA Loan Pros and Cons. Retrieved from https://www.veteransunited.com/valoans/va-loan-pros-and-cons/
Tapman, T. (2016). The 13 Biggest VA Loan Myths BUSTED! Retrieved from https://blog.swbc.com/personalhub/the-13-biggest-va-loan-myths-busted
US Department of Veterans Affairs. (2012). Summary of VA home loan guaranty benefits. Retrieved from http://www.benefits.va.gov/BENEFITS/benefits-summary/SummaryofVAHomeLoanGuarantyBenefits.pdf
Veterans Administration. (2017). Home loan guaranty: VA guaranteed loan. Retrieved from http://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf
Veterans United. Your Complete Guide to the VA Home Loan. Retrieved from https://www.veteransunited.com/va-loans/