VA loans can look very attractive if you are a veteran or in the military. They are a popular choice for eligible homebuyers with no down payment requirement and better interest rates.
Despite offering good terms, they might not be the best option for everyone. Buyers need to know that VA loans have property condition requirements, so if you’re looking at a fixer-upper, they may not work. We look at the pros and cons of VA loans so that you can see if it is the right choice for you.
What is a VA Loan?
A VA home loan is provided by lenders and guaranteed by the VA. This lets lenders offer better terms as there is less risk to them.
If you are in the military, are a veteran, or are the surviving spouse of a service member, you can use VA loans to buy a home.
Pros and Cons of VA Loans
While there are many reasons to use this type of loan, it may not always be your best financial choice. Let’s look at the pros and cons:
Pros
No down payments
The most obvious advantage to using a VA loan is the 0% down payment. If you qualify for a loan, you can borrow as much as the lender will loan without having a down payment.
Conventional loans might have a minimum 3% or 5% down payment requirement, and with FHA loans, it is 3.5%. If you borrow $200,000 with FHA loans, the minimum down payment will be $7,000.
Higher debt-to-income ratios
A lender will compare your debts to your monthly income, and you can qualify if the ratio is less than 41%. If your DTI is higher, qualifying for financing is sometimes still possible.
No PMI
Private mortgage insurance isn’t required for a mortgage through the VA program. PMI is usually required if you don’t have a 20% down payment with conventional loans.
The FHA has something similar to PMI called mortgage insurance premiums (MIP) that can last the full length of the mortgage with down payments under 10%. There is also an upfront mortgage insurance premium of 1.75% of the purchase price at closing, though this can be added to the FHA loan.
No prepayment penalties
If you want to repay your mortgage early, cutting down the interest you pay, you won’t be penalized. This isn’t always the case with other types of mortgages.
Lower interest rates
VA loans benefit from lower average interest rates. They also often have lower closing costs when compared to conventional loans.
Assumable loans
Another borrower can take over VA loans. However, this can mean the veteran loses entitlements until the other borrower pays off the loan.
Bankruptcies and foreclosures
If you have suffered a bankruptcy or a foreclosure, you could be eligible for a VA loan sooner than other mortgages. You could apply only 2 years after Chapter 7.
VA streamline refinancing
If you want to lower your interest rate, the VA allows you to refinance more easily from one VA loan to another. You could also choose a cash-out to refinance, though the charges will increase the loan cost.
Cons
Funding fee
Most VA loans require a funding fee. This goes to the VA to help run the program and could be thousands of dollars. It can be financed as part of the home loan, and some borrowers are exempt from having to pay.
The funding fee also increases each time it is used. The first-time fee will be the lowest, but increases can be reduced by having a down payment.
Minimum property requirements
The VA requires that every home goes through an appraisal. This is similar to an inspection and evaluates the home to ensure it meets certain requirements.
A VA appraisal assesses the home’s value like other appraisals but goes further. The VA appraiser has to check that the home is safe, sound, and sanitary to be approved for a VA loan. This is designed to protect the borrower from purchasing a home that has expensive problems.
However, this inspection by an appraiser could prevent you from buying the home you want. If you want a renovation project or don’t mind buying a home that isn’t perfect, the appraisal might not go your way.
Primary residences only
This loan cannot be used for second homes or when buying an investment. The home has to be lived in full-time unless a VA Streamline refinance is used.
VA Loans are unfamiliar to some
If a real estate agent doesn’t understand VA loans, time can be wasted with homes that won’t meet VA appraisal requirements.
Sellers might also favor other types of loans if they have multiple offers. While this doesn’t make much of a difference to the seller, a lack of understanding could occasionally make this happen.
Final thoughts
Exploring VA loans will be worth your time and effort when you have been part of the military. Speak to your mortgage broker or lender for more info.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years.
