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Q: I’m a retired veteran looking to purchase my first home. A friend of mine recommended a VA loan, but I’m not sure if it’s right for me. What are some VA loan pros and cons I need to consider?
A: Veterans and other qualified military members have access to what’s often considered one of the best mortgage programs through the VA home loan program. VA loan requirements are often less restrictive than those of other types of home loans when it comes to down payment and credit score requirements, making the program an attractive option for active and former service members.
Chris Birk, vice president of mortgage insight and director of education at Veterans United, a mortgage lender specializing in VA loans, explains that this financing option continues to help many active and former service members realize their dream of homeownership. “VA loans are arguably the most powerful home-buying tool on the market,” he says. “This benefit program was created to help level the playing field and boost access to homeownership for those who serve. Nearly 80 years later, VA loans are still fulfilling their original mission and helping a new generation plant roots and build wealth.”
However, as with any mortgage product, the VA loan program also has drawbacks, such as restrictions on certain types of properties. Military members thinking about buying a house with this type of mortgage can better determine if it’s right for them by considering some of the most notable VA loan pros and cons.
Pro: Borrowers are not required to make a down payment on their new home.
One of the biggest pros of VA loans veterans may not know about is that they don’t have to put any money down when buying a home. Down payment requirements can often throw new home buyers off track due to the large out-of-pocket cash outlay. Conventional lenders often require borrowers to put at least 20 percent down to avoid paying mortgage insurance. Even some of the best mortgage lenders for first-time buyers, which might offer lower down payment requirements on conventional or FHA home loans, usually require at least a 3.5 percent down payment.
VA loans don’t have a down payment requirement, which means a borrower could finance the entire purchase price of the home. Without the need to save for a down payment, many service members can realize their dream of homeownership sooner by taking advantage of a VA loan. In addition, borrowers who do have cash saved for a new home can potentially put that money toward upgrades, renovations, or unexpected home expenses rather than a down payment.
Con: VA loans are only available to active and former service members as well as surviving spouses.
While VA loans offer many great benefits to buyers, VA loan eligibility is extremely limited. A loan program backed by the Department of Veterans Affairs (VA), VA loans are designed to benefit active and former members, although spouses of deceased service members or those missing in action may also qualify for the program. Qualified veterans and service members are typically those who have 90 continuous days of active-duty service in the military. Non-military home buyers will not qualify for the program.
Pro: Lenders typically offer lower interest rates on VA mortgages than for conventional home loans.
After qualifying for a VA loan, borrowers often receive interest rates that are competitive with those of other mortgage products. VA loan rates tend to be lower than mortgage rates for conventional home loans. Reduced interest rates could add up to large cost savings over the life of the loan, as well as lower monthly mortgage payments.
VA loan mortgage rates are often lower than interest rates for conventional mortgages because the loans are backed by the federal government. Although the VA doesn’t fund home loans directly, it will guarantee VA loans extended by approved mortgage lenders. This means that if a borrower defaults on their VA loan, the VA guarantees to pay the lender a portion of the defaulted loan amount. This lowers lenders’ financial risk, encouraging them to offer lower mortgage rates on VA mortgages.
Con: VA loans may not be available for all real estate purchases, including second homes, investment properties, and in some cases, manufactured homes.
The VA loan program is intended to help veterans and active-duty military members purchase a home, not invest in real estate. This means veterans can only purchase a primary residence through the program. Second homes or investment properties do not qualify for the program. For this reason, a veteran hoping to invest in a rental property or second home may want to consider one of the best investment property loans to finance their purchase.
Another potential con of VA loans involves property limitations and VA loan inspection requirements. For example, properties financed with a VA loan must have year-round street access. In order to qualify for VA financing, a service member looking to purchase a home on a private road in the country will likely need a permanent easement granting them access to the property via the private road. Inspectors will also verify that the home has a permanent foundation, which could disqualify certain manufactured homes from VA loan eligibility.
Pro: Mortgage insurance is never required on a VA loan.
Along with not needing to make a down payment, VA loan borrowers won’t have to pay mortgage insurance. Mortgage lenders typically require borrowers who put less than 20 percent down on a conventional home loan to carry private mortgage insurance (PMI). PMI is insurance that recoups costs for a lender if a borrower defaults on their mortgage. Mortgage insurance isn’t required on VA loans because the VA already guarantees the loan, minimizing the lender’s risk. Even specialized VA loans, such as VA construction loans, don’t require mortgage insurance.
Con: Borrowers need to pay a VA funding fee, and that fee will increase on subsequent mortgages.
The VA funding fee is a service fee that borrowers must pay when they close on a VA loan. Fees can range from 1.25 percent to 2.15 percent of the loan amount, depending on the size of the down payment and whether the borrower is using their VA entitlement for the first time. The VA entitlement is the maximum amount the VA agrees to pay a lender if the borrower defaults on their mortgage. Although eligible veterans and service members can use their VA loan benefits multiple times—borrowers can restore their VA entitlement by repaying their VA loan—the VA funding fee increases after they use their benefits for the first time. With that in mind, VA loans are often more expensive for those who have already used their VA entitlement than for first-time home buyers using a VA loan.
Pro: Lenders often have more flexible eligibility requirements—lower credit scores and higher debt-to-income (DTI) ratios, for instance—to qualify for VA loans.
Generally, a high credit score and low debt-to-income (DTI) ratio gives borrowers a higher chance of securing a mortgage. In addition, having good credit and minimal debt can also lead to lower interest rates, better mortgage terms, and larger loan amounts. However, one of the many benefits of the VA program is more flexibility in financial eligibility for a loan. Many of the best VA mortgage lenders (such as Veterans United and Navy Federal Credit Union) have less stringent credit score and DTI ratio requirements compared with those of conventional loans. As such, those who may not qualify for a conventional mortgage due to their credit score or monthly debt obligations could still be eligible for a VA loan, which could help them secure financing to purchase a home.
Con: Not all mortgage lenders offer VA loans.
Only VA-approved mortgage lenders can offer VA home loans. Many lenders simply don’t offer VA loans, which could make shopping for this type of mortgage more difficult for borrowers. For example, a veteran may want to keep their finances simple by securing a home loan from their local bank. However, if the bank isn’t approved by the VA, it won’t be able to offer VA loans.
Additionally, the VA only facilitates mortgages, not other types of loans. For example, there are no VA personal loans for service members to apply for if they need additional funds. In addition, those looking to tap into their home equity may need to consider one of the best home equity loan providers, as the VA does not back this type of financing. However, a veteran may be able to use a cash-out refinance through the VA mortgage loan program to convert home equity into cash.
Pro: VA loan closing costs may be lower than those required with a conventional mortgage.
Closing costs are expenses incurred in the process of securing a mortgage. Common closing costs include loan origination, appraisal, and title or deed fees. These fees help the lender cover the administrative cost of preparing a mortgage and transferring ownership from the previous owner to the buyer. While borrowers will pay closing fees on any mortgage, VA loans often have slightly lower fees than conventional mortgages. Part of the reason service members may pay less in closing costs is because the VA limits how much a lender can charge in origination fees. With lower closing costs, borrowers can minimize their up-front expenses when taking out a home loan.
Con: Closing timelines could be longer with VA loans compared with those of conventional home loans.
The closing timeline for VA loans may be longer than that of a conventional mortgage in some cases. Strict inspection and appraisal requirements can mean a longer lead time to close on a home using a VA loan. The VA generally requires a financed home to meet certain appraisal requirements that may exceed what a lender would require with a conventional mortgage. For example, VA inspectors will consider the size of the home and if it provides enough space for the borrower and their family. They’ll also look to see if there are any easements or encroachments related to the property that may prevent the homeowner from accessing the property. If the appraiser or inspector finds an issue that needs to be addressed before a loan can be approved and funded, the buyer and seller may have to go back and forth to fix it—which can add to the closing time.
Due to the lower interest rates, flexible down payment options, and relaxed financial eligibility requirements, qualifying home buyers may find VA loans to be the right choice for their financing needs.
Despite the potential downsides of a VA loan, many veterans and other eligible service members will find this type of financing to be one of the most affordable ways to buy a home. Veterans looking to get a VA loan may want to carefully consider all of their options before deciding on a lender. Interest rates, closing costs, and other expenses can vary from one lender to another, so it’s worth shopping around.
It might also be worth looking at several mortgage types when comparing loan products to see which option works best for a particular situation, advises Birk. “In many cases, a VA loan will be the most financially advantageous path to homeownership,” he says. “But that isn’t always the reality, and what’s most important for veterans is finding lenders and real estate agents they trust who can help them evaluate their options.”
Regardless of what type of financing home buyers require, the best mortgage lenders can typically provide the right home loan to suit their needs.
