VA Loan Pros and Cons
Millions of veterans have evaluated the VA loan pros and cons and have determined that a VA loan is the right choice for them. In this article, we will provide some additional insight so you can make the right choice for yourself.
What Are The Pros and Cons of a VA Loan?
Are you a veteran considering buying a home? If so, you will probably want to consider a VA loan. VA home loans are mortgages specifically for those serving or serving in the military.
Each year thousands of veterans and military families take advantage of what VA loans offer.
We will review everything you need to know about these mortgages, including the pros and cons. Let’s dig in.
What is a VA Loan?
A VA loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA). It is available to eligible veterans, active-duty service members, certain members of the National Guard, and reservists.
The VA loan program was designed to provide veterans with a better way to finance a home purchase.
VA loans are government-backed and offer several advantages over traditional mortgages, such as no down payment, no private mortgage insurance, and more flexible qualification requirements.
VA loans often come with more attractive interest rates than a traditional mortgage.
Not having private mortgage insurance is a significant advantage compared to conventional loans.
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How Do VA Loans Work?
How do VA loans work? Private lenders, such as banks and mortgage companies, make VA loans to eligible veterans and service members.
The VA guarantees the loan, meaning that if the veteran defaults, the VA will repay the lender. This makes it easier for veterans to get a loan, as lenders are more likely to approve it when the government backs it.
To be eligible for a VA loan, a veteran must have served in the military for at least 90 days during wartime or 181 days during peacetime.
Additionally, the veteran must have been discharged with other than a dishonorable discharge. Active duty service members must have served for at least 90 days.
What Are The Qualification For a VA Loan?
Besides the conditions already mentioned about being a military member, there are some financial requirements too.
In addition to the eligibility requirements, veterans and service members must meet certain credit, income, and debt-to-income ratio requirements to qualify for a VA loan.
Generally, VA loans require a minimum credit score of 620 and a debt-to-income ratio of 41% or less. However, some lenders may offer to finance a VA loan with as little as a 500 credit score.
Being able to get a loan without good credit scores can be a significant benefit to many borrowers.
Additionally, veterans must have sufficient income to cover their monthly mortgage payments. You can use VA guaranteed disability income, or income from a job, or both.
VA loans also require a funding fee, typically .5% -3.5% of the loan amount but the average is over 2%. The funding fee that you may be charged is tied to your eligibility, loan amount, and disability status. This fee helps to offset the costs of administering the loan program.
Finally, veterans must obtain a Certificate of Eligibility from the Department of Veterans Affairs to apply for a VA loan. This certificate is proof of eligibility and is usually obtained from the local Veterans Affairs office.
What Are The VA Loan Pros and Cons?
The main benefit of a VA loan is that it provides eligible veterans and service members with a way to purchase a home with little or no money down. This is a huge advantage for those who may not have the cash to make a large down payment.
Additionally, VA loans often have more attractive interest rates than traditional mortgages.
VA loans also offer more flexible qualification requirements than traditional mortgages, making it easier for veterans to get approved. With a VA loan, veterans do not have to worry about paying private mortgage insurance, typically included in the loan.
If you have had a credit problem, the VA is likely to overlook it to a greater extent than with other loans.
One of the biggest drawbacks of a VA loan is that it requires a funding fee, typically 2.3% of the loan amount. This fee helps to offset the costs of administering the loan program and can add to the cost of the loan.
Additionally, veterans must obtain a Certificate of Eligibility from the Department of Veterans Affairs to apply for a VA loan.
The property you are buying also must meet specific condition requirements, so you can’t purchase a lemon. Unfortunately, borrowers cannot waive certain contingencies commonly found in real estate contracts, such as home inspection and appraisal.
Not being able to waive these items can put buyers at a disadvantage in extreme seller’s markets where numerous bidding wars occur.
Overall, VA loans are a great way for eligible veterans and service members to purchase a home with little or no money down.
While there are some drawbacks, such as the funding fee and the need to obtain a Certificate of Eligibility, the benefits far outweigh the disadvantages.
Pros of a VA Loan
- No down payment
- No private mortgage insurance
- Lower interest rates
- Lower closing costs
- Easier for borrowers to qualify
- More straightforward to get a loan with a credit problem in the past
- Terrific refinancing options
- Low credit scores allowed
Overall VA loans lower the costs of owning a home.
Cons of a VA Loan
- Only those in the military can utilize this kind of financing
- You will pay a funding fee as part of getting the loan
- There are property condition requirements that need to be met
- There is less flexibility, like being able to waive a home inspection or a real estate appraisal
- Sometimes loans take a little longer to close, given you need approval from the VA and the lender.
Problems with VA Loans for Sellers
Some of the problems with VA loans for sellers are perceived and are not real. Some fear the sellers will have to pay for the borrower’s closing costs if they are financing with a VA loan. That is not true.
Buyers can negotiate with sellers to help pay for some or all of the closing costs but that will happen regardless of which mortgage program the buyer is using. It is not unique to those who are using a VA loan to purchase the home.
There are no rules in place which require sellers to help offset some or all of the closing costs when the buyer is using a VA loan to make the purchase.
Final Thoughts on VA Loans
Overall, a VA loan is an excellent option when you have been part of the military serving our country. Like anything else, working with a lender that regularly does VA loans without a problem is essential.
Do careful research, possibly getting a recommendation from your buyer’s agent on who a good lender is to work with.