Buying a new home can be both exhilarating and overwhelming when it comes to financing for your home purchase. If you’re considering a home purchase in the near future, the good news is there are plenty of choices available when it comes to mortgage loans. Whether you use a conventional mortgage loan, or opt for a government-backed loan, like a USDA loan or FHA loan, there are options available for nearly every type of buyer.
That said, active-duty military members and Veterans have one extra home loan option to weigh: a VA loan. VA mortgages are a type of home loan backed by the Department of Veterans Affairs and are geared specifically to meet Veterans’ unique homebuying needs and challenges.
As with any type of mortgage loan, it’s important to know the pros and cons of VA loans before making a decision.
VA Loan Pros and Cons
|Cons of the VA Loan
|Pros of the VA Loan
|Less equity in the home without a down payment
|No down payment
|Funding fee is required*
|Stricter appraisal requirements
|Relaxed credit requirements
|Cannot purchase rental properties or second homes
|Lowest average interest rate
*Unless you qualify for an exemption
What are the Pros of a VA Loan?
Many active military and Veterans opt for VA loans because they come with advantages over other loans. Here are some of the benefits you can expect:
No down payment
With a VA loan, you don’t have to put down money for a down payment. In fact, one of the main perks of using a VA loan is the ability to fund your home purchase with $0 down.
If you want to use a conventional loan to buy your home, you’ll typically need to put down at least 5% of the purchase price. In some cases, buyers might need to put down even more. Saving for a down payment can be especially tough you’re deployed or on a fixed income.
Another benefit of a VA loan is you won't be stuck paying for private mortgage insurance, or PMI. Conventional buyers typically need to pay for PMI if they’re putting down less than 20% of the purchase price.
That’s a huge perk, as PMI can add a hundred dollars or more to your monthly mortgage payment each month. Removing that extra insurance from the monthly cost equation can help you qualify for a bigger loan, too.
Relaxed credit requirements
A VA loan comes with relaxed credit requirements. Credit score minimums can vary by the lender and other factors, but you’ll typically need a lower score for VA loans than conventional. That can really come in handy for military members and younger Veterans, given that it can be tough to focus on credit-building while deployed overseas or on active duty.
VA loans also come with shorter waiting periods after negative credit events like bankruptcy, foreclosure and short sales.
Lowest average rates
This is a big money-saving benefit of VA loans, which for more than seven years in a row have had the lowest average fixed rate on a 30-year mortgage, according to ICE Mortgage Technology. Lower rates help Veterans expand their buying power, not to mention potentially save thousands over the life of the loan. Rates can and will vary based on the lender and other factors.
No prepayment penalties
Certain types of mortgage loans can penalize buyers with extra fees for paying off their mortgage early. VA loans come with no prepayment penalties. That means you can pay off your mortgage early without having to worry about shelling out extra money in fees for doing so.
Another major perk of VA loans is that they’re assumable, meaning that when you sell a home you purchased with a VA loan, the buyer has the option to take over the terms of the existing mortgage, whether they’re a civilian or a service member. That’s a huge perk for buyers when weighing homes to buy, and it can be a huge benefit to you when it comes to selling your home.
There are two refinancing options when it comes to VA loans: a VA Streamline refinance, also known as an Interest Rate Reduction Refinance Loan (IRRRL), which lets you easily refinance your mortgage to a lower rate with little paperwork, and a VA Cash-Out refinance, which lets you tap into your home’s equity to make repairs, pay off high-interest debt, or for any other purpose.
What are the Cons of a VA Loan?
As with any other type of loan, there are also potential disadvantages of VA loans. These include:
Required VA funding fee
One disadvantage of a VA loan is the additional cost of the VA Funding Fee. This fee goes straight to the VA and varies on a purchase from 2.3% to 3.6%, depending on whether you’ve used the benefit before. Buyers can lower their funding fee by putting down at least 5%. Veterans who receive compensation for a service-connected disability and select others are exempt from paying this fee. This is a cost buyers can finance into their loan.
Tighter occupancy requirements
VA loans are meant to help military members buy houses to live in — not investment properties or vacation homes. Veterans need to intend to occupy the new home, typically within 60 days of closing.
Stricter appraisal requirements
The appraisal process for both VA and FHA loans looks different than the one for conventional mortgages. Homes need to meet the VA’s broad property condition requirements, which aim to ensure that Veterans are buying homes that are safe, sound and sanitary. Any repairs that arise from the appraisal typically need to be completed before the loan can close. Sellers or even buyers can pay for those repairs in order to keep things moving.
Less equity without a down payment
While you have the option to buy a home without a down payment when using a VA loan, there can be downsides to doing that, including a lack of equity. The more you pay into your home, the more equity — or the portion of the home you own outright — you have. Equity is one of the biggest perks of owning a home, but if you opt for a VA loan without a down payment, it can take a while to make enough payments to gain a substantial portion of ownership in your home.
For homeownership only
As noted, VA purchase loans are only available for owner-occupied residences, which means that you don’t have the option of using your VA loan to purchase a rental property. But VA buyers can purchase a multiunit property -- typically up to a four-plex -- provided they intend to occupy one of the units.
Is a VA Loan Worth It?
Whether or not a VA loan is worth it depends on your goals and specific situation. There are tons of perks that come with using this type of loan, so if your goal is to own a home that you and your family live in, a VA loan can help make that happen. The ability to buy without a down payment or the need for a high credit score is a huge opportunity that opens the doors of homeownership to many Veterans who might otherwise be left out.
But every buyer’s situation is different. A trusted lender can help you run the numbers and evaluate all of your mortgage options.
Check Your VA Loan Eligibility
Another factor to consider with a VA loan is whether you're eligible for one. Generally, you may be eligible if you have served
- 90 consecutive days of active service during wartime.
- 181 days of active service during peacetime.
- Six years in the Reserves or National Guard.
- You are the spouse of a service member who died in the line of duty or as a result of a service-related injury.
To see a VA loan might be right for you, talk to a Paddio specialist.