VA loans are one of the primary home financing options for veterans and military borrowers. They can provide some financing benefits and advantageous for veterans and military borrowers over other traditional financing options. However, it’s important to have a solid understanding behind the pros and cons of VA loans if you’re thinking about using them to finance your home. In this article we will take a look at how VA loans work and some of the pros and cons that come with them.
VA Loans Explained
The “VA” stands for the Veterans Affairs. It’s a department of the federal government that provides home loan options to veterans and military members. A VA loan is a mortgage issued by private lenders with loans partially backed and guaranteed by the VA. If you’re an active-duty military member, veteran, or a surviving spouse, you have the option to use a VA home loan to purchase or refinance a home.
VA loans work differently than standard conventional mortgages. The Department of Veterans Affairs does not originate loans. Instead, the VA backs and guarantees a portion of each VA loan against a possible default. This guarantee and backing against defaults are what give lenders the incentive to extend favorable financing options and rates for veteran borrowers.
The process to preapprove, underwrite and close a VA loan is similar to that of a conventional mortgage. Borrowers still have to qualify, but the requirements are more relaxed from an underwriting perspective. Let’s take a look at the pros and cons of VA loans.
Pros of VA Loans
There are many unique pros associated with VA loans for qualified veterans and military borrowers. They are in place to help those that defend our country to finance a home for their family.
- No Down Payment – One of the biggest advantages of a VA loan is the fact that there is no down payment required. Unlike conventional mortgages that require you to put at least 3%- 20% down of the purchase price, a VA loan has zero down payment requirements. This is a massive benefit to families who don’t have enough cash to use as a down payment. It allows a different segment of buyers to participate in the home buying experience.
- No PMI – Another massive advantage of VA loans is the fact that you don’t have to pay for private mortgage insurance. With other loans like an FHA loan or a conventional mortgage, you will have to pay private mortgage insurance if you put down less than 20%.
- Higher DTI Ratio – The VA prefers loans with no more than 41% DTI. However, if borrowers have higher DTI ratios they can still get approved if they have sufficient “residual income”.
- No Minimum Credit Score Requirement – The VA doesn’t have a required minimum credit score to qualify borrowers for a VA loan. This will vary from lender to lender. However, the average lowest score for a VA loan is around 620. There are lenders that will approve VA loans with lower credit scores.
- No Prepayment Penalty – In today’s mortgage environment prepayment penalties have pretty much gone away. If you pay off your VA loan earlier, you will have no prepayment penalty.
- Great Refinance Options – Another advantage of VA loans is that they offer great refinance options. You can even go as high as 90% of the value of your home for a cash-out refinance. VA loans also have interest rate reduction refinance loans that can lower your interest rate without getting a standard appraisal.
- Better Terms and Favorable Interest Rates – VA loans have more flexible terms than traditional mortgages. They also tend to have lower rates than most FHA and conventional mortgages.
- Flexibility with Foreclosure and Bankruptcy – In most cases, borrowers will still have to be subject to the standard waiting period after bankruptcy or foreclosures in order to obtain a VA loan. However, there may be lenders that are willing to shorten the waiting period for VA loans following foreclosure or bankruptcy.
As you can see there are many pros to getting a VA loan over an FHA loan or a conventional mortgage. If you’re a qualified military member, getting a VA loan for the purchase of your primary residence is the better option.
Cons of VA Loans
VA loans aren’t perfect. As such it’s important to be aware of their cons and limitations for borrowers if you’re thinking of using it as a way to finance your home.
- VA Funding Fee – Although you won’t have to pay mortgage insurance with a VA loan, you will have to pay a “VA funding fee” at closing. The VA funding fee ranges between 1.25% – 3.5% of the loan amount. If you’re taking out your first VA loan and not making a down payment, the funding fee will be between 2%-2.5% of the loan amount. This is somewhat of a significant fee. If this is your second time getting a VA loan or refinancing a VA loan the fee can be higher at around 3-3%. The VA funding fee gets grouped in with the loan amount so borrowers typically end up coming out of pocket with zero money.
- Limited to Primary Residences – VA loans are limited to primary residences only. They are not allowed for second homes or investment properties. Unless you happen to purchase a multi-unit property and rent out some of the units, you may not use a VA loan for a traditional investment property.
- Some Sellers May Not Agree to Offers with VA Loans – Depending on the location of the property that you plan on buying and the general competition of the market, sellers may not be open to receiving VA offers. This is due to the fact that VA loans can take longer to close. Also due to the fact that certain sellers only want offers from more qualified borrowers.
- Limited for Military Service Members and Spouses – VA loans are limited to military service members and their qualified spouses. Regular “civilian” borrowers do not qualify for VA loans.
- Property Restrictions – VA loans can limit you to the type of property you want to purchase. If you had your eyes set on a manufactured property it will be subject to an inspection by a structural engineer. In addition, the VA has limits on the number of units for VA loans.
There are both pros and cons of VA loans. As a military member, they are a great way to finance the purchase of your primary residence. However, they can have their own set of limitations when compared to traditional mortgages.
Are VA Loans Assumable?
VA loans are indeed assumable. What does this mean?
A VA loan is deemed “assumable” because the VA permits a borrower to take over the terms of the current VA mortgage. This is the even if they aren’t military service members, veterans, or surviving spouses. This makes VA loans very flexible. Assumable loans permit someone other than the original borrower from taking over the repayments terms and outstanding loan balance of the loan.
How Many VA Loans Can You Have?
There is no limit on how many VA loans you can have in your lifetime. It’s even possible to have multiple VA loans at the same time. In addition, VA loans must be used to finance the purchase of a primary residence