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If you’re an eligible active-duty military member, veteran or surviving spouse, you can use a VA home loan — guaranteed by the U.S. Department of Veterans Affairs (VA) — to buy a new property or refinance an existing mortgage. There are benefits of a VA home loan, as well as drawbacks to consider.
Pros and cons of a VA loan
- No down payment required
- No mortgage insurance
- Lower interest rates and fees
- Easier qualifications
- Convenient refinancing options
- Assumable for veterans and civilians
- Funding fee required
- Property restrictions
- Less equity to start
Benefits of a VA loan
No down payment required
While conventional mortgages require a down payment of at least 3 percent of the purchase price, VA loans allow eligible borrowers to become homeowners without putting a penny down upfront. That makes a big difference: Forty percent of Americans who don’t own homes cite an inability to cover a down payment and closing costs as a primary driver for continuing to rent, according to recent Bankrate data.
No mortgage insurance
If you’re comparing VA loans versus FHA loans and conventional loans, VA-backed loans offer a big point of differentiation: no mortgage insurance. That’s a premium you’ll pay on all FHA loans — both an upfront premium and an annual premium throughout the loan term. You’ll also pay private mortgage insurance (PMI) on a conventional mortgage if your down payment is less than 20 percent.
Lower interest rates and fees
Lenders tend to charge lower rates for VA loans than they do on conventional loans, which means you can save a lot of money on interest in the long run, especially over a 30-year loan. VA home loan closing costs might be less than those for other loans, as well, since the VA limits the origination fee a lender can charge to no more than 1 percent of the mortgage.
The VA doesn’t have a minimum credit score requirement. While some VA lenders impose a 620 credit score — the same minimum as a conventional loan — many offer loans with a lower minimum score to qualify. Along with this flexibility, if you’ve encountered a financial challenge — you declared bankruptcy or you sold your home in a short sale, for example — the typical waiting period after a foreclosure is just two years with a VA loan. Compare that to three years with an FHA loan and up to seven years for a conventional mortgage.
Convenient refinancing options
With a VA cash-out refinance option, you can finance up to 90 percent of the value of your home. Alternatively, you could opt for an Interest Rate Reduction Refinance Loan (IRRRL) that doesn’t require an appraisal. Both refinancing options might make a VA loan more appealing overall. Plus, the funding fee on a VA IRRRL is relatively small: just 0.5 percent of the loan amount.
Assumable for veterans and civilians
VA loans are assumable, meaning that a buyer — who, with lender approval, does not need to be a veteran — can take over the terms of the VA loan on the home they’re buying instead of obtaining a new loan. VA loan assumptions are especially beneficial when interest rates are rising, as you could assume a loan with better terms than you could get otherwise. While loan assumptions require extra steps for the seller to keep their full VA loan entitlement after the sale, they can be an excellent perk for a buyer.
Disadvantages of a VA loan
Funding fee required
While you won’t pay for mortgage insurance with a VA loan, you will pay a funding fee at closing (although this fee can be financed into your loan, increasing the total amount you owe). If you’re taking out your first VA loan and putting down less than 5 percent, the funding fee equates to 2.15 percent of the loan amount. If you do plan to put money down or have obtained a VA loan in the past, the fee can range from 1.25 percent (for first-time or repeat borrowers putting at least 10 percent down) to 3.3 percent (for repeat borrowers with less than 5 percent down).
Not all borrowers are required to pay the funding fee. For example, if you receive compensation for service-connected disabilities or are a veteran’s surviving spouse, you might be exempt from paying the funding fee.
VA loans limit the type of property you can buy and how you can use it. You can only buy a primary residence with a VA loan — no investment or rental properties unless you intend to live in one of the units. Manufactured homes are also subject to more scrutiny, including a structural engineering examination.
Less equity to start
The major upside of a VA loan is the ability to get a mortgage with no money down. However, that can be a downside if your home declines in value or you need access to your equity. In the case of the former, you could end up underwater on your loan if home values fall and you owe more on the mortgage than what your property’s worth. This can make it much harder to sell your home or refinance to a new mortgage. In the case of the latter: Because you haven’t put any equity into the home to begin with, it’ll take longer to build this asset and leverage it.
Is a VA loan the best option for you?
For many borrowers, the math works for a VA loan. However, even if you’re eligible, there are times when a VA loan might not be your best choice.
“For example, if you are an eligible borrower who currently owns a home but wants to sell and purchase another primary home to yield a large down payment — 20 percent or more — from the sale that you can put toward your next home purchase, a VA loan may not make sense for your next property,” says Rob Killinger, senior loan officer at Movement Mortgage in Massachusetts. “If you were to use a VA loan in this scenario, you may be required to pay the VA funding fee, whereas a conventional loan program would not require such a fee.”
On the other hand, a VA loan offers special benefits that other financing does not.
“For instance, a qualified borrower could purchase a two- to four-unit property with a zero-down VA loan that they plan to live in instead of a single-family home,” says Killinger. “In comparison, a conventional loan requires a minimum 15 percent down on a multi-unit property.”
Still, the funding fee can be expensive. If you are planning to remain in your home for less than two years, it might not be worth it to pay this fee to get a VA loan.
If you’re still not sure whether a VA loan makes sense for you, consult closely with your loan officer, who can present all of the mortgage options you qualify for and help guide your decision.
Home sellers can and do accept purchase offers with VA loan financing, but depending on your market and the individual seller, you might encounter some resistance. That’s because there are some myths about VA loans — that the documentation required can create closing delays or that the appraisal process can derail deals, for example. It can be helpful to work with a real estate agent who knows how to educate the seller’s agent on VA loans, debunk those myths and show that your offer is just as strong — if not stronger — than the competition.
A VA loan isn’t your only choice of financing. Consider the following options:
- Conventional loan – There is no funding fee on a conventional loan, and you can use it to purchase primary homes, investment properties and second homes. The interest rates tend to be higher than for VA financing, however, and you’ll also need to make a down payment, as well as pay for mortgage insurance if you’re putting down less than 20 percent.
- FHA loan – An FHA loan is also insured by the government, but requires you to pay an upfront mortgage insurance premium and annual mortgage insurance premium. Your interest rate might also be higher. Still, it might be easier to qualify for an FHA loan if your credit needs work (depending on lender) compared to a VA loan.
- USDA loan – As with a VA loan, a USDA loan doesn’t require a down payment, but it’s only for borrowers in designated rural areas. USDA loans also come with income restrictions, and the property must be a single-family home.