When it comes to buying a home, VA loans are a popular choice for Veterans and active military members. There are many advantages to using a VA loan over other government-backed loans or even conventional mortgages. As a result, millions of Veterans have utilized their VA home loan benefits.
But is a VA loan worth it for you?
Some VA loan advantages are well known, such as not requiring a down payment. However, the VA loan program offers many other benefits to Veterans. Does that mean a VA loan is better? Not always. This will depend on your personal preferences and current financial circumstances.
To help you make a well-informed decision, we have broken down the most important VA loan pros and cons from both a buyer's and seller's point of view.
Overview of VA Loan Buyer Pros and Cons
|Easy qualification process||VA funding fee|
|No down payment, PMI or prepayment penalty||Must be primary residence|
|Lower interest rates and closing costs||Sellers may be unfamiliar|
|Flexible rates and refinance options||-|
|Higher debt-to-income ratio||-|
|VA loans are assumable||-|
VA Loan Pros For Buyers
VA loans are favored by military members and Veterans for a reason. The program has been designed to help Veterans become homeowners with unique advantages. As a result, the program offers the following benefits:
Easy Qualification Process
VA loan eligibility requirements are more lenient and flexible because the financing is backed by the Department of Veterans Affairs. The government backing allows lenders to be more lenient on the qualification criteria. As a result, VA loans are some of the easiest home loans to apply for when compared to other loan types such as FHA loans and conventional loans. This can reduce the time, hassle and stress of applying for a home loan.
No Required Down Payment
Saving for a down payment is often the biggest roadblock for anyone trying to purchase a home. The great thing about choosing a VA loan is that there is no down payment required. You can finance up to 100 percent of the purchase price with $0 down, which is a powerful benefit found in very few loan types. You still have the option to put a down payment on a home purchase through a VA loan, but it isn't required.
No Private Mortgage Insurance
FHA loans or even some conventional loans require private mortgage insurance (PMI), which can add a significant amount to your monthly mortgage payment. PMI is required for the life of the loan if you go the FHA route, and PMI for conventional loans is required until you build up 20 percent equity in the home.
With a VA loan, no private mortgage insurance is required, even with the zero down payment advantage. This can save Veterans thousands of dollars in extra fees on top of their mortgage payments.
No Prepayment Penalty
Some lenders will penalize you for making additional payments to pay off your mortgage earlier than the set loan term. A VA loan is an ideal choice if you want to make extra payments to pay off your mortgage faster.. This means you won't face penalties if you make additional payments during the life of the loan, or pay the whole loan off before its term. A reduced loan term means you could potentially save thousands of dollars in interest payments over the course of your loan.
Lower Interest Rates and Closing Costs
Of all the loan types on the market, VA loans are one of the cheapest when it comes to closing costs and interest rates. Interest rates on any government-backed loans tend to be lower when compared to conventional mortgages. By choosing a VA loan, you could significantly reduce your potential monthly mortgage payments.
Closing costs on a VA loan are another expense that can make mortgages much more expensive than they first appear. These costs can be as much as 3% to 5% of the price of the home, and can vary by lender. VA loans differ in that they give borrowers the option to limit what they have to pay.
Seller Concession Rule
Another benefit for VA borrowers is you can ask the seller to help pay for loan-related costs on your behalf. While the seller isn't required to pay those costs and can refuse, it's a consideration for part of the negotiation process.
With a VA loan, the borrower can ask the seller to pay up to 4% of the purchase price in what’s called “concessions” to cover non-loan-related costs. This is an additional bonus to the common discount points and payment of the borrower’s loan-related closing costs. These include fees such as prepayment of property tax, recording fees, daily interest charges, homeowners association fees, home warranty fees and real estate commissions.
Like many mortgage types, VA borrowers benefit from the flexibility of choosing between fixed and adjustable-rate mortgages. Though selecting the right type of VA loan and mortgage term can be difficult, the flexibility means you can find an option that works best for your financial situation.
For example, if you want to prioritize lower monthly repayments, you could opt for a 30-year fixed-rate mortgage. If you would rather save on interest over the course of your loan, you could go with a 15-year loan term and accept the higher monthly payments.
Flexible Refinance Options
Rate flexibility also helps when it comes to refinancing a mortgage. Refinancing allows you to change to a different mortgage type or loan term based on available options. If you want to refinance your VA loan later down the road to lower monthly payments or even take out cash from your equity, there are a few options.
Higher Allowable Debt-to-Income (DTI) Ratio
One reason why some buyers struggle to get approved for a home loan is because of their debt-to-income ratio (DTI).
DTI is a ratio of gross monthly income to monthly debts. The VA and lenders want to see a smaller percentage of debt relative to what you earn. The ideal DTI when applying for a VA loan is typically no more than 41%. But in some cases, you can get approved with a slightly higher ratio, providing your other financials look healthy and your affordability isn’t severely affected. 41% is slightly higher than conventional loan requirements, making this a unique pro of the VA loan program.
Approval with Bankruptcy or Foreclosure
A history of bankruptcy or foreclosure can raise a red flag when it comes to purchasing a home, but through the VA loan program, borrowers can qualify for a VA loan two years after the discharge of a Chapter 7 bankruptcy, or following a foreclosure or short sale. For most other loan types, you will usually have to wait much longer before you can be considered for a new loan approval.
The VA loan program also stands out against other loan types because the VA encourages lenders to offer foreclosure avoidance programs. The VA has foreclosure avoidance specialists who can help any VA homebuyer avoid foreclosure and stay in their homes.
While there’s no guarantee that you will be accepted for a VA loan after foreclosure or bankruptcy, it can still be a good option, provided you can repair your credit score and meet the other financial criteria.
VA Loan Assumption is Possible
VA loans are assumable which means a borrower can take over the terms of an existing VA loan.
This could include assuming a loan with a low-interest rate from a seller can help you save money. Or if you're a Veteran with a VA loan who is selling a home, offering the financing benefits could help sweeten the deal for potential buyers.
VA Amendment to Contract
The purchase contract connected with buying a house typically comes with appraisal contingencies. The benefit of the VA Amendment to Contract rule is that potential buyers have the freedom to walk away from a home purchase contract if the VA appraisal comes back at a lower value than the contracted price of the property. When this happens, buyers automatically receive their money back and are free to drop out of the deal.
Most other loan types do not allow buyers to walk away from a purchase contract without consequences, making the VA loan program one of the more flexible and risk-free loans to apply for.
VA Loan Cons For Buyers
While VA loans have plenty of benefits, there are some downsides to consider before deciding to finance your home purchase with a VA loan. Depending on what you want from a mortgage and your personal circumstances, a VA loan may not always be the best option for you.
Some VA loan disadvantages include the following:
Required VA Funding Fee
One of the main downsides of applying for a VA loan is the VA funding fee. This mandatory fee keeps the VA home loan program running, which helps other Veterans and military families also looking to use their benefits.
This fee is calculated as a percentage of your total loan amount and can range from 0.5% to 3.6%. The expense will depend on the type of loan you get, the total amount of your loan and whether you’ve used a VA loan in the past.
While most borrowers will pay the VA funding fee, there are some exceptions.
Must be Used for Primary Residence
Another potential disadvantage is the VA occupancy requirement. VA loans are only to be used for your primary residence.
The VA loan program is designed to help Veterans and their families find a safe and secure place to live. It is not designed to be used for investors, and can’t be used for rentals, vacation properties, commercial properties or other investment properties.
However, one way around this requirement is to purchase a multiunit property. If you decide to do this, you must agree to live in one of the units, while renting out the remaining ones. Because the unit is your primary residence, the VA loan can be used to help you buy the property.
Seller May Be Unfamiliar With VA Loan Process
In some ways, VA loans can be slightly more complicated to navigate when compared to other mortgage loan types. The process is made up of specific steps, features and requirements, which might be unfamiliar.
Additionally, not all sellers or real estate agents are familiar with the process of applying for a VA loan. This can lead to confusion, as well as concerns over potential delays to closing. Some sellers and real estate agents may even prefer not to deal with buyers using the VA loan program for fear of the extra requirements, paperwork and delays.
Overview of VA Loan Seller Pros and Cons
|Less underwriting criteria||Minimum property requirements|
|Higher than average closing rates||Required appraisal|
|Increased purchasing power||Risk of borrower being deployed|
VA Pros For Sellers
The VA loan program doesn't just benefit buyers. Sellers can also benefit from selling to Veterans with a VA-backed loan. While the process for approving this type of financing can be a little more complex than with other loan types, there are still plenty of benefits that could swing the selling decision in the Veteran’s favor.
Less Underwriting Criteria
One of the biggest causes of delays in the home-buying process is the underwriting process. Underwriting allows the lender to evaluate the buyer's risk for loan repayment. It tells the lender that the buyer can meet monthly mortgage payments without difficulty. As such, it relies on a great deal of information. Issues such as missing documentation, high debt-to-income ratios or low credit scores can cause delays.
Most VA-approved lenders have more lenient criteria for approval. Since the government guarantees the loan, lenders have more peace of mind. The result is a less complex underwriting process, which is good news for any seller who wants to get their home sold quickly.
Higher Closing Rates
Typically, VA loans have a much higher closing rate when compared to other mortgage loan types. While VA loans require extra steps before closing, they are less likely to fall through compared to other loan types.
If you're selling your home to a Veteran who has applied for a VA-backed loan, you have more confidence the purchase won't fall through and the loan will close. This can be an ideal choice if you want a stronger guarantee of closure.
Increased Purchasing Power
Another plus for sellers is that a VA borrower doesn’t need to worry about a down payment. While this can be seen as a drawback, it’s actually a positive. Having zero down payment is not a sign that the buyer isn’t serious or doesn’t have great credit or income. In fact, it could mean that the buyer potentially has more cash on hand and this means greater flexibility when negotiating the sale.
Many times, a down payment can actually create more concern for sellers. This is because lenders have to verify the source of the down payment funds, which can cause delays. Buyers using a VA-backed loan and opt for a zero down payment don’t have to go through that process. This can put less stress on the lender and on you, as the seller. You don't have to stress about a buyer's inability to make the target down payment needed for closing day, making one less thing to worry about during the process.
An Opportunity to Honor Those Who Serve
A straightforward selling process and the financial aspect are important to all home sellers. But many sellers will also jump at the chance to help honor military members by working with homebuyers using the VA loan program.
This could be the Veteran’s first time buying a home, or they may have recently returned from deployment and want to start a new chapter of their lives. By selling to a Veteran using the program, you can make a small gesture to help military members get on the housing ladder and achieve a huge milestone.
VA Cons For Sellers
Naturally, where there are pros, there are disadvantages to know about as well. The VA loan program has many benefits for both buyers and sellers, but there are some drawbacks to consider as well.
Minimum Property Requirements
One of the drawbacks sellers and buyers have to contend with in the VA loan program is the minimum property requirements. The VA has a set of minimum property requirements (MPRs) that must be met for loan approval. The MPRs are in place to ensure that the house the Veteran is buying is safe, sanitary and structurally sound. In other words, the lender needs to know that the home is fit for habitation and free from hazards.
In order for the VA and VA lenders to be satisfied that the home has met the minimum property requirements, a VA appraisal is essential. As such, a required appraisal is necessary before approval of any VA loan.
This appraisal process ensures two things:
- That the property is listed at a fair selling price and the buyer will not default on the loan
- That the property can meet the minimum property requirements and is a safe option for Veterans
While a thorough appraisal can give Veteran buyers peace of mind, it can be a cause of worry for sellers, especially in a competitive market. Sellers who want a quick sale will likely not want their home fully inspected. If issues arise from the appraisal, it means the seller might have to go back and repair the damage for the loan to get approved. This can lead to a lengthier process.
Risk of Borrower Being Deployed
With active military members, there is always the potential of deployment. As a result, it is possible for service members using a VA loan to close on the home via power of attorney (POA). The use of this legal instrument can catch sellers by surprise. It could even be regarded as a downside from the seller's point of view, as they want to know who they're selling to. The seller might prefer a buyer they can get to know and connect with over one that is nameless and requires a POA.
Keep in mind that this might not be an issue for most sellers. But others prefer to meet a buyer and get to know them before accepting their offer.
Is a VA Loan Worth it?
Even if you can get a VA loan, does that make it the best choice for your mortgage? Not necessarily. The VA loan program is specifically tailored to Veterans and active military members, offering plenty of benefits that millions have taken advantage of over the years. But some Veterans still choose other home loan programs such as USDA loans or FHA loans, while others go down the more traditional route of choosing a conventional loan.
Need Help with Your Decision?
While shopping in a highly competitive homebuying market, using a VA loan to buy (or selling to a Veteran who is using VA-backed financing for the purchase) can be a plus. However, it’s so important to weigh all the VA loan pros and cons. When considering the downsides, it makes the decision much less straightforward.
If you are still unsure whether a VA loan is the best option for you, it’s worth consulting with a VA loan officer to get expert advice for your situation. Get in touch with one of our lenders or advisors today to discuss your options.