Pros and Cons of VA Loans
The United States Department of Veterans Affairs is the guarantor for all VA mortgages. The VA loan can be used by active-duty members of the armed forces, veterans, and people who have served in either the guard or the reserves. Different factors determine if a person can qualify for a VA loan. Over 20 million veterans have used this program since 1944 to purchase a home. In the article below we will point out the pros and cons of the VA loan.
How a VA Mortgage Works
Although VA loans are guaranteed, the loan does not come directly from the VA office. To make things easier and more widely available, The VA authorizes mortgage companies all across the country to offer the VA mortgage based on particular rules. As long as companies follow the rules, the company will be reimbursed by the VA if the borrower stops making payments on the loan.
VA Loan Eligibility
In the most basic of terms, a borrower must obtain their COE (Certificate of Eligibility) first to apply for a VA loan. Most mortgage companies or loan officers can assist veterans with getting a copy of the COE. A borrower must match the requirements of one of the following situations to be eligible for a VA COE:
- You have completed your service in the military, and you meet the minimum length of service set by the VA (90 days if served during war, 181 days if served during peace)
- You are currently serving in the military and have completed a minimum of 6 months of service
- Served a minimum of 6 years in either the Army Reserves or the National Guard
- Surviving spouse of a veteran who either perished during service or passed away as a direct result of an injury received during service.
If a person falls into one of those categories and has a sufficient amount of income to cover their existing debt along with the home payment, along with a decent credit history, then the person should be able to qualify for the VA mortgage.
Pros of VA Loans
Here are the most common benefits of a VA loan that make it such a popular option for buying a home.
No Down Payment Requirement
Provided that the selling price of the home is equal to or lower than the home’s appraised value, the VA loan program will allow borrowers to finance 100% of the price. An FHA loan will require a 3.5% down payment and a conventional loan will require a 5% down payment in most cases. On a purchase price of $200,000, a VA loan can save the borrower thousands of dollars at the time of purchase.
Easier Credit Requirements
In general, it is easier to qualify for a VA loan than a conventional mortgage. While it is true that the VA office does not have any minimum credit scores mentioned in their guidelines, the vast majority of VA lenders will impose some type of credit score requirement. This is known as a mortgage overlay and the lender adds this requirement to minimize their risk in lending the money.
With that being said, it is common for people who have experienced some financial struggles in the past to get approved with a VA home loan after they have re-established their credit.
VA Mortgage Does not Impose Maximum Loan Amount
Most home loans have a maximum amount that they are willing to loan on a home. This maximum will depend on the state and county of the property’s location. VA loans typically are different in the fact that there is no set maximum for their loans.
However, the VA office does impose a limit on the guarantee. Mortgage companies typically will not make a loan above the guaranteed amount to avoid a loss in the event the borrower is no longer able to make the house payments.
Around the country, most mortgage companies do not offer VA loan products over $548,250. This amount may vary slightly among mortgage companies and different cities. Your local lender can give you an accurate limit for your area.
VA Loans Don’t Require Private Mortgage Insurance
With conventional and FHA loans, mortgage companies will require borrowers to pay monthly mortgage insurance premiums if the borrower pays less than 20% down at the time of purchase. This simply adds to the monthly home payment for the borrower.
The VA loan does not have a private mortgage insurance requirement. This saves the borrower in monthly payments since they are not assessed with an extra fee for the loan.
Reduced Closing Costs
Most mortgage options will incur numerous closing costs at the time of closing. To protect the veteran, the VA office has set a limit on the varying charges that can be assessed. This can lower the overall amount that a borrower is requested to pay. In addition, sellers can pay a portion of the closing costs so long as both the seller and buyer agree to the amount in writing as part of the contract to buy the home.
The following list represents the most common items that are charged with the VA home loan program:
- Fee for credit report
- Origination fee charged by the lender
- VA Appraisal charge for determining the home’s value
- Local tax as well as state taxes
- Insurance for the home’s title
- The fee to record the mortgage and deed at the local county courthouse
Some lenders and closing attorneys may charge additional fees. Your lender should be able to provide an estimate of the charges associated with a potential loan.
Cons of a VA Loan
Considering all the great benefits of using VA mortgage loans, it would seem like a no-brainer for most qualified borrowers. However, there are a few issues dealing with the Veterans Office guidelines. Here are some of the items to consider for this type of loan.
Funding Fee
All VA loans require the borrower to pay the VA funding fee (unless otherwise noted on the Certificate of Eligibility). The VA funding fee is assessed at the beginning of the loan. The fee varies based on the following factors
- Type of military service
- Type of mortgage (fixed-rate loan versus an adjustable-rate loan)
- First-time user of VA loan versus a repeat user
VA Borrowers have the option of adding the funding fee to the balance of their loan and paying the amount over time.
Loan Limits
As mentioned above, most lenders will not offer a loan above the guarantee amount determined by the location of the property. If a qualifying veteran wishes to get a loan above that loan limit, they would need to look for another type of loan. However, most other mortgages will require a down payment, and, in the event, the buyer pays less than 20% down, private mortgage insurance. These two items could cost the borrower quite a bit of money compared to using a VA loan.
Loan Amount Exceeds Home’s Value
Earlier it was explained that the VA guidelines will allow borrowers to buy a home with no down payment if the selling price is below or equal to the market value of the property. Suppose a veteran is told that their funding fee for their first home purchase is 2.3% and the home is priced at $225,000.00
This means that the borrower would add $4,837.50 to the mortgage balance (2.15% x 225000 = $4,837.50) for a total starting balance of $229,837.50
If the borrower makes all of their payments on time for the first year of the loan, the balance at the end of the first year will be $226,133.48 assuming a 4.00% interest rate for a 30-year fixed loan. Some people may not like the idea of starting with a balance that is noticeably larger than the home’s value.
Total Closing Costs
Another drawback to a mortgage, whether it is a VA loan or a conventional loan, is the associated closing costs. Amounts will vary from mortgage company to mortgage company, but it is safe to assume that the costs will be somewhere around 3% to 5% of the asking price. Again, using the example from above of a home priced at $225,000, this would mean that there are costs ranging from $6,750 to $11,250 depending on different factors including your escrow (taxes and insurance) amount. If the seller is not willing to pay a portion of these costs, it could take some time for the veteran to save up this amount of money to be comfortable with the purchase.
Summing Up The Advantages and Disadvantages of a VA Loan
This article is not intended to influence any decision about getting a VA mortgage or some other type of loan. It is merely a comparison of facts to help potential buyers review their financial situation. By reviewing the disadvantages and advantages of a VA loan, Veterans should be able to make the best decision for their needs.
Additional VA Loan Resources:
What Is A VA Mortgage? by Bill Gassett
VA 2nd-Tier Entitlement
About the author: This article on “Pros and Cons of VA Home Loans” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.
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