VA Loan Pros and Cons
The United States Veteran’s Affairs department is the guarantor for all VA mortgages. The VA loan can be used by active-duty members of the armed forces, veterans, and people that have served in either the guard or the reserves. Different factors determine if a person can qualify for the 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 VA Loans Work
Although the VA mortgages are guaranteed by the VA Department, the loan does not come directly from the VA office. To make things easier and more widely available, The VA authorizes lenders all across the country to offer the VA mortgage based on particular rules. As long as lenders follow the rules, the lender 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 in order to apply for a VA loan. Most mortgage lenders have the ability to assist veterans with getting a copy of the COE. A borrower must match the requirements of one of the following situations in order to be eligible for the 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 that 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 the VA Loan
Here are the most prominent features of the 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 mortgage 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 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 that 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 mortgage 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 is different in the fact that there is no set maximum for their loans.
But the VA office does impose a limit to the guarantee. Lenders typically will not make a loan above the guaranteed amount in order to avoid a loss in the event the borrower is no longer able to make the house payments.
Around the country, most lenders do not offer VA loans over $548,250. This amount may vary slightly among lenders and among different cities. Your local lender can give you an accurate limit for your area.
Private Mortgage Insurance is Waived
With conventional and FHA loans, lenders will require borrowers to pay monthly private 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 mortgages will incur numerous closing costs at the time of closing. In order 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 a mortgage:
- Fee for credit report
- Origination fee charged by the lender
- 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 the VA Loan
Considering all the great benefits of using the VA mortgage, 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.
All VA loans are subject to a VA funding fee. The 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
Borrowers have the option of adding the funding fee to the balance of their loan and paying the amount over time.
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 purchase 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% 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 of 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 lender to lender, 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 in order to be comfortable with the purchase.
Summing Up The Pros and Cons of The 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 pros and cons of the VA loan, Veterans should be able to make the best decision for their needs.
Additional VA Loan and Home Buying Resources:
Facts Veterans Should Know
What Is A VA Mortgage? by Bill Gassett
How To Make a Sound Offer On A House by John Cunningham
VA 2nd-Tier Entitlement
About the author: This article on “Pros and Cons of The VA Loan” 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 generating new leads from his website.
We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage. Our branch currently serves Wisconsin, Illinois, Minnesota, and Florida. On our website, you will find state-specific mortgage information. For example, take a look at our Illinois VA page.