Pros and Cons of VA Loans: A Comprehensive Guide

If you’re in the military, a veteran, or a surviving spouse, you can use a VA home loan to buy a new home or refinance your current mortgage.

This article explores the pros and cons of VA loans’ in this comprehensive guide.

Learn how these loans, backed by the U.S. Department of Veterans Affairs, can benefit military members, veterans, and surviving spouses looking to buy a home or refinance a mortgage.

An Image of VA Loans
Pros and Cons of VA Loans. Photo Source (Freepik)

Pros of VA Loans

No Down Payment Required

VA loans don’t need a down payment, unlike regular mortgages that typically require at least 3% down.

This is significant because many Americans who can’t afford a down payment and closing costs often choose to rent instead of buying a home.

No Mortgage Insurance

VA loans don’t need mortgage insurance, which is required for FHA and conventional loans.

FHA loans have upfront and annual premiums and conventional loans require PMI if your down payment is less than 20%.

Lower Interest Rates and Fees

VA loans usually have lower interest rates than conventional loans, which can save you a lot of money on interest over a 30-year loan.

They also tend to have lower closing costs because the VA limits the origination fee lenders can charge to no more than 1% of the mortgage.

Easier Qualifications

VA loans don’t have a fixed minimum credit score requirement.

While some lenders may ask for a 620 credit score, many accept lower scores.

They also offer more flexibility if you’ve faced financial challenges, like bankruptcy or a short sale.

After a foreclosure, the waiting period is just two years with a VA loan, compared 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, you can borrow up to 90% of your home’s value.

An Interest Rate Reduction Refinance Loan (IRRRL) doesn’t require an appraisal.

These options can make a VA loan more appealing.

The funding fee for a VA IRRRL is only 0.5% of the loan amount.

Assumable for Veterans and Civilians

VA loans can be taken over by a buyer without needing to be a veteran.

This can be helpful when interest rates are rising.

While it requires extra steps for the seller to keep their full VA loan entitlement after the sale, it can be a great perk for a buyer.

Cons of VA Loans

Funding Fee Required

With a VA loan, you won’t pay for mortgage insurance, but you’ll have to pay a funding fee at closing.

This fee can be included in your loan amount.

The fee varies based on factors like whether it’s your first VA loan and how much you’re putting down.

Some borrowers, like those with service-connected disabilities or surviving spouses of veterans, may not have to pay the funding fee.

Property Restrictions

VA loans can only be used to buy your main home, not for investment or rental properties, unless you plan to live in one of the units.

If you’re considering a manufactured home, it will undergo a more thorough examination, including a structural engineering assessment.

Less Equity to Start

With a VA loan, you can buy a home without putting any money down.

This is great, but it can be a problem if your home loses value or you need to use your equity.

If your home’s value drops and you owe more on your mortgage than your home is worth, it can be hard to sell or refinance.

Since you didn’t put any money down at the start, it will also take longer to build up equity in your home.

Is a VA Loan the Best Option for You?

A VA loan can be a good choice for many people, but it’s not always the best option.

For example, if you plan to sell your current home and use the money as a big down payment on your next home (20% or more), a VA loan might not be the best choice because you could have to pay a fee that you don’t have to pay with other types of loans.

But a VA loan also has some good things that other loans don’t have. For example, you can buy a building with two to four apartments with a VA loan and not have to put any money down.

With other loans, you usually have to put down at least 15% for a building like that.

But the fee for a VA loan can be a lot of money. If you think you might move in less than two years, it might not be worth paying the fee for a VA loan.

If you’re not sure if a VA loan is right for you, talk to the person who is helping you get your loan.

They can tell you about all your choices and help you decide what’s best for you.

Conclusion

VA loans are good for military members, veterans, and surviving spouses.

They don’t need a down payment or mortgage insurance and have lower interest rates and fees.

VA loans are easier to get and have options for refinancing.

But they have a funding fee, property rules, and you start with less money in your home.

You should think about these things and talk to a loan officer to decide if a VA loan is right for you.

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