A VA loan is a mortgage that private lenders offer with partial backing from the Department of Veterans Affairs in the United States. There are no limits on the amount you can borrow with this lending option if you qualify for it, but there are restrictions on the guaranteed amount from the government.
The guarantee of a VA loan comes from entitlements that are offered to eligible veterans. You can receive a basic and a bonus option. The basic entitlement is the lessor of $36,000 or 25% of the total mortgage if you default on the loan for some reason. Most lenders will provide up to four times this amount, so you can treat the 25% figure as a down payment for your home. You are not required to use the full entitlement.
Then the bonus entitlement covers 25% of a loan limit, which is 25% of $484,350 in 2019. The ceiling can be as high as $726,525 in high-priced areas. You’ll need to check your loan limit for your area. If you qualify for this amount, then the government subtracts the maximum basic entitlement from the second-tier option.
List of the Pros of a VA Loan
1. Most qualifying veterans do not need to worry about making a down payment.
If you qualify for a VA loan, then the guaranteed amount that receives government backing acts like a down payment for your application. That means you can skip the process of saving up for the initial loan like non-military households. An FHA loan would typically need a 3.5% down payment, and then conventional lending products might want 5% or more. If you’re purchasing a $175,000 home, that’s about $10,000 you might need that would not be necessary with the VA loan.
2. You don’t need to worry about private mortgage insurance (PMI) with VA loans.
Conventional borrowers who want to purchase a home and are unable to come up with 20% down on the property almost always need to have private mortgage insurance included with their final borrowing package. PMI can be paid up front at the time of purchase or rolled into the monthly mortgage payment. It will not disappear from the mortgage until homeowners achieve 20% equity in their home. When you qualify for a VA loan, then you don’t need to worry about this extra expense.
3. There is a higher allowable DTI ratio with a VA loan.
When lenders look at what is achievable with a mortgage for your income, then they will compare what you make with your total monthly expenses. Although the benchmarks can vary from lender to lender, a general rule of thumb is a debt-to-income (DTI) ratio that is 30% or below. That means your mortgage payment and all other expenses can only comprise 30% of your total income. If it is higher than that, then you might not quality for the mortgage.
When you qualify for a VA loan, then the government wants to see a DTI that is 41% or less, which is a significantly higher benchmark for many families. Some borrowers with an excellent credit history may even qualify for a lending product when their debt-to-income ratio is higher than that.
4. You don’t need to worry about a prepayment penalty with a VA loan.
When you qualify for a VA loan, then you don’t need to worry about paying extra on your mortgage each month. There are no prepayment penalties on this lending product like there are with most other mortgages. If you fall into a position where you can pay off the loan early for some reason, then you get to clear the debt while maintaining ownership of the property without an interest charge.
This advantage can make it a lot easier for military families to gain outright ownership of their property faster than non-military households, especially if there is a refinancing package involved in their lending product.
5. There are options to refinance your mortgage to save some money.
The VA home loan program in the United States offers qualifying veterans a couple of different refinancing options that can help them get some cash back from their equity or to lower their overall monthly payments. One of the programs, the IRRRL (Interest Rate Reduction Refinance Loan) works with existing VA loans and can only be approved if it creates a lower interest rate, lower monthly payment, or converts an adjustable mortgage to one with a fixed rate.
That makes it a lot easier to manage your budget each month if your financial circumstances change. There are also options to get cash at the closing of some products so that you can pay down some debt or take care of other needs that your family might have.
6. You have more flexibility with foreclosures and bankruptcies.
If you have a foreclosure or a bankruptcy and qualify for a VA loan otherwise, then some borrowers can become eligible for a new mortgage in 24 months after this event. If you were to pursue a more conventional type of loan, then the wait might be much longer than that. You’ll still need to come up with the required DTI for the lending product, but all of the other benefits of having this type of mortgage are in place, even with such an adverse financial event on your records.
7. The government does not require a minimum credit score.
There is not a minimum credit score requirement associated to a VA loan. If your credit is less-than-perfect, then this lending option can get you into a home instead of needing to deal with the rental market. It is essential to remember that this advantage only applies to the government backing for the 25% portion of coverage. Most lenders do impose a minimum credit score requirement that you will need to manage.
Because there can be differences in what qualifies for approval, it is a good idea for veterans or active-duty personnel to shop around with lenders and compare offers before settling on one specific VA loan.
8. VA loans come with limited closing costs.
The Department of Veterans Affairs sets limits on the amounts that lenders can charge for specific fees and closing costs. This advantage can lower the amount of money needed at closing so that you can get the keys to your new home right away. Some sellers can pay the closing costs if the buyer can negotiate that stipulation into their purchasing contract.
There can be loan discount points of up to 2% of the total amount. A loan origination fee of 1% is standard. Then recording fees, title insurance fees, credit report fees, and an appraisal fee are all part of the cost, as well as any state and local taxes for which you might be responsible.
List of the Cons of a VA Loan
1. There is a VA loan funding fee that you must pay with this lending product.
Every VA loan, no matter what your credit history and down payment amount happens to be, comes with a mandatory funding fee that the government charges. This amount goes directly to the agency, giving it money to continue operating in the future so that other families can take advantage of this benefit. You do have the option to finance this fee into your loan.
If you have a service-connected disability, then you are exempt from paying this fee. Just keep in mind that this expense is not something that you’re paying with an FHA or conventional mortgage. You’ll want to ask your lender how much the expense is, who pays for what, and if you might be eligible for a refund.
2. You can only use a VA loan for a primary residence.
The VA loan program is intended to help qualifying veterans get into a primary residence with a mortgage payment they can afford. If you already have a home and a mortgage, then you won’t qualify for this lending product if you wish to purchase a second property. It does not work for investment properties either. There may be some exceptions to this disadvantage in some situations, but expect your lender to suggest a different product if you’re going to be purchasing real estate for a place other than where you live.
3. Some lenders may not provide access to a VA loan.
You may find that your preferred lender does not offer a VA loan option. You will want to work with a full-service provider that offers FHA, conventional, and VA loans for purchasing and refinancing to ensure that you can get a good rate. Then look for options that include fixed-rate loans of 15-30 years, as well as adjustable-rate mortgages, even if you do not intend to use a higher-risk lending product to purchase a home.
Some veterans believe that it Is the government who lends the money with a VA loan, so every lender should offer access to this product. That is not the case. You’re borrowing from a private lender, which means some agencies may choose to work with a specific customer niche instead.
4. There might be some resistance from sellers to a VA loan.
You will find that there are a lot of misconceptions, myths, and outright falsehoods that some sellers believe about VA loans. Stories around the Internet talk of how the money didn’t come through with a purchase or the entire purchasing amount was never transferred to them after the sale. The reality of a VA loan is that it is like any other lending product. You might not be able to change someone’s mind if they aren’t open to receiving an offer from a borrower with this lending product, but you can at least give them accurate information to review.
5. You must still meet the lender’s credit requirements.
Although the lending requirements for a VA loan are more relaxed than other mortgages because of the government backing it receives, you must still meet the credit requirements of the lender to receive financing. That means there must be enough income in place to purchase the property in the first place, so you will need to provide a complete overview of your income to the lender.
You must also have a satisfactory credit history to qualify for a VA loan. That means you must not have any bankruptcies or foreclosures on your credit history for at least two years, but that stipulation could go up to 6-7 years for some providers. You may also see exclusions occur for collection accounts, missed payments, and other derogatory marks. If your credit score is below 600, you may wish to speak with a financial counselor before proceeding with this loan option.
6. You must obtain a Certificate of Eligibility to complete the process.
Just because you served in the military does not mean that you qualify for a Certificate of Eligibility to receive a VA loan. Every situation is unique, but in general terms, you or your co-applicant will need to fit into one of the following categories.
- You are a veteran of the U.S. military with a specific length of service time.
- You are currently serving in an active-duty capacity for the minimum time.
- You qualify as an eligible National Guard member or a Reservist.
- You are an eligible surviving dependent (usually a spouse) of a deceased veteran.
7. Your loan might put your home underwater in the first days of ownership.
If you decide to take a VA loan for 100% of the property value and you need to finance your funding fee requirements as well, then your final mortgage expense will give you a loan that is higher than the value of your property. Although there are grants, down payment options, and other ways to manage this potential disadvantage, there is a risk for some military and veterans families that the property could be underwater initially.
Verdict on the Pros and Cons of VA Loans
If you are a qualifying veteran, then applying for a mortgage through the VA loan process can help you get into the right property without a significant upfront financial expenditure. The down payment requirements may be nullified, and your DTI ratio does not need to be as good as it would be for a more conventional lending product.
The primary issue that some borrowers face is the fact that this option only applies to a primary residence. You must live in the home that you purchase with a VA loan.
The other pros and cons of VA loans are worth considering when you are thinking about buying a home for the first time, refinancing, or you need to move because of new orders. Talk about the key points in this guide with your lender to ensure that this lending product can meet your needs effectively.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.