If you are an eligible active-duty member of the military, a veteran, or a surviving spouse, you have the option of obtaining a VA home loan without a down payment. This type of loan may be the most beneficial financing option for a home purchase or refinance, but there are pros and cons, and even other choices that may be better suited to your situation. Here are the pros and cons to consider.
What is a VA loan?
A VA loan is guaranteed by the United States Department of Veterans Affairs (VA), but the loan itself, which can be used to buy or refinance a home, is technically not granted by the government. Banks, mortgage companies, credit unions, and other types of mortgage lenders offer them.
However, not everyone is eligible for a VA loan; it is only available to veterans, active duty military personnel and their surviving spouses.
“To be eligible, you have to do your time,” says Jimmy Kinley, a senior loan originator at Cherry Creek Mortgage in Highlands Ranch, Colorado. If you are on active duty, that means 90 consecutive days of service. If you are a member of the National Guard or the Reserve, that means 90 consecutive days if you are activated, or six consecutive years if you are not. If you are a veteran, the required service times vary depending on when you served.
Benefits of a VA loan
A VA loan offers several advantages over other forms of mortgage financing. For starters, you can buy a home without having to make a down payment and without paying for mortgage default insurance. With a conventional loan, you have to pay at least 3% or 5% (depending on the program), and if you pay less than 20%, you will have to pay for mortgage default insurance.
Plus, you’ll likely pay less interest with a VA loan, whether you choose a fixed or variable rate mortgage.
“The interest rate is typically about half a percent lower than that of a conventional loan,” says Kinley.
Additionally, the VA does not impose a minimum credit score requirement on VA loan borrowers, although many mortgage lenders require a FICO score of 620 or higher. For lenders with less than the minimum VA loan credit, it might be easier for you to qualify. A VA loan also allows for a higher debt-to-income ratio (DTI), which can help you qualify for a more expensive or larger home.
Plus, the closing costs associated with a VA loan can often be lower than with other loans because the VA limits the origination costs that a lender can charge to no more than 1% of the mortgage.
“The VA loan program also has no prepayment penalties, so the borrower can sell or refinance their loan at any time without penalty,” adds Rob Killinger, senior loan officer at Mortgage Network, based in Danvers, Massachusetts.
When it comes to refinancing, there is a VA withdrawal refinance option where you can finance up to 90 percent of the value of your home; or, you can opt for an Interest Rate Reduction Refinance Loan (IRRRL) which allows you to lower your interest rate through a streamlined process that does not require an appraisal. The two refinancing options could make a VA loan more attractive overall.
With more relaxed loan guidelines, you also won’t have to wait that long for a VA loan if you’ve been the subject of foreclosure, bankruptcy, or a short sale. , says Kerry Sherin, consumer advocate for Ownerly, a New York-based home appraisal company.
“The waiting period for a VA loan can be up to half the term of a traditional loan: two years after a foreclosure, two years after a short sale, unless all payments are on time – to which case there is no waiting period – two years after Chapter 7 bankruptcy and 12 months after on-time payments during Chapter 13, ”says Sherin.
Disadvantages of a VA loan
There is a flip side to every form of financing, and VA loans are no exception. While you won’t pay for mortgage insurance with a VA loan, you will pay a closing finance charge (although these charges can be funded in your loan).
If you take out your first VA loan and don’t make a down payment, the finance charge is 2.3% of what you borrow. If you are planning to put money in or have had a VA loan in the past, the fees can range from 1.4% (for first-time or repeat borrowers putting at least 10 percent) to 3.6% ( for recurring borrowers without Payment).
Also, a VA loan can only be used for a primary residence, not for an investment or rental property or a second home or vacation home, says Chuck Vander Stelt, real estate agent at Quadwalls in Valparaiso, Indiana. You might be allowed to buy a manufactured home with a VA loan, but it must be attached to a foundation and pass a structural engineering exam.
Additionally, with a VA loan, you are not allowed to forgo certain contingencies, such as a home inspection or appraisal, to make your loan offer more attractive to a seller. Some sellers, for that matter, are also less inclined to accept an offer with VA loan financing.
“In general, the unknowns and myths about VA home loans can create concerns about the quality of the buyer and the spirit of the seller,” says Kinley. “In a competitive market, some listing agents tell sellers not to accept VA offers.”
Alternatives to the VA loan
A VA loan is not your only financing choice. Consider the following options, especially if you don’t qualify for a VA loan:
- Conventional loan – There is no financing charge on a conventional loan, and it can be used to buy investment properties. However, interest rates tend to be higher than for VA financing, and a down payment is also required, as well as private mortgage insurance if you put less than 20 percent.
- FHA loan – An FHA loan is also backed by the government and requires you to pay an initial mortgage insurance premium, similar to the cost of financing the VA loan. However, you will also pay a monthly mortgage insurance premium, potentially for the life of your loan, and your interest rate could be higher.
- USDA loan – As with a VA loan, no down payment is required for a USDA loan, but it is only for borrowers in designated rural areas. USDA loans also come with income restrictions and the property must be a single family home. In addition, only 30-year fixed rate financing is available.
Is a VA loan the best option?
Even if you are eligible, there are times when a VA loan may not be your best bet.
“For example, if you are an eligible borrower who currently owns a home but want to sell and buy another primary home to get a large down payment – 20% or more – of the sale that you can use on your next purchase. A Home Loan The VA loan may not make sense for your next property, ”says Killinger. “If you were to use a VA loan in this scenario, you may have to pay VA financing fees, whereas a conventional loan program would not charge such fees.”
On the other hand, a VA loan offers special benefits that other financings do not.
“For example, a qualified borrower might buy a two to four unit property with a VA no-down loan he plans to live in instead of a single-family home,” says Killinger. “In comparison, a conventional loan requires a minimum of 15% down payment on a multi-unit property. “
Still, finance charges can be costly. If you plan to stay in your home for less than two years, it might not be worth paying these fees to get a VA loan.
“Plus, if you’re shopping for a home in a very competitive market where sellers may look down on VA financing, a VA loan may not be your best option,” says Vander Stelt.
If you’re still not sure if a VA loan is right for you, consult closely with your loan officer, who can walk you through all of the different mortgage options you qualify for and help you make your decision.