So, you’re eyeing a new home. You’ve heard of VA home loans. They’re for veterans and active military personnel like you. But is it the right path for you?
In this post, I’ll unpack VA home loans and talk about the advantages and disadvantages of VA home loans.
Ever wondered why some sellers might hesitate? I’ll cover that too. By the end, you’ll have a clear map to navigate your home-buying journey. Ready to take the first step? Let’s jump right in.
Table of Contents
- Understanding VA Home Loans
- 5 Main Advantages of VA Home Loans
- 4 Main Disadvantages of VA Home Loans
Understanding VA Home Loans
Before we dive into the VA loan pros and cons, let’s first understand what VA home loans are and how they work. This will give us a solid foundation to build upon as we go deeper into the specifics.
What is a VA Home Loan?
A VA home loan is a particular type of mortgage loan that’s backed by the US Department of Veterans Affairs (VA), hence the name.
But it’s not the VA that gives you the money. They simply guarantee a portion of the loan, which makes lenders more willing to offer favorable terms.
So, who can get a VA home loan? It’s specifically designed for active duty military members, veterans, and eligible surviving spouses.
The main goal of this program is to help these individuals become homeowners. It’s a way for the country to say “thank you” for their service.
How VA Home Loans Work
Now that we know what a VA home loan program is, let’s talk about how it works. The process starts with getting a Certificate of Eligibility (COE) from the VA. This certificate proves to lenders that you’re eligible for a VA-backed loan.
Once you have your COE, you can apply for a VA home loan through any lender that offers this type of loan. The VA guarantees a part of your loan, which can help you get better terms. For example, you might qualify for a lower interest rate or be able to buy a home with zero down payment.
One unique aspect of VA home loans is the VA Funding Fee. This is a one-time fee that helps keep the program running. The amount depends on several factors, including the type of loan, your military category, and whether you choose to make a down payment.
Remember, while VA home loans come with many benefits, they’re not always the best choice for everyone. It’s important to consider all your options and choose the one that best fits your needs.
5 Main Advantages of VA Home Loans
VA home loans are a unique offering with some standout benefits. Let’s dive into the specifics of these advantages.
No Down Payment Requirement
One of the significant advantages of VA home loans is the zero down payment requirement. Unlike conventional loans that typically require a 20% down payment, VA home loans allow you to finance the whole purchase price of the home. This means you could potentially become a homeowner without having to save up thousands of dollars for a down payment.
No Private Mortgage Insurance (PMI)
Private Mortgage Insurance, or PMI, is an insurance that conventional lenders require if you put down less than 20%. It’s an extra cost added to your monthly mortgage payment.
But with a VA home loan, there’s no PMI, even if you put down 0%. This could save you hundreds or maybe thousands of dollars each month.
Lower Interest Rates
VA home loans typically offer lower interest rates compared to conventional loans. For example, as of June 22, 2023, the national average 30-year VA loan APR is 6.57%, while the average 30-year conventional loan APR might be higher.
Over the life of a 30-year, $250,000 loan, even a small difference in APR could lead to significant savings. For instance, a 1% difference in APR could save you over $50,000 in interest over the life of the loan.
Lower Closing Costs
Closing costs are fees you pay at the closing of your home purchase. They can include things like loan origination fees, title insurance, and appraisal fees.
With a VA home loan, these costs are often lower. Plus, the VA limits the amount lenders can charge for closing costs. For example, the loan origination fee is capped at 1% of the loan amount.
Finally, qualifying for a VA home loan can be easier than qualifying for a conventional loan. The VA doesn’t identify a minimum credit score, and lenders often have more flexibility with underwriting guidelines.
For example, the VA allows for higher debt-to-income ratios compared to conventional loans. This means you might qualify for a VA home loan even if you have a higher level of debt relative to your income.
4 Main Disadvantages of VA Home Loans
While VA home loans have their advantages, they also have a few drawbacks. Let’s delve into these in more detail.
VA Funding Fee
The VA Funding Fee is a significant cost to consider. It’s a one-time fee paid directly to the Department of Veterans Affairs. The purpose? To keep the VA loan program running. The fee varies based on several factors.
For instance, a first-time VA loan user making no down payment will pay a funding fee of 2.15% of the loan amount. That’s $4,300 on a $200,000 loan. While you can roll this fee into your loan amount, it does increase the overall cost of your mortgage.
Seller Resistance to VA Financing
Another potential hurdle is seller resistance. Some sellers have misconceptions about VA loans. They might think the process is more complex or takes longer than conventional mortgage loans.
This could make them more hesitant to accept an offer from a buyer using VA financing. In turn, this resistance can limit your options when house hunting.
Specific Property Requirements
VA home loans also come with specific property requirements. The VA has Minimum Property Requirements (MPRs) to ensure the home is safe, sound, and sanitary. These cover everything from the condition of the roof to the plumbing system.
So, if a home doesn’t meet these requirements, it might not qualify for a VA loan. This could limit your options or require the seller to make repairs before closing.
Unique Appraisal Process
Lastly, VA home loans require a unique appraisal process. The VA requires a VA-specific appraisal to ensure the home meets its MPRs. This process can be more rigorous than conventional appraisals.
If the home doesn’t pass, it could delay or even derail the home purchase. For example, if the appraiser finds that the roof is in poor condition, the VA won’t approve the loan until the roof is repaired.
While these disadvantages are important to consider, many veterans and active military members successfully use VA home loans to purchase their homes. You must understand both the advantages and disadvantages and work with a lender and real estate agent who are familiar with the VA loan process.
Choosing the right home loan is a big decision. Therefore, understanding the advantages and disadvantages of VA home loans is a must for every home buyer like you. It’s all about what works best for your situation.
Remember, you’re not alone in this. A licensed loan officer can guide you through the process. They can help you understand if a VA home loan is the right fit for you.
So, why wait? Reach out to a licensed loan officer today. They’re ready to help you on your home-buying journey.
Advantages and Disadvantages of VA Home Loans FAQS
Can I use a VA loan for a fixer-upper?
Yes, but it can be a bit complicated. The VA offers a type of home loan specifically for buying and renovating homes called the VA renovation loan. However, the home still needs to meet the VA’s Minimum Property Requirements after the renovations are complete.
Can I use a VA loan to buy a second home or investment property?
No, VA loans are designed for primary residences only. You can’t use a VA loan to buy a vacation home or an investment property. However, you can use this loan to buy a multi-unit property, live in one unit, and rent out the others.
Can I use a VA loan if I have bad credit?
The VA doesn’t set a specific credit score for VA loans, but many lenders do. Most lenders look for a score of at least 620. However, it’s still possible to get a VA loan with a lower credit score, but you might have to pay a higher interest rate.
Can I get a VA loan if I've had a foreclosure or bankruptcy in the past?
Yes, it’s possible to get a VA loan after a foreclosure or bankruptcy. However, you’ll typically need to wait two years after a bankruptcy discharge or foreclosure. You’ll also need to have re-established good credit and have a stable income.
Can I refinance a VA loan?
Yes, the VA offers two types of refinancing: a VA Streamline Refinance (Interest Rate Reduction Refinance Loan or IRRRL) and a VA cash-out refinance. The Streamline Refinance is for lowering your interest rate, while the cash-out refinance lets you take out cash from your home equity.