The Pros and Cons of VA Loans

Is a VA Loan the Best Option for You? 

I've been through the process of getting a VA Loan several times and have helped countless Active Duty and Veterans use their VA Loans; and want to share with you some of the pros and cons so you can make an informed decision.

Millions of veterans have used their VA home loan benefits to purchase a home, but is a VA loan the best option for you? 

VA Loan Pros

Zero Percent Down

VA loans are an excellent benefit for those who have served our country. The ability to put $0 down is one of the biggest pros. Qualified borrowers can borrow as much as a lender is willing to lend without needing a down payment. VA loans are available to active-duty military, veterans, and eligible surviving spouses. They are guaranteed by the Department of Veterans Affairs and made by private lenders, such as banks, credit unions, and mortgage companies. VA loans are an excellent way for those who have served our country to realize the dream of homeownership.

NO Private Mortgage Insurance

Private mortgage insurance, or PMI, protects the lender if you default on your home loan. PMI is typically required if you have a conventional loan and make a down payment of less than 20%. However, VA loans are guaranteed by the Department of Veterans Affairs and do not require PMI. This can save Veterans thousands of dollars over the life of the loan. 

Higher Debt to Income Ratio

The Veterans Administration has guidelines to ensure that those who have served our country can afford a comfortable lifestyle after active duty. One of these guidelines is the 41% debt-to-income ratio. This means that no more than 41% of your monthly income can go towards paying debts. While this may seem like a low number, it is possible to exceed it and still secure VA financing. The key is to have a strong income and a low amount of debt. For example, if you have a $4,000 monthly income and $1,500 in debts, your debt-to-income ratio would be 38%. This is just below the limit, so you would likely still be approved for VA financing. To increase your chances of approval, you should aim to have a debt-to-income ratio of 40% or less.

Lower Interest Rates

VA loan rates are typically lower than both FHA and conventional mortgage rates. VA loan rates are generally lower due to the VA backing a portion of each loan. Typically, VA loans tend to have lower interest rates — and if rates drop, refinancing with a VA Interest Rate Reduction Loan (IRRRL) can be easier than with a conventional loan. In addition, VA loans tend to have lower default rates than other types of loans, which also helps to keep rates down. Finally, VA loans often come with no origination fee or prepayment penalty, further reducing the overall borrowing cost. All of these factors make VA loans an attractive option for those who are eligible.

VA Loan Cons

The VA Funding Fee

The VA Funding Fee is a one-time payment made by all Veterans using their VA Loan benefit for the first time. The fee helps keep the VA Loan program running for future generations of Veterans. The standard VA Funding Fee is 2.3% of the loan amount; however, if Veterans are looking to reuse their VA Loan benefit, the Funding Fee is higher at 3.6%. There are ways for buyers to lower this fee. For example, if a Veteran makes a down payment on their home, the funding fee percentage is significantly reduced. The funding fee can also be financed into the loan, and certain groups of Veterans are exempt from paying the funding fee altogether. These groups include Veterans with service-connected disabilities, those who have received a Purple Heart or Medal of Honor, and surviving military spouses. The VA Funding Fee is an integral part of the VA Loan process and helps to ensure that future generations of Veterans will have access to this vital program.

Primary Residence Only

The VA loan is a great way to finance a primary residence, but it cannot be used to purchase a second home or an investment property. However, if you purchase a duplex, triplex, or quadplex, there is a workaround. You can live in one unit and rent out the others while still meeting the primary residence requirement. This can be a great way to offset your mortgage payments and make some extra money while still enjoying all the benefits of owning your own home. Just be sure to do your research and talk to a financial advisor before making any decisions so that you can find the best option for you and your family.

Negative Equity Position

One potential downside of a VA loan is that you may start in a negative equity position. This can occur when the VA funding fee is added to the loan amount, resulting in a total loan amount greater than the property's value. While this may not be a concern if you plan on staying in the home for the long term, it could prove problematic if you need to sell or refinance within a few years. In addition, if your home has decreased in value, you may end up owing more on the loan than the property is worth. As a result, it’s important to consider all of the potential risks and rewards before deciding whether or not to apply for a VA loan.

VA Loan Negative Myths and Misunderstanding

It's common for home sellers to have misconceptions about VA appraisals. For instance, many sellers believe that their home must be in perfect condition to pass the appraisal. However, this is not the case. If the appraiser does identify any property condition issues, buyers may be able to obtain an exemption from the VA. Additionally, if an exemption is not granted, the seller is not required to pay for the repair - it's possible for the buyer to do so in order to keep the deal moving forward.

Another common misconception is that the home seller will have to pay all buyers' closing costs. While the seller is not required to pay any closing costs on behalf of a VA buyer, they may still be responsible for some fees, such as “non-allowable” fees that Veterans aren’t allowed to pay. As a result, it's crucial for sellers to work with a VA Specialist and educate themselves on the VA appraisal process before ruling out VA offers.

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