If you are an eligible active member of the military, a veteran, or a surviving spouse, you have the option to obtain a VA home loan with no down payment. This type of loan may be the most advantageous financing option for a home purchase or a refinance, but there are pros and cons and even other options that are better suited to your situation. The advantages and disadvantages must be taken into account here.
What is a VA Loan?
A VA loan is supported by the US Department of Veterans Affairs (VA), but the loan itself, which can be used to buy or refinance a home, is technically not made by the government. Banks, mortgage lenders, credit unions, and other types of mortgage lenders offer them.
Not everyone qualifies for a VA loan, however; it is only available to veterans, active service members, and their surviving spouses.
“You have to take your time to be eligible,” said Jimmy Kinley, a senior lender with Cherry Creek Mortgage in Highlands Ranch, Colorado. If you are on active duty, it means 90 consecutive days of service. If you are a member of the National Guard or the Reserve, it means 90 consecutive days if you are activated or six consecutive years if you are not. If you are a veteran, the service hours required will vary based on when you served.
Benefits of a VA Loan
A VA loan offers several advantages over other forms of mortgage financing. First of all, you can buy a home without paying a down payment – and without having to pay for mortgage insurance. A traditional loan requires you to deposit at least 3 percent or 5 percent (depending on the program), and if you deposit less than 20 percent, you’re on the hook for mortgage insurance.
In addition, whether you opt for a fixed or adjustable rate mortgage, you are likely to pay less interest on a VA loan.
“The interest rate is typically about half a percent lower than a traditional loan,” says Kinley.
Additionally, the VA does not impose minimum credit standards on VA loan borrowers – although many mortgage lenders require a FICO score of 620 or higher regardless. However, for the lenders with a lower VA loan loan minimum, 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.
Also, the closing costs associated with a VA loan can often be lower than those for other loans because the VA limits the commitment fee a lender can charge to no more than 1 percent of the mortgage.
“The VA loan program also has no prepayment penalties, so the borrower can sell or refinance their loan at any time with no penalty,” added Rob Killinger, senior loan officer at Danvers, Massachusetts, Mortgage Network.
When it comes to refinancing, there is a VA cash-out refinancing option that allows you to fund up to 90 percent of the value of your home; or you can opt for a Reduced Interest Rate Refinancing Loan (IRRRL) which allows you to lower your interest rate through a streamlined process that does not require valuation. Both refinancing options could make a VA loan overall more attractive.
Also, with relaxed credit guidelines, you won’t have to wait that long to get a VA loan if you’ve gone through a foreclosure, bankruptcy, or short sale, says Kerry Sherin, consumer advocate for Ownerly, a real estate appraisal company based in New York City.
“The waiting time for a VA loan can be up to half the time of a traditional loan: two years after a foreclosure, two years after a short sale, unless all payments are made on time – in which case there is no waiting period – two years after Chapter 7 bankruptcy and 12 months of on-time payments in Chapter 13, ”says Sherin.
Disadvantages of a VA loan
Every form of finance has a downside and VA loans are no exception. While you don’t pay for mortgage insurance with a VA loan, you pay a financing fee when you take out it (although that fee can be included in your loan).
If you take your first VA loan and don’t make a down payment, the financing fee is 2.3 percent of your borrowing. If you are planning on saving money or have received a VA loan in the past, the fee can range from 1.4 percent (for first-time or repeat borrowers who put at least 10 percent off) to 3.6 percent (for repeat borrowers with no default) lie payment).
Also, a VA loan can only be used on a primary residence, not an investment or rental home, or a second home or vacation home, says Chuck Vander Stelt, a real estate agent with Quadwalls in Valparaiso, Indiana. You are allowed to buy a prefabricated house with a VA loan, but it must be attached to a foundation and pass a structural examination.
In addition, with a VA loan you must not forego certain eventualities such as a house inspection or the appraisal in order to make your loan offer more attractive to a seller. Also, some sellers are less inclined to accept a VA loan financing offer.
“In general, the unknowns and myths about VA home loans can be worrisome about the quality of the buyer and seller,” Kinley says. “In a competitive market, some listing agents advise sellers not to accept VA offers.”
Alternatives to a 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 are no financing fees with a conventional loan and it can be used to purchase investment properties. However, the interest rates tend to be higher than VA financing, and a down payment is required and private mortgage insurance is required if you deposit less than 20 percent.
- FHA loans – An FHA loan is also government supported and requires you to pay a mortgage insurance premium upfront, similar to the VA loan financing fee. However, you will also pay a monthly mortgage insurance premium, possibly for the life of your loan, and your interest rate may be higher.
- USDA loan – As with a VA loan, a USDA loan does not require a down payment, 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, there is only a 30-year fixed-rate financing.
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’re an eligible borrower who currently owns a home but wants to sell and buy another home to get a large down payment – 20 percent or more – of the sale that you can use on your next home purchase, a VA loan may not make sense for your next property, ”says Killinger. “If you are using a VA loan in this scenario, you may have to pay the VA financing fee while a traditional loan program does not require such a fee.”
On the other hand, a VA loan offers special advantages that other types of financing do not offer.
“For example, a qualified borrower could buy a two to four unit property with a zero down VA loan that they would like to live in instead of a single family home,” says Killinger. “In comparison, a conventional loan for an apartment building requires at least 15 percent less.”
Still, the financing fee can get expensive. If you are planning to stay in your home for less than two years, it may not be worth paying that fee to get a VA loan.
“Also, if you’re looking to buy a home in a highly competitive market where sellers look down on VA funding, a VA loan may not be the best option,” says Vander Stelt.
If you are still unsure whether a VA loan makes sense for you, check closely with your loan officer who can explain all of the different mortgage options to you and help you make a decision.