For military veterans and their spouses, VA loans have become one of the most popular choices for purchasing a home. These flexible loans come with some significant financial benefits, not the least of which is being able to purchase without a down payment. In 2017, over 740,000 military borrowers obtained a VA loan, and that number has only gone up since. But while the loan is no doubt one of the best choices out there, it may not be the best fit for everyone. As with everything, they have pros and cons which will have to be weighed carefully before deciding. Here’s what you need to know about VA loans.
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What is a VA loan?
VA loans are a product of the US Department of Veteran Affairs which will allow you to purchase a home without any down payment. Its purpose is to help veterans, service members and surviving spouses to become homeowners. You can apply for them just as you would with any loan through a bank or private lender. Because the VA guarantees a part of the loan, lenders are better protected from loss and thus can offer generous borrowing terms. The lender will also be charged a one-time funding fee which goes towards the cost of the loan. This allows the lender to offer a lower interest rate and easier qualifying parameters than conventional loans.
How can you qualify for a VA loan?
There is a common misconception with VA loans that only veterans are eligible for them. That’s not necessarily the case as you’ll see. Many things are used to determine if you are eligible for a VA loan such as having acceptable credit, sufficient income and a certificate of Eligibility. The home you plan to purchase must also be your primary residence. The only certain way to determine if you qualify for a VA loan is to talk with a mortgage lender that has experience with them. At the least, you should tick the box on one or more of the following:
- You’ve served more than 90 consecutive days of active service during wartime
- You’ve served more than 181 days of active service during peacetime
- You have more than six years of service in the National Guard or Reserves
- You’re the spouse of a service member who has died in active service or as a result of a service related injury
Pros and cons of VA loans
With a required down payment of exactly 0% it’s easy to assume there could be no better option when looking for a home. But not so fast, as strange as it might sound, VA loans are not always the best option. They have their pros and cons just like any loan.
- No Down Payment – By far, not having to make a down payment is the most significant benefit of VA loans. Even an FHA loan requires a minimum down payment of 3.5%. So long as you can cover the monthly mortgage payments and other expenses you can qualify for a VA loan. It gets even better for disabled vets. In their case, the one-time funding fee of 2.15% is waved. However, if you can, it’s better to make a down payment as you’ll get a lower interest rate and start building equity
- No Private Mortgage Insurance – Conventional loans require private mortgage insurance if you’re making down payment of less than 20%. This comes in the form of an upfront payment and/or monthly payments until you’ve reached 20% equity. With VA loans this doesn’t apply.
- No Prepayment Penalties – It sounds crazy, but lenders typically don’t want you to pay off your mortgage too early. Lenders make their money from the interest on the loan, and if it’s paid off too soon, there’s no chance to do so. Therefore, most mortgages will penalize the borrower if they attempt to pay off the mortgage early with VA loans that are not the case.
- Higher Allowable DTI Ratio – VA loans are incredibly flexible compared to conventional loans. For instance, you can qualify if you have a debt-to-income ratio of up to 41% or less. Also. Some borrowers who qualify for a VA loan can be eligible for it two years after a bankruptcy or foreclosure. With conventional loans, the wait can be much longer.
- VA Funding Fee – As mentioned earlier, VA loans come with a mandatory fee for the service. This fee goes towards the program and helps to keep it running for future applicants. It also acts as a safety net to offshoot the cost should the loan go into default. It’s not something you’ll see with other loans so be sure to calculate this fee into the loan
- Sellers aren’t always on board – Sellers may sometimes have some qualms about selling to a VA buyer. This is because VA loans are subject to a strict appraisal. More appraisal issues are likely to arise than with conventional loans which can make sellers uneasy. It’s also easy to lose out to multiple offers as sellers usually prefer to see a buyer who can make a down payment.
VA loans are a fantastic option for those who qualify and are struggling to save for a down payment. But they still come with pros and cons which must be weighed carefully first. They’re not always the best option even if you do qualify. If you’re undecided, reach out to a local lender that specializes in VA loans to learn more.