If you’re a qualified active-duty member of the military, veteran, or surviving spouse, you can use a VA home loan to buy a new house or refinance an existing mortgage. 2021 was a record year for the VA home loan program, with more than 1 million VA loans funded.
VA loans have many advantages, including no down payment, lower interest rates, and reduced closing costs. But, there are some disadvantages before you decide to apply for a VA loan. In addition, mortgage lenders will also have different requirements for VA loan applicants, so it’s important to compare your options before you apply.
In this post, we will take a look at some of the pros and cons of VA loans so that you can decide if this type of financing is right for you.
What is a VA loan?
Missouri VA loans are guaranteed by the United States Department of Veterans Affairs, but the money isn’t coming from the government. Instead, banks, mortgage companies, and other lenders offer these loans, which the VA ensures in the case of failure.
The United States Department of VA provides these loans to service members, veterans, and surviving spouses. VA loans are popular among many borrowers because they offer many benefits, including no down payment and lower interest rates.
Pros of VA loans
No Down Payment
One of the essential benefits of VA loans is that you can get a mortgage with no down payment. Qualified borrowers may borrow up to as much as a lender is willing to lend without a down payment.
The FHA requires a 3.5 percent minimum down payment on mortgages, and for many conventional loans, it is a 5 percent deposit. That is a $6,125 down payment for FHA and $8,750 for conventional on a home worth $175,000.
This can be considered a benefit for many who can’t afford a down payment, but it might also be a disadvantage for some borrowers. It is feasible to finance more than the property’s value, which implies you may begin with no equity in your property.
No Private Mortgage Insurance (PMI)
PMI is commonly required by conventional borrowers who do not have a 20% down payment at closing. However, PMI is not required on VA loans, which can save Veterans thousands of dollars.
The FHA requires a Mortgage Insurance Premium for all borrowers, typically the same duration as the mortgage. They also have a front-end fee towards closing that can be financed into the loan.
Higher Allowable Debt-to-Income (DTI) Ratio
The ratio of your monthly income to your major monthly obligations is taken into account by local mortgage lenders. The VA prefers a DTI ratio of 41 percent or less, but it is possible to do so and still obtain VA financing with a higher DTI.
Most lenders require a DTI ratio of no more than 43-45% of your gross monthly income to qualify for a conventional loan. But, some lenders will go as high as 50%.
No Prepayment Penalty
A VA loan has no prepayment penalties. So, you might pay off your mortgage early or make extra payments without worrying about being penalized financially.
Some mortgage alternatives, such as conventional and FHA loans, may have prepayment penalties that prevent borrowers from saving money.
Refinance Options
The Veterans Administration’s home loan program has two refinance loans that can assist qualified buyers in lowering their monthly payments or getting cashback from their house equity.
The most significant advantage is for current VA borrowers desiring to lower their interest rate through a Streamline Refinance, the VA Interest Rate Reduction Refinance Loan (IRRRL). IRRRLs allow Veterans to take advantage of falling interest rates more quickly.
The VA Cash-Out Refinance allows veterans and non-veterans to refinance their loans and receive cash at closing to pay down debt or meet other needs. However, keep in mind that refinancing may result in increased finance charges throughout the life of the loan.
Cons of VA Loans
VA Funding Fee
The VA Funding Fee is a one-time processing fee that all Veterans Affairs (VA) borrowers must pay. The VA Funding Fee is a non-refundable fee charged by the VA to help sustain the program for future generations.
The fine news is you can finance this into the loan, so you don’t have to come up with the cash out of your pocket.
The Funding Fee Increases on Subsequent Use
Veterans who want to refinance their VA loan and get access to more money will notice that the VA Funding Fee has increased. However, the initial usage fee is generally lower than subsequent uses for most VA loans. If a buyer makes a down payment, they may reduce this cost.
They’re Intended for Primary Residences
The Veterans Affairs (VA) loan isn’t designed to help you buy a second house or an investment property. A VA loan is a mortgage that can only be used to buy a primary home. Also, the borrower must intend to live in the house full-time. The VA streamline refinance is the lone exemption here.
Not Every Real Estate Agent is Familiar With the VA Loan
It’s critical to hire a professional who understands the VA loan program if you want your house-buying experience smoothly.
Unfortunately, not all real estate agents are familiar with the program. The best way to find out is to ask your agent if they’ve ever helped a buyer purchase a home using a VA loan.
Sellers Aren’t Always on Board
Sellers in high-priced housing markets are less likely to accept VA offers. It’s not an uncommon occurrence, but it can happen when several bids come into play. This is usually due to a lack of understanding or myths and misconceptions surrounding VA loans.
So, Is It True That VA Loans are a Good Idea?
Overall, the answer is a resounding yes.
If you’re considering buying a home and qualify for a VA loan, it’s worth looking into. The benefits of a VA loan are multiple and can save you a lot of money over the life of your loan. Just make sure to do your study and understand the pros and cons of a VA loan before making your final decision. Mortgage lenders will be happy to help you understand the loan process and compare your options.
