As with any mortgage loan option, there are advantages and potential disadvantages to VA loans. However, VA loans are an optimal home financing option for eligible veterans, active-duty members, or a qualifying spouse. Here we will examine some VA loan pros and cons to help you make beneficial decisions when choosing your mortgage.
As a veteran VA loans can seem very appealing thanks to big benefits like no down payment and no mortgage insurance. But VA loans aren’t perfect. There are some real disadvantages to think through before you apply.
I want to provide an honest look at the downsides of VA loans, so you can weigh the pros and cons and decide if a VA mortgage is right for your situation
The VA Funding Fee
One major disadvantage of VA loans is the funding fee you have to pay at closing. On a typical mortgage, borrowers avoid this extra fee.
The VA funding fee depends on a few factors
- Whether it’s your first or a repeat VA loan
- Your down payment amount
- Your military service status
For first-time VA loan borrowers putting down less than 5%, the funding fee is 2.3% of the total loan amount. On a $200,000 mortgage, that equals a $4,600 fee.
The fee drops if you make a down payment of at least 5%. Disabled veterans and surviving spouses may qualify for a reduced funding fee or even avoid it altogether.
But for most borrowers, the VA funding fee adds a significant extra cost to closing. And unlike other closing costs, you can’t negotiate with the lender on this mandatory fee.
Property Restrictions
VA loans come with strict property eligibility guidelines. You can only use a VA loan to buy or refinance a single-family home that will serve as your primary residence.
That means VA loans can’t be used for:
- Investment properties
- Second homes/vacation properties
- Multi-unit properties over 4 units
- Co-ops
- Commercial real estate
These property restrictions make VA loans useless for real estate investors or anyone buying a second home. even if you plan to live in one unit of a multi-family home, VA guidelines make it tougher to qualify that property.
Tougher to Qualify Manufactured Homes
VA loans can be used to buy manufactured homes. However, the VA has additional requirements compared to other mortgages.
All manufactured homes must:
- Have been built after June 1976
- Meet VA minimum space requirements
- Pass an engineering inspection
These extra steps make it more challenging to buy manufactured housing with a VA loan. Sellers may be turned off by the additional red tape as well.
Potential Appraisal Issues
The VA appraisal process is another common pain point. Appraisers must follow strict guidelines when assessing a home’s value and condition.
VA appraisals require a detailed inspection, which can:
- Delay closing timelines
- Lead sellers to reject VA offers if repairs are required
- Result in lower appraised values than buyers expected
It’s important to work with a real estate agent familiar with VA loans to help educate sellers on what to expect with the appraisal.
Slower Equity Building
Since zero down payment VA loans don’t require you to invest anything upfront, you start out with zero home equity.
Without that initial equity stake, it takes longer to build equity through mortgage payments and appreciation. If home prices dip, you could end up underwater quickly.
This slower equity growth can make it harder to:
- Sell or refinance later
- Tap home equity for other financial goals
- Weather housing market downturns
For long-term homeowners, the equity disadvantage of no-down-payment loans is important to consider.
Loan Assumptions Can Create Headaches
VA loans are assumable, so buyers can take over your existing VA mortgage when you sell. This perk can help sell your home faster.
But assumable mortgages also come with drawbacks:
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You must occupy the home as your primary residence until you sell in order to keep your full VA entitlement for future VA loan eligibility.
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The buyer must be approved by the lender to assume the loan. If they don’t qualify, you may lose out on that sale.
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Rates may adjust up or down when the loan is assumed, depending on market conditions.
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You remain responsible if the buyer defaults on the loan in the future.
For these reasons, some choose to obtain a new non-VA mortgage rather than assume the seller’s VA loan.
The Bottom Line
VA loans offer amazing perks but also have some real disadvantages. As you weigh your home loan options, consider:
- How much the VA funding fee will add to your costs
- If the property you want will qualify for a VA loan
- Your down payment capabilities and equity goals
- Your risk tolerance if rates rise in the future
Look at the pros and cons to decide if a VA loan aligns with your home buying plans and financial situation. While VA loans are an excellent choice for many, there are cases where an FHA, USDA, or conventional loan may be the better fit.
May have less equity in your home
One potential drawback of a VA loan is that it may result in less equity in your home. With the advantage of being able to buy a home with little or no money down, you won’t need an initial out-of-pocket payment. However, this means your property will be 100% financed, potentially leaving you in a negative equity position.
Limited to those eligible
Obviously, a con of this loan product is that it is only applicable for veterans and their spouses. This means that there is limited eligibility and that the program is not open for many borrowers.
PROS and CONS of a VA Loan
FAQ
What is a drawback of a VA loan?
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Pro
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Con
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No PMI
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VA funding fee increases after first use
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Higher allowable DTI
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Loan could exceed market value
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Credit flexibility
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Only for primary residences
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Better than average interest rates
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Sellers and agents may not be familiar
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Why do sellers not like VA loans?
What can you not do with a VA loan?
Is it harder to buy a house with a VA loan?
What are the pros and cons of a VA loan?
Pros: no down payment or mortgage insurance, lower rates and costs, flexible refinancing, shorter wait time from bankruptcy or foreclosure. Cons: funding fee, no investment or vacation properties, appraisal and inspection required, not as desirable for some sellers VA loans come with a long list of big benefits for prospective homeowners.
What are the disadvantages of the VA funding fee?
One of the disadvantages of the VA funding fee is that it’s higher for subsequent use if you have a down payment of less than 5%. The increased fee looks like this: To translate those percentages into dollar figures, a first-time use of the VA loan for $200,000 will result in a VA funding fee of $4,300.
Are VA loans good or bad?
Clearly VA loans have positives, but they may not be for everyone. Here are alternatives to VA loans, all of which are available to servicemembers: Conventional loan: A conventional loan is type most borrowers use. It is provided by banks, credit unions and mortgage lenders.
What are the benefits of a VA home loan?
There are benefits of a VA home loan, as well as drawbacks to consider. While conventional mortgages require a down payment of at least 3 percent of the purchase price, VA loans allow eligible borrowers to become homeowners without putting a penny down upfront.