The Pros and Cons of VA Loans: A Comprehensive Guide

VA loans are often one of the most attractive home financing options for Veterans and military borrowers – 2022 was another record-breaking year for the VA loan, with the VA guaranteeing more than 1 million VA loans. However, the VA loan isnt always the best financial choice for every borrower.

Here we dive into the pros and cons of the VA loan program and the most significant financial considerations to keep in mind when choosing your mortgage.

VA loans are mortgage options backed by the Department of Veterans Affairs that provide many benefits to eligible military members, veterans, and surviving spouses. As someone who has served, you’ve earned special home financing options, including the chance to buy a home with no down payment.

However VA loans aren’t right for everyone. While they provide excellent opportunities they also have some potential drawbacks. Weighing the pros and cons of VA loans can help you make the best home financing decision.

An Overview of VA Loan Benefits

Let’s start with an overview of some of the main pros of getting a VA-backed mortgage

No Down Payment Required: Unlike conventional loans that require 10-20% down, VA borrowers can get a mortgage for 100% of the purchase price. This removes the main barrier to homeownership for many.
No Mortgage Insurance: No private mortgage insurance (PMI) or upfront mortgage insurance premiums are required, saving borrowers hundreds per month.
Lower Rates and Fees: Interest rates on VA loans tend to be lower than conventional mortgages. Closing costs and lender fees are also capped, keeping costs down.
More Relaxed Guidelines: VA loans allow higher debt-to-income ratios than conventional loans and have more lenient credit requirements. Minimum credit scores can be as low as 580 with some lenders.
Refinancing Options: Veterans enjoy special refinancing products, including streamlined IRRRL refinances with limited paperwork and no appraisals required.
Assumable: VA loans can be assumed by qualified veteran and non-veteran buyers when a home is sold, making purchases easier.

For eligible borrowers, it’s easy to see why a VA home loan is an attractive option. But these benefits don’t come without some tradeoffs.

The Potential Drawbacks of VA Loans

VA mortgages provide excellent opportunities for military borrowers. However, they aren’t perfect products. Here are some of the key cons to weigh:

VA Funding Fee: All VA loans require an upfront VA funding fee, ranging from 1.4-3.6% of the loan amount. This increases closing costs.
Less Flexible: VA loans can only be used to buy or refinance a primary residence. Investment properties or second homes aren’t eligible.
Property Restrictions: The VA has minimum property requirements and won’t finance homes in poor condition. Manufactured homes also face greater scrutiny.
Slower Process: VA appraisals and paperwork requirements can complicate and slow down the mortgage process in some cases.
Loan Limits: The VA has county-by-county loan limits that cap the maximum loan amount, which can limit buying power in high-cost areas.
Less Equity: With no down payment, it takes longer for borrowers to build home equity and increase financial risk if prices drop.

As you can see, VA loans provide excellent benefits, but also have limitations and conditions borrowers need to accept. The pros and cons will vary for each borrower and situation.

Key Questions to Consider About VA Loans

As you weigh whether a VA mortgage is right for your personal situation, here are some key questions to think over:

How long will you stay in the home? If less than 3-4 years, the VA funding fee likely won’t pay off. But longer terms amortize the fee.
Is your income stable? VA loans allow higher debt ratios. So stable income is key to ensuring affordability and managing risks.
What down payment do you have saved? VA loans work with 0% down. But a bigger down payment lowers fees and risk, and may open better rates.
What credit score do you have? VA has more flexible credit guidelines, but incomes below 620 will face challenges and higher rates.
**Where are you buying?**Loan limits may restrict buying power for pricier markets like California or New York.
Are you open to a fixer-upper? VA loans have property condition requirements that may limit distressed properties.

Asking these questions will help analyze if a VA loan aligns well with your personal financial situation.

Alternatives to Consider Beyond VA Loans

If your assessment shows that a VA mortgage includes too many limiting cons for your situation, other options exist too:

Conventional 97% LTV Loans – Allow 3% down with similar rates as VA loans, avoid the VA funding fee, and provide more equity upfront. But require mortgage insurance.

FHA Loans – Offer 3.5% down and flexible credit like VA loans. But have mortgage insurance premiums and require 10+ year occupancy for the best pricing.

USDA Loans – Provide 100% financing options for low-income borrowers buying in designated rural areas, but have income caps and limited property types.

Adjustable-Rate Mortgages – Have lower initial rates but carry risk when fixed periods end and market rates adjust higher.

Down payment assistance programs – Provide grants, low-rate seconds loans, and other down payment support options to help borrowers afford larger down payments on conventional loans when possible.

The right loan program will depend on your specific home buying goals, financial situation, and loan amount needed.

Weighing the Pros and Cons

Hopefully this overview has helped highlight the key benefits and drawbacks borrowers face when considering VA loans. There are excellent reasons why VA mortgages help millions of military families buy homes. But also limitations to factor in.

Ensuring you understand both the pros and cons will empower you to make the most educated financing decision. Reach out to a loan officer early when buying a home to map the best mortgage approach for your situation.

VA Loan Pros and Cons at a Glance

Pro	Con
No down payment	VA Funding Fee
No PMI	VA funding fee increases after first use
Higher allowable DTI	Loan could exceed market value
Credit flexibility	Only for primary residences
Better than average interest rates	Sellers and agents may not be familiar
Multiple refinance options	–
No prepayment penalty	–
VA loans are assumable	–

This table provides a high-level overview of the pros and cons. Below the table is a full explanation for each pro or con.

Starting with the pros, here are some of the more prominent advantages of the VA home loan program:

pros and cons of va loans

The ability to put $0 down is one of the biggest pros of VA loans. Qualified borrowers can borrow as much as a lender is willing to lend, all without needing a down payment.

FHA loans typically require a 3.5 percent minimum down payment, and for many conventional loans, its a 5 percent minimum. On a $175,000 home purchase, thats a $6,125 down payment for FHA and $8,750 for conventional.

While this is a pro for many who cant afford a down payment, it could also be considered a con for some borrowers. Its possible to finance more than the homes value, which means you could start out with no equity in your home.

pros and cons of va loans

VA Loans are assumable

Assumptions have traditionally been a lesser-known and lesser-used pro of the VA home loan. The biggest benefit of assumptions is that borrowers can take over a Veteran’s loan and lock into interest rates lower than what is currently available. Looking into a VA loan assumption might be a huge win financially, especially once interest rates start to rise.

However, assumptions arent for everyone. You can read more about assuming a VA loan here, but if another borrower assumes your VA loan, your entitlement may be wrapped up in that loan until the loan is refinanced or paid in full – unless the homebuyer assuming the VA loan is a Veteran and transfers their entitlement.

PROS and CONS of a VA Loan

FAQ

What are the disadvantages of a VA loan?

VA loans offer many benefits such as no down payment/mortgage insurance, easier qualifications and lower interest rates. However, they also have drawbacks such as a required funding fee, property restrictions and potentially less equity to start.

Why do sellers not like VA loans?

One of the primary reasons some sellers may hesitate to accept a VA loan is due to misconceptions about the program. Some sellers believe that VA loans involve more red tape, delays, or stricter inspection requirements compared to conventional loans. In reality, VA loans are not as cumbersome as they may seem.

Is it worth putting money down on a VA loan?

Pros of making a down payment on a VA loan You’ll save money on your mortgage: Because you’re putting down some of the home’s purchase price, you won’t need to borrow as much with the mortgage. That means you’ll save on your monthly payment as well as interest on the smaller loan balance.

Is there a penalty for paying off a VA loan early?

VA loans have no prepayment penalties. You can pay off your mortgage early or make additional payments without fear of being penalized financially. Other loan products on the market, such as conventional and FHA, may have prepayment penalties, which can prevent borrowers from saving money.