The Pros and Cons of VA Home Loans: A Complete Guide for 2023

If you are an active military member, veteran, or qualifying spouse considering buying a home, you likely have come across VA home loans. VA loans offer some excellent benefits like no down payment and no private mortgage insurance that can make them very appealing. However, VA loans also have some potential drawbacks to weigh. In this comprehensive guide, I’ll walk through the key pros and cons of VA home loans to help you decide if this type of financing is the right fit.

An Overview of VA Home Loans

First, let’s start with a quick primer on what VA home loans are and how they work. VA loans are mortgage loans issued by private lenders but insured by the Department of Veterans Affairs. This VA guarantee allows lenders to provide loans with much more flexible terms compared to conventional mortgages.

To qualify for a VA home loan you must be an active duty service member veteran, reservist, or qualifying military spouse. VA loans can be used to purchase or refinance a primary residence like a single-family home, townhouse or condo. They cannot be used for investment properties or vacation homes.

Now that we’ve covered the basics, let’s dive into the key pros and cons of VA home loans.

The Pros of VA Home Loans

1. Zero Down Payment Required

The biggest benefit of VA loans is that they require no down payment whatsoever. This can make homebuying much more accessible, especially for first-time buyers without substantial cash savings. With a conventional loan, you typically need a down payment of at least 3-5%. With an FHA loan, you can go as low as 3.5% down. But VA has no minimum down payment requirement.

2. No Private Mortgage Insurance

On conventional loans with less than 20% down, homeowners must pay private mortgage insurance (PMI) until they reach 20% equity in the home This adds hundreds of dollars to the monthly payment VA loans have no PMI requirement, saving you significant money each month.

3. Lower Interest Rates

Since the VA guarantees the loan against default lenders can offer lower interest rates on VA loans compared to conventional mortgages potentially saving you tens of thousands of dollars in interest over the life of the loan. Rates are also very competitive with FHA.

4. Flexible Qualifying Guidelines

VA has more flexible credit and debt-to-income requirements than conventional loans. VA doesn’t set a minimum credit score requirement, and many lenders will approve scores as low as 580 or 600. The maximum DTI allowed on VA loans is also 41% compared to typically 36% for conventional.

5. Limited Closing Costs

Origination fees on VA loans are capped at 1% of the loan amount, lower than the typical 1-2% for conventional loans. And veterans are exempt from paying state and county taxes on VA loans in many areas.

6. Streamlined Refinancing Option

VA offers streamlined refinancing called the Interest Rate Reduction Refinance Loan (IRRRL) that allows skipping the appraisal and credit check for an easier, cheaper refi.

7. Assumable by Future Buyers

VA loans can be assumed by future buyers if you sell the home. This can give your property a competitive edge in the market.

The Potential Cons of VA Home Loans

1. Funding Fee Required

While VA has no PMI, you will have to pay a one-time VA funding fee at closing rolled into the loan amount. For first-time users, this fee is 2.3% of the total loan amount if you make less than a 5% down payment. The fee decreases as your down payment increases.

2. Strict Home Standards

The VA appraisal process is very strict, requiring the home pass all minimum property requirements related to safety, structural soundness, working systems, and lack of health hazards. If issues are found, the seller will have to fix them before closing. This could potentially delay closings or deter some sellers.

3. Less Equity at Close

With no down payment, you start out with zero home equity and owe the full loan amount. This means it will take longer to build equity and leaves you more exposed if home values decline.

4. Loan Limits Set by County

There are limits on the maximum loan amount allowed based on averages in your county. In more expensive areas, you may be capped below what you need to buy larger homes.

5. Tight Occupancy Rules

You must personally live in the home as your primary residence. No renting out rooms or using as a vacation property. And unmarried joint applicants both must live in the home.

6. May Not Allow Multiple Properties

Some lenders restrict buyers from owning multiple homes at once. So it may not be possible to keep your current home when buying another with VA financing.

7. Potential Stigma Among Sellers

Some sellers have misconceptions about VA loans causing appraisal-related closing delays. A good real estate agent can help educate sellers that this is generally not the case.

Who Should Consider a VA Home Loan?

VA loans offer excellent benefits that make them a great option to consider if you are eligible. They can be especially useful for:

• First-time homebuyers without cash saved up for a down payment and closing costs
• Buyers wanting to keep their monthly costs as low as possible
• Anyone with past credit challenges that may not qualify for a conventional loan
• Veterans with full entitlement looking to purchase again without a down payment
• Those looking for the easiest, quickest refinancing process

However, conventional or FHA loans may be preferable if you:

• Want to purchase a vacation home or investment property
• Need to buy in an expensive market with tight loan limits
• Plan to move within 1-2 years and want to avoid the VA funding fee
• Have ample savings for a 10-20% down payment

The Bottom Line

VA home loans can be an excellent option that opens the doors to homeownership for many buyers. But they aren’t a fit for every situation. Consider both the pros and cons carefully in relation to your own financial profile and home buying plans to decide if a VA loan is the right choice. And consult a loan officer who can walk you through program guidelines and your best mortgage options. With the right information, you can feel confident pursuing the optimal home loan to buy your dream home!