VA loans are one of the more attractive mortgage options available to prospective homebuyers. They are reserved for active-duty service members, veterans, and qualifying spouses, and they come with many benefits that make homeownership more accessible and affordable. That said, VA loans are not without potential drawbacks to consider when deciding if they’re a viable option for funding needs.
What is a VA Loan?
Before diving into the pros and cons of these loan products, you should understand how they work. In a nutshell, a VA loan is a type of mortgage that’s insured by the U.S. Department of Veterans Affairs (VA). It’s available exclusively to current and former military members and eligible surviving spouses.
Understanding VA Loan Eligibility
The VA loan program comes with specific program guidelines that must be met to access VA loan benefits.
Service Requirements
Active-duty service members need 90 days of service during wartime or 181 days of service during peacetime. If you’re a veteran, the required service depends on when you served and your discharge status.
National Guard and Reserve members need six years of service. But if you were called to active duty, the time differs.
If you’re a surviving spouse, you could qualify if your partner died in the line of duty or from a service-related disability.
Certificate of Eligibility (COE)
The COE is a document confirming you meet the VA loan service requirements. You can log in to the eBenefits portal to retrieve it or send a completed copy of VA Form 26-1880 to get a copy of your COE by mail. Or, if you’re already working with a lender, you can ask them to obtain your COE.
Eligible Property Types
VA loans can only be used for primary residences. So, if you plan to buy or refinance a second home or rental property, you’ll need to look elsewhere for funding.
There are also restrictions on the type of property you can purchase. Single-family homes, modular homes, condominiums, and select manufactured homes are eligible. You can also buy a multi-family unit (with up to four units), but one must be used as your primary residence.
It’s also important to know that all homes must meet the VA’s minimum property requirements (MPRs). These are guidelines that are put into place to ensure the home is safe, structurally sound, and sanitary.
Determining Whether a VA Loan is Right for You: VA Loan Pros and Cons
Before applying for a VA loan, it is important to understand how it works and evaluate the benefits and drawbacks that come with this loan product. Doing so will give you the knowledge needed to make an informed decision.
What are the Pros of VA Loans?
No Down Payment
You buy a home using a VA loan with no money down. This is a major perk, as most mortgage programs require at least 3% down. So, you can get into your new home faster instead of spending several months or years saving up for a down payment.
Competitive Interest Rates
VA loans come with some of the lowest interest rates you’ll find among mortgage products. Since they are backed by the Department of Veterans Affairs, lenders assume less risk and can pass these cost-savings along to borrowers.
No Private Mortgage Insurance (PMI) Requirement
PMI is typically required on conventional loans if you put less than 20% down, potentially adding hundreds of dollars more to your monthly mortgage payments. However, VA loans skip this requirement to help make homeownership more affordable. Plus, you’ll save thousands of dollars over the life of the loan.
Limited Closing Costs
The VA caps the amount lenders can charge for closing costs. Although the mandatory funding fee is included in this equation, it can be rolled into the loan amount at closing to lower your out-of-pocket costs.
Flexible Credit Requirements
Unlike most loan programs, the VA does not impose a minimum credit score requirement. Lenders are free to set their own guidelines, which are typically 620 or higher. However, some may be willing to approve you with a lower credit score if there are other compensating factors.
Foreclosure Avoidance Support
You may not be completely out of luck if you face financial hardship that makes it difficult to afford your monthly mortgage payments. The VA provides foreclosure avoidance support resources, including financial counseling, to help you get back on track and stay in your home.
Assumable Loan Benefits
The assumability of VA loans is another major perk that you won’t find with many mortgage products. This means if you sell your home, the new borrower can assume your loan and keep the current terms, even if they don’t meet the VA’s minimum service requirements. However, the buyer must meet credit score and income guidelines, and a down payment may be required. The VA also assesses a funding fee of 0.5% of the amount owed on the loan.
Accessible Refinancing Options.
You’re not limited to home purchase transactions with VA loans. The VA also offers two types of refinances. The VA Streamline Refinance or Interest Rate Reduction Refinance Loan (IRRRL) is designed to help you get a lower interest rate and more affordable monthly mortgage payments through a simplified process that doesn’t require loads of paperwork. There’s also the VA cash-out refinance that lets you tap into your home equity and use the funds to consolidate high-interest debt, make home improvements, or do whatever else you see fit.
What are the Cons of VA Loans?
VA Funding Fee
This fee is charged on all VA loan transactions unless you qualify for an exception. The amount you’ll pay depends on the VA loan type, down payment and whether you’ve used a VA loan before. It ranges from 0.5% to 3.3% and can be rolled into the loan balance if you prefer not to pay this amount at closing.
Primary Residence Requirement
VA loans are intended to help fund the purchase or refinance of a primary residence or home you occupy most of the time. This means you must look elsewhere if you want to buy a home you’ll use as a vacation or investment property.
Appraisal Requirements
The VA doesn’t let up in this department. Property appraisals must be completed by a VA-approved appraiser to determine the home’s fair market value. The property must also meet what’s referred to as the Minimum Property Requirements (MPRs) to qualify for funding.
Property Restrictions
Single-family homes, townhomes, condominiums, and select manufactured homes can be purchased with a VA loan. If you want to buy a multi-unit property, you must occupy one of the units.
Limitations on Loan Sizes
VA loans are not subject to limits, but lenders often impose their own in accordance with the conforming loan limits in your county. If you want to buy a home that exceeds this amount, you could be eligible, but with a down payment.
Possible Longer Closing Process
The VA loan process can take longer than conventional loans. The closing process involves additional steps, such as a VA appraisal and adherence to stricter property guidelines.
These extra steps can lead to longer waiting times from application to closing. If you need to move quickly, this might be a significant drawback. The longer closing process can also be a turn-off for sellers looking for a quick sale, making it harder to get your offer accepted.
How to Apply for a VA Loan
When you’re ready to apply, here’s how to move forward:
- Step 1: Obtain your COE online, by mail or through your lender.
- Step 2: Shop around and get pre-qualified with at least three lenders to find the best rates.
- Step 3: Formally apply with the lender and submit the required documents promptly to avoid processing delays.
- Step 4: Await the results of the appraisal and the clearance to close the loan.
- Step 5: Attend closing, pay any applicable closing costs and seal the deal.
How Does a VA Loan Compare to Other Home Loan Options?
The table below demonstrates how VA loans compare to conventional loans and FHA loans. Conventional loans are a popular option amongst homebuyers, and FHA loans, which are backed by the Federal Housing Administration (FHA), are a government-insured alternative with flexible lending guidelines.
| Type of Mortgage | Minimum Credit Score | Minimum Down Payment | Interest Rates | PMI | Closing Costs |
| VA | Not applicable, but a 620 or higher is preferred | Not required | Competitive compared to traditional loan products | Not required | 3% – 5% of the loan amount, and lenders impose caps to make them affordable |
| Conventional | 620 | 3% | Usually higher than VA loans | Required with a down payment under 10%, and typically costs between 0.22% and 2.25% of the loan amount | 2% – 6% of the loan amount |
| FHA | 500 or 580 | 3.5%10% (with a credit score between 500 and 579) | Slightly higher than VA loans | FHA Upfront-Mortgage Insurance Premium: 1.75% Annual Mortgage Insurance Premium (MIP):0.40-1.05% | 3% – 6% of loan amount |
