23 Sep The Pros And Cons Of VA Home Loans
Veterans and military borrowers often choose VA loans as one of their primary home financing options – 2021 was another record-breaking year for VA loans, with the VA guaranteeing over 1 million loans. Nevertheless, not every borrower will benefit from a VA loan.
When choosing your mortgage, keep the following financial considerations in mind: the pros and cons of the VA loan program.
VA Loan Pros
Among the VA home loan program’s most prominent advantages are the following:
No down payment
Putting no down payment on a VA loan is one of the most significant advantages. Qualified borrowers can borrow as much as a lender is willing to lend, all without requiring a down payment.
Typically, FHA loans require a down payment of 3.5 percent, while conventional loans require a down payment of 5 percent. The down payment for a $175,000 home is $6,125 for FHA loans and $8,750 for traditional loans.
It may be an advantage for those who cannot afford a down payment, but it may also be a disadvantage for others. The home can be financed for more than its value, leaving you with no equity.
PMI is not required
In most cases, conventional borrowers who don’t pay at least 20% down are required to purchase private mortgage insurance. VA loans don’t require PMI, regardless of how much you put down, which can save Veterans thousands.
An FHA mortgage insurance premium (MIP) typically lasts the life of the loan for borrowers who qualify for PMI. In addition, there is an upfront fee due at closing.
The debt-to-income ratio (DTI) may be higher.
Lenders will consider your gross monthly income about your significant monthly debts. Generally, VA financing requires a debt-to-income ratio of 41 percent or less, but it’s possible to exceed that threshold.
A prepayment penalty is not applicable.
Prepayment penalties do not apply to VA loans. Making additional payments to your mortgage or paying off your mortgage early will not result in financial penalties.
A borrower’s ability to save money can be impeded by prepayment penalties on other loan products, including conventional and FHA mortgages.
Qualified buyers can reduce their monthly payments or get cash back from their equity with the VA home loan program’s refinance loans.
Streamline refinances, also known as VA Interest Rate Reduction Refinance Loans (IRRRLs), are best suited to VA borrowers who want to lower their rates. Because you are refinancing from one VA product to another with an IRRRL, you are more likely to be able to lower your rate.
Homeowners can refinance and receive cash at closing through cash-out refinances. Remember that refinancing may result in higher finance charges over the life of the loan.
Assumption of VA loans is possible.
VA home loans traditionally have a lesser-known and lesser-used pro of assumptions. Taking over a Veteran’s loan offers borrowers the opportunity to lock in lower interest rates than are currently offered. Assuming a VA loan might be a huge financial win as interest rates rise.
There are, however, exceptions to the rule when it comes to assumptions. You can find out how to assume your VA loan here, but if another borrower accepts your loan, your entitlement may be tied to that loan until the loan is refinanced or paid off – unless the new borrower assumes the VA loan is a Veteran who transfers the entitlement to them.
Better terms and interest rates
Based on data from Ellie Mae, VA loans have had the lowest average fixed rate for over six years. Additionally, VA loans are typically associated with lower closing costs and fees than conventional mortgages.
VA Loan Cons
There are some disadvantages associated with VA loans. We’ll look at a few of the program’s more significant cons:
VA Funding Fee
There is a VA Funding Fee that most VA borrowers must pay. Fees charged by the VA to maintain the program for future generations are called the VA Funding Fee.
Veterans with service-related disabilities, Purple Heart recipients, and surviving spouses of veterans are not required to pay fees.
Funding Fees increase with subsequent use.
When veterans re-use their VA loan benefits, they will find that the VA Funding Fee is higher than the first time. A VA loan’s first-time use fee is usually lower than its subsequent use fee, and this fee can be lowered when a down payment is made.
Their primary use is as a residence.
Primary residences can only be used as primary residences, and VA loans cannot be used for second homes or investment properties. VA streamlined refinances are the only exception.
Some real estate agents are unfamiliar with VA loans
Working with an agent familiar with the VA loan product is crucial to ensure a smooth homebuying experience.
The VA’s appraisal requirements and other guidelines can cause wasted time if the agent is unfamiliar with the program.
Contact a VA loan specialist today.
There isn’t always agreement between sellers and buyers.
Sellers may not accept VA offers in highly competitive housing markets. Multiplying offers is not a common occurrence, but it can occur.
VA loans are often misunderstood due to myths and misconceptions surrounding them.
What are the benefits of VA loans?
VA loans are usually the best option for homebuyers who are military members. Your unique financial situation will determine which option is best for you.
Contact Veterans United if you are unsure which option is best for you. To make the best financial decision, we can answer your questions about the VA loan and help you compare loan types.