When families are looking to purchase a home, they find many lending options available on the market. Each option has its pros and cons, and the best choice depends on each families’ situation. For military service members looking to buy a home, there is one additional option that is not available to the civilian community.
VA Home Loans are offered to military members by qualified lenders. There are many benefits to this type of loan, with the main one being that Veterans Affairs backs or guarantees the loan. This means that if you default on the loan for some reason, they will pay the lender a specific percentage of the entire loan, causing the lender to be more flexible.
Are you a service member beginning your home buying journey? Here is a breakdown of the most prominent pros and cons of choosing to purchase a home with a VA Loan.
Pros of Using a VA Loan
In return for service to your country, the VA offers many benefits to service members and their families. One such benefit is the opportunity to purchase a home with a VA Loan. Here are a few of the main benefits of using a VA Loan.
No Down Payment
The most apparent VA Loan benefit is that borrowers are not required to put down any cash upfront. Meaning there is no down payment requirement. This is an excellent benefit for new families looking to purchase their first home who have not yet had the opportunity to save up a significant amount of cash.
Unfortunately, this is the number one term of homebuying for the civilian world that keeps many potential buyers out of the market. It can take years for the average family to save up enough for a down payment without a VA Home Loan.
Though there is an option for conventional buyers to purchase a home without the traditional 20% down payment, there are extra costs involved. Private Mortgage Insurance (PMI) is a fee that is required on top of monthly payments for conventional buyers who use an FHA loan and can only put down less than 20%. The purpose of this insurance is to protect lenders from the risk of the borrower defaulting on their loan.
With VA Loans, even when providing $0 for a down payment, PMI is never required, thus saving service members money and allowing them to pay down the principal on their loan much quicker.
Flexible Debt Qualifications
When purchasing a home, lenders dig into your financial situation to assess the risk of lending to you. The main aspects they consider are your credit history and debt-to-income (DTI) ratio. Many lenders have very strict policies on credit score qualifications, meaning that your score must meet a specific number. As for DTI, lenders assess your current monthly income and expenses and decide whether your financials will affect your ability to repay your mortgage loan.
Qualified VA lenders are typically willing to be more flexible with debt qualifications, and it may or may not affect your interest rate. The VA has recommended guidelines for lenders, but each lender has its own terms and specifications for what it will allow. In most cases, VA lenders will have lower credit score requirements and higher DTI ratios for those using a VA Loan, making home-buying more available for those on a tight budget or with poor credit history.
There are many aspects of VA Loan terms that differ from conventional loans. For instance, the VA sets limits on how high closing costs can be for borrowers, and in many cases, some closing cost amounts can be rolled into the loan.
Additionally, there are different laws for loan limits on homes purchased with a VA Loan. This means that in many cases, you may qualify for a loan amount that is higher than if you chose to use a conventional loan in many cases. However, the loan amount must meet the VA appraisal to cover the entire loan.
There are no prepayment penalties when deciding to sell your home or refinance your loan when you have a VA Loan.
Cons of Using a VA Loan
Even though there are many benefits to using a VA Loan, each family and financial situation is different. There may be reasons that a VA Loan is not best for you and your individual circumstances. Listed below are a few cons to VA Loans.
The most obvious con to the VA Loan program is that not everyone is eligible for a VA Loan. VA Loans are only available for qualifying veteran or active-duty US military members, national guard, or reserves. There are also guidelines for surviving spouses of service members killed in the line of duty.
Therefore, the VA Loan requires qualifying terms of service, and those who do not meet one of these qualifications are not eligible to use a VA Loan.
To keep the VA Home Loan program running in the future, there is a VA funding fee associated with using a VA Home Loan. This is a one-time fee of a certain percentage of your home loan that must be paid along with your mortgage.
This fee, of course, does bring more cost to your home buying experience, but the payment can be rolled into your loan. Therefore you do not have to provide cash upfront, and you know exactly how much your home will cost you upfront.
Though a benefit to VA Loans is that there is no down payment requirement, there is the possibility that putting no money down could put you in an upside-down situation when it comes to equity.
In a growing market, your home’s equity will build, and you will soon make money on your home. But in a downturned market, if you have not put any money down upfront, there is potential that you could lose money on the sale of your home if you must sell soon or quickly.
VA Home Loans are only intended for service members’ primary residence. This means that VA Loans cannot be used to purchase investment properties or vacation homes unless those properties are lived in by the service member and paid in full before they transition to a rental or secondary residence.
Work With a Lender Who Knows VA Loans
As you can see, there are many benefits and differences when using a VA Home Loan to purchase your dream home. Because of these differences and specifications, it is best to work with a VA Home Loan Specialist rather than the average home lender. This will ensure you receive the best service for your home buying experience.
Our veteran-run team knows exactly what it takes to get you into the home of your dreams, with the best terms, at the best price. We walk every step of the home loan process with you through the VA Home Loan Journey and are committed to serving your family.
Call today at (602).908.5849 to begin your home buying journey.