The Pros and Cons of VA Loans

Pros of VA Loans

1. No Down Payment Required

One of the biggest reasons that military homebuyers choose VA loans is the ability to purchase a home with no money down. Conventional lenders typically require between 3% and 20% down, so this is a major advantage, especially for first-time buyers. It also means you might be able to buy a house more quickly, because you don’t have to save up for a down payment.

2. No Private Mortgage Insurance (PMI)

VA loans don’t require private mortgage insurance (PMI), which is a requirement with conventional loans if the borrower puts down less than 20%. FHA loans usually require mortgage insurance for the entire life of the loan if you put down less than 10%. Not paying PMI can significantly reduce your monthly loan payment.

3. Competitive Interest Rates

Because VA loans are backed by the government, lenders view them as lower-risk. That means they can offer interest rates that are often lower than conventional and FHA rates. Even a small difference in rate can reduce your monthly payment and total interest paid over 15 or 30 years. The lower interest rate alone can make a VA loan more cost-effective than other loan types, even when the VA funding fee is taken into account.

4. Easier Qualification Requirements

VA loans are known for their flexible underwriting standards. While lenders still review your income, employment history, credit score, and debt-to-income (DTI) ratio, the requirements are generally more forgiving than those of conventional loans. That means you might have an easier time qualifying for a loan if you don’t have great credit or a steady income.

5. Limits on Closing Costs

The VA places limits on what lenders can charge borrowers for closing costs, which can protect homebuyers from excessive fees. Additionally, sellers can pay up to 4% of the home's sale price towards the buyer's closing costs when using a VA loan. This significantly reduces the amount of money needed to close on a house, and can make your home purchase more affordable overall.

6. No Prepayment Penalty

VA loans don’t charge a penalty fee for paying off your mortgage early. That gives borrowers the flexibility to make extra payments to reduce interest, refinance when rates drop, or sell their home without financial consequences. This flexibility can be especially beneficial for military families who relocate frequently and might not stay in the same home for a long period.

7. Streamlined Refinancing Options

The VA Interest Rate Reduction Refinance Loan (IRRRL), sometimes called a VA streamline refinance, allows borrowers to refinance their current VA mortgage into a new VA loan with a lower interest rate. Usually, this type of loan requires minimal paperwork and no appraisal. It’s one of the easiest and quickest refinance options available, which makes it ideal for military homeowners who want to take advantage of falling interest rates.

Cons of VA Loans

1. VA Funding Fee

Instead of monthly mortgage insurance, VA loans usually require a funding fee, which is a one-time cost that helps support the VA home loan program. The fee typically ranges from 0.5% to 3.3% of the loan amount, depending on factors like your down payment amount, military status, loan type, and your entitlement. The fee can be rolled into the loan, but it will increase your total borrowing costs.

2. Primary Residence Restriction

VA loans can only be used to purchase a primary residence. You can’t use this type of loan to buy a vacation home, second home, or short-term rental. You’re required to move into the home within a certain timeframe after closing (typically 60 days), so if you’re looking to purchase an investment property, you’ll need to choose another type of loan.

3. More Strict Appraisal Requirements

When you get a VA home loan, the property must be appraised before the loan is underwritten. VA appraisals are known for being more strict than conventional appraisals. The VA wants to ensure the home meets minimum property standards and is safe, structurally sound, and move-in ready. While this is a benefit for the buyer in terms of safety and long-term value, it can also introduce challenges and potential delays.

4. Closing Costs Still Apply

Although VA loans have capped closing costs, you’ll still have to pay those fees. Closing costs usually include things like loan origination fees, title fees, and escrow fees. While these closing costs can sometimes be rolled into the loan or covered by seller concessions, borrowers should still be prepared for some out-of-pocket costs.

5. Misconceptions From Sellers

Even though VA loans are widely used and generally very reliable, some sellers and agents have outdated misconceptions that VA loans are slow, complicated, or more likely to fall through. This isn’t accurate, but the perception alone can make it harder for VA buyers to compete with conventional offers, especially in hot markets.

6. Not Always the Best Option

Just because you’re eligible for a VA home loan doesn’t necessarily mean it’s the best option. For military homebuyers with excellent credit and a large down payment, a conventional loan can sometimes be more cost-effective, especially because you avoid the VA funding fee. A conventional loan may also be a better option if you’ve used a VA loan in the past and only have partial entitlement.

Is a VA Loan Right for You?

VA loans are a great financial tool for people in the military who want to purchase a home. VA mortgages provide unmatched benefits, like no down payment, no PMI, and lower interest rates than conventional and FHA mortgages. For many military families, a VA loan is by far the most affordable and accessible path to homeownership.

However, VA loans aren’t the right option for everyone. Between the funding fee, strict appraisal requirements, and limitations on buying an investment property, it’s important to weigh the pros and cons to decide if a VA loan is the best mortgage for your needs.

The key is to compare your options, consider your long-term goals, and work with a lender who specializes in VA loans and understands the unique needs of military borrowers. If used strategically, a VA loan can save you thousands of dollars and open the door to homeownership without the financial strain that often comes with traditional loan programs.

Frequently asked questions