The Pros and Cons of VA Loans
April 21, 2018
The Veteran’s Administration guaranteed home loan program has allowed millions of veterans and active duty service members an affordable way to own their own homes.
The program does not provide home loans for veterans. Instead, it guarantees loans given by private lenders.
A look at the pros and cons of the program can help homebuyers determine if a VA guaranteed loan is right for them.
Pros of VA Home Loans
The VA home loan program is popular because it offers homebuyers a number of advantages:
- Little or no down payment is required – Homebuyers can purchase a home sooner because they do not have to save for the large down payment required by lenders offering conventional loans.
- Competitive interest rates – Because the risk for repayment of the loan is covered by the federal government, lenders can offer lower interest rates.
- The purchase price of the home is assured – A VA appraisal ensures that the home is worth the value of the loan.
- Closing costs are limited – The VA program will pay customary closing cost items, but not additional costs.
- No prepayment penalty – Homeowners who then sell their property do not have to pay a penalty for paying off the loan earlier than its term.
- VA loans are assumable – The homeowners can offer the favorable mortgage terms to a subsequent buyer.
- Forbearance for financial difficulties – If the homeowner has a financial setback and cannot make payments, special terms can be negotiated for them.
- Warranty for VA approved construction – The VA will assist in enforcing the builder’s warranty for justifiable construction complaints.
Cons of VA Home Loans
A home loan through the VA program also has a number of disadvantages that homebuyers should take into account:
- VA home loans are for the purchase of primary residences – These loans cannot be used for purchasing investment property or second homes.
- You must pay a VA loan funding fee – The VA imposes a fee on these loans to fund the program. The fee can be rolled into the loan amount. Veterans who have service-related disabilities are exempt from paying this fee. The funding fee increases each time you use the VA home loan funding program.
- Sellers may not agree to a sale with VA loan – A number of misconceptions regarding VA home loans have contributed to seller reluctance to enter the application process. However, sellers may be required to pay some of the closing costs, and this expense may put off some sellers.
- Loan limits and overlays may apply – The VA home loan program does not impose limits on home loans. However, private lenders may have additional requirements, called overlays, in regard to loan amounts. These requirements help to ensure that the lender maintains its favorable record with the VA.
- VA loans do not guarantee construction defects – Approval of the loan neither guarantees that the property is free of defects, nor can it compel the builder to correct any problems with construction. However, it can suspend the builder from the VA program.
- The VA program does not provide for legal services, if necessary – Any legal action against the builder or previous owner is the responsibility of the buyer.