The VA Home Loan is one of the most powerful mortgage products available today. This loan is guaranteed by the United States Department of Veterans Affairs (VA) and is reserved exclusively for military members, veterans and their families. With amazing benefits ranging from a $0 down payment to no private mortgage insurance (PMI), the VA Loan allows eligible service men or women, veterans, and some military spouses the opportunity to buy a home using advantages only available to those serving or who have served in the United States military.
Pros/Cons
For veterans and military families, the VA Loan is one of the best loan options, especially because of the benefits available that other loan products don’t offer. Below we’ve broken down the pros and cons of the VA Loan so you can make the best financial decision for you and your family.
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Pros |
Cons |
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$0 down payment |
VA Funding Fee |
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No private mortgage insurance (PMI) |
Funding Fee increases after first time use |
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No credit score or DTI (debt-to-income) requirements |
Some exclusions apply on type of house |
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Highly competitive interest rates |
Potential for a loan that exceeds the market value of the house |
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Multiple strong refinance options |
Not all agents and sellers know how the VA Loan works |
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Closing costs are often lower than FHA and Conventional loans |
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No penalty for paying off the loan early |
VA Home Loan Pros Explained
$0 down payment and lower closing costs - the VA Loan is one of the only loans available that doesn’t require a down payment for buyers which makes closing costs lower than other traditional home loan programs. Since the funding fee can be rolled into the total amount of the loan, the financial commitment up front is often significantly less than other loan products.
No PMI - a lot of lenders add private mortgage insurance to loans where the borrower doesn’t put 20% of the purchase price down at closing and can hike up monthly mortgage rates until that 20% is paid off. Regardless of the amount a borrower brings to closing with a VA Loan, there is no PMI, which makes monthly payments lower and helps veterans and military families save big.
More credit and DTI ratio flexibility and highly competitive interest rates - because the Department of Veterans Affairs guarantees VA Loans regardless of credit scores, lenders often accept lower credit rates, have more relaxed debt-to-income (DTI) ratio requirements, and offer some of the best interest rates available on the market, making the requirements more flexible than traditional loan products.
Multiple strong refinance options - the IRRRL (interest rate reduction refinance loan) and the cash-out refinance loan are some of the best refinance options available and offer flexible options to homeowners while still providing the unparalleled benefits of the VA Home Loan.
No penalty for early payoffs - borrowers who prepay their loan prior to it coming to full term do not face a financial penalty like some other loan products.
VA Home Loan Cons Explained
VA Funding Fee - in order for the Department of Veterans Affairs to continue funding the program that backs VA Loans, they add a mandatory fee to each loan that borrowers can either choose to pay up front or opt to have tacked on to their total loan. The amount varies depending on the loan product and may be waived in certain circumstances like if you have a Purple Heart, a service-related disability, or are a surviving military spouse.
Funding fee increases - veterans and military families are able to use the VA Loan more than once, but after the first time use, the funding fee increases. It is possible to lower this fee if buyers choose to make a downpayment and certified lenders can help borrowers determine what their rate will be.
Some exclusions apply - the VA Loan is only intended as a loan for primary residents. This means that second homes, investment properties, and other types of homes that are not intended to be lived in full-time are excluded with the exception of a VA IRRRL refinance. The VA loan is also not generally useful for flipping homes or for homes that need major repairs done. The VA loan guidelines require that a home meet certain minimum property requirements and that the home be safe and sound to live in at the time of closing on the home. If you are interested in renovating your home with a VA Loan, see VA Renovation.
Potential for a total that exceeds the market value - because borrowers need to factor in funding fees with VA Loans, the total cost of the loan may exceed the market value of the house.
Not everyone knows about the VA Loan - lenders and real estate agents who are experts in working with veterans and military families know the ins and outs of the VA Loan and the paperwork and process required by the Department of Veterans Affairs. For agents who are more familiar with traditional loan products, the VA Loan may be a bit foreign which could be a potential disadvantage during the home buying process. It’s yours and your loan officers job to help educate unknowing agents of the awesome benefits of the VA loan program.
Cost & Fees
Like any other loan product on the market, VA Loans do have some costs and fees associated with them, but the benefit is that many of these can be bundled into the loan and do not need to be paid at closing. Keep reading to learn more about the funding fee and any other closing costs you may need to be aware of with VA Home Loans.
VA Funding Fee
Funding fees are one-time costs that are paid directly to the Department of Veterans Affairs and are rolled into the loan if you choose. All fees collected by the government are saved so VA Loans remain available to service members. If you were to default (stop making payments) on your mortgage, the VA would pull from the Funding Fee coffers to offset the bank or lender's losses. The government guarantees up to 25% of VA Loans (AKA the offset). This guarantee lowers the risk of offering VA Loans to military members and service members without down payments and allows them to finance their homes completely.
In order to pay the funding fee, buyers have two options. One option is to finance the fee and include it in the full amount of the loan in order to pay it off over time (this is the most popular option for buyers). The second option is to pay the fee in part or in full at closing as part of closing costs.
Cost of Funding Fees
The price of the funding fee is directly related to the number of times a veteran has used the VA loan, how much (if any) of a down payment the veteran is applying to his/her loan, and whether or not the veteran has a service connected disability rating of 10% or more. Below is a chart break down of when the funding fee applies
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If your down payment is... |
Your VA funding fee will be... |
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|---|---|---|
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First Use |
Less than 5% |
2.15% |
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5% or more |
1.5% |
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10% or more |
1.25% |
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After first use |
Less than 5% |
3.3% |
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5% or more |
1.5% |
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10% or more |
1.25% |
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Veterans with a disability of 10% or more |
Any |
0% |
Additional Closing Costs
Like many other loan products, there are a few potential closing costs that will likely be incurred with a VA Loan. Even though some of these costs can be substantial, they are not all incurred by both the buyer and the seller. Here’s a snapshot of some of the most common closing costs and who is responsible for paying them.
Closing costs typically paid by the seller
- Commission for real estate agents: this is the amount a realtor makes from negotiating the sale and is often 5-6% of the purchase price.
- Transfer taxes: these fees are paid when the title passes from the seller to the buyer.
Closing costs typically paid by the buyer
- VA funding fee: fee paid directly to the Department of Veterans Affairs
- Loan origination fee: lender fee that covers origination, processing, and underwriting fees.
- Discount points: a fee associated with rates lower than the par rate of the day. A par rate would be the rate with no discount points or lender credits associated with it.
- VA appraisal fee: valuation of property document completed by a certified appraiser.
- Home inspection: these inspections are done to thoroughly check the state of the property before the sale is final.
- Title insurance and fee: this fee goes towards the attorney or title company who checks the title to make sure there are no liens or other encumbrances. Insurance protects the buyer in case there are any issues with the title.
- Taxes: This would be any applicable real estate taxes due to the county where your home is located. Your lender will build out your impound account with at least 6 months of taxes to be stored away for when the tax bill comes due.
- Insurance: Your lender will collect at least 12 months of homeowners insurance (also known as hazard insurance)to be paid to your insurance provider of choice.
Investing & Tax Incentives
In addition to a $0 down payment and no PMI, the VA Home Loan has some potential tax benefits and investment incentives that can be a real game changer. Let’s first jump into the ins and outs of investing with the VA Home Loan.
Can VA Home Loans be Used as Investment Tools
With strong benefits and little to no money due at closing, it seems the VA Home Loan would be ideal for investment properties, but there are a few limitations to keep in mind. First, the Department of Veterans Affairs set up the VA Home Loan as an ‘owner-occupied’ loan. This means that the veteran must intend to occupy the home for at least one year. There are certain exceptions to the rule that can be applied either during the occupancy or before ever occupying the home that would allow the veteran to not have to occupy the home for at least one year.
- If the homeowner is on active duty and receives orders to relocate to another duty station
- If the homeowner is on active duty, the service members family can occupy the home on his/her behalf
- General life changes that would make it not beneficial for the veteran to occupy the home any longer (I.e. getting married, having children, family moving in etc..)
Besides that after that year is up, homeowners are free to move and can rent the home and use it as an investment property. The VA Loan benefits are able to be used more than one time, following a few simple rules.
- Restore the entitlement: This can be done through a refinance or by selling the house. Refinancing into a conventional loan from a VA loan is the best way to have multiple homes using the VA loan.
- Using 2nd tier entitlement/ remaining entitlement: This method revolves around using the remainder of your entitlement in relation to the county loan limit. If the county loan limit in the county you are buying in is $500,000 and you used $200,000 on your first home, then you would have ~$300,000 in remaining entitlement for a new VA loan.
Another great benefit for investments with the VA Loan is that future rental income can be used as qualifying income to help determine debt-to-income (DTI) ratios. In order to prove that the rental income should count towards one’s DTI, they must fall into one of two categories. First, the lease for the property will need to be signed by the renter or there needs to be proof that a property management company is in charge of the house. Second, the homeowner can prove they have a two-year track record as a landlord through tax returns.
Tax Deductions with the VA Loan
A major advantage of the VA Loan is that there are some pretty significant tax deductions that homeowners can take advantage of. The most powerful include:
Mortgage interest: most borrowers can deduct the interest they paid on their loan over the past year.
Discount points: borrowers who use discount points to lower their interest rates can deduct these on their annual taxes.
Funding fees: VA funding fees are often tax deductible regardless of if they are paid all at once or over the life of the loan.
Origination fees: fees that the borrowers had to pay to cover the underwriting, origination, and processing of the loan can be deducted.
Expenses incurred from moving: if the move was because of a PCS or military order, a portion of the expenses incurred during moving can be deducted. In some cases, moving expenses not ordered by the military may also be deducted.
Additional exemptions for disabled veterans: there are many additional benefits reserved for disabled veterans and those who have received the Purple Heart. These can include some amazing benefits like property tax exemptions and funding fee exemptions and skilled lenders can help borrowers navigate these.
Loan Comparison (VA vs. FHA vs. USDA vs. Conventional)
Choosing the loan product that works best for you is incredibly important and the ideal way to do so is to understand the differences between each of the major loan products. Understanding the ins and outs of the main mortgage options can be confusing, which is why we put together a quick guide to help you make an informed decision.
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VA Loan |
FHA Loan |
USDA Loan |
Conventional Loan |
|---|---|---|---|
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$0 down payment |
3.5% minimum down payment |
$0 down payment |
3% minimum down payment (PMI incurred on loans unless buyer puts 20% down) |
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No minimum credit score required by the VA and relaxed requirements by lenders |
580 minimum credit score with a 3.5% down payment and 500 minimum credit score with a 10% down payment |
Typically 640 credit score is required, but this varies by lender |
620 minimum credit score |
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VA funding fee (typically between 1.25% and 3.6%) |
1.75% PMI up front and annual fees |
No PMI required, but there is a 1% upfront guarantee fee (can be included in the total loan) |
No PMI required up front, instead it is added to monthly fees until 20% of loan is paid |
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Reserved exclusively for veterans, service members, and military families |
Good option for borrowers with lower credit scores or high DTI ratios |
Only available in certain areas so they’re good options for rural homebuyers and buyers with low incomes. |
Great option for borrowers with good credit and a healthy savings |
To select the best loan for you, take a closer look at the qualifications required for each loan, its benefits, and its fees. Lenders who are knowledgeable about each of these different loan products and your situation can also help you determine what works best. Once you feel confident in your decision, you can get started on the fun part, searching for a home!