If you’re eligible for a VA loan and are wondering if it is the best loan type for you, we’ve outlined some helpful scenarios below to help you understand your options and when a VA loan is best.
“Hi. I am eligible for a VA loan, now living in Missouri after leaving the military. My family says I should get a VA loan for my upcoming home purchase since no down payment is required. My realtor says sellers don’t like them. How do I decide which loan option is best for me?”
Firstly, thanks for your service. As you’re discovering, there can be pros/cons for various loan programs. Let’s look at both for VA loans:
VA Loan Pros
No down payment in most cases:
VA loans offer eligible veterans 100% financing, unlike other mortgage options. Sellers can also pay buyers’ closing costs, or even pay off some of their buyers’ debt, subject to guideline limits.
No monthly mortgage insurance costs:
VA loans also do not require mortgage insurance (unlike conventional loans with down payments under 20% or FHA loans). Why is this a big deal? Depending on loan specifics, including a host of factors such as down payment %, credit scores, purchase price, etc, the PMI on a conventional $300,000 purchase can be as much as $378/month (or more, in some cases!)
VA loans are also assumable, which can be a substantial benefit, especially for anyone buying a home secured by a VA loan originated during 2020-2022’s record low interest rates. Chris Maloney with BOKF writes, “Breaking that down across the three segments for how much of the universe is paying 3% or less on their mortgages as of the end of May, for conventional 30-year borrowers that comes to 32%, for FHA 30-year borrowers 21.9% and for VA borrowers 50.7%.” Now we know why assumability matters: Over half of all current VA loan holders have rates under 3%! If you’re a VA home buyer and manage to find a veteran-owned property for sale with current mortgage rates in the 2’s, you’ll save oodles (a technical industry term) on your new mortgage. How much?
On a $300,000 loan, using MortgageNewsDaily.com’s current average VA rate of 6.62%, the principal and interest (P&I) payment would be $1920/month. If you’re lucky enough to buy a home with an existing VA loan at 2.75% and assume that loan, your P&I payment (depending on how long the current mortgage has been in place) could be as low as $1251/month! If you’re selling a home with a VA assumable mortgage that’s substantially below current interest rates, it’s likely your potential buyers will offer more than on a similar home without a low rate, assumable mortgage.
Streamline refinance eligible: VA loans can also be “streamline refinanced”, a simple process compared with typical refinances. When rates drop, existing VA borrowers can reduce their interest rates without an appraisal or concerns about their debt-to-income ratios. There are HUD imposed restrictions (cannot refinance prior to making 6 months’ payments, must reduce interest rates by a minimum of .5%, etc), but overall, VA borrowers’ average rates are lower than conventional, FHA, or USDA borrowers.
VA Loan Cons
As your agent noted, some home sellers may be reluctant to accept offers involving a VA loan. The typical concern is that VA appraisals are more detailed than conventional loans, and the home seller must repair/replace any items the appraiser cites as not meeting VA requirements. A seemingly inconsequential item such as peeling paint on a deck might not matter to you, but if the VA appraiser cites it as a deficiency, the seller must remedy it (and appraiser return to verify the repair) prior to final loan approval.
We touched on “no mortgage insurance on VA loans” earlier, but there’s a caveat involved. VA loans require, in most cases, a “funding fee”, which is added to the loan balance. As with mortgage insurance, the amount of the funding fee depends on the transaction. Veterans with a VA disability rating (regardless of its degree) are exempt from funding fees, but those without will pay a 2.3% (of loan size) funding fee with down payments under 5% if they’re first time VA borrowers. “Subsequent Use” VA borrowers (those who’ve already bought a property using a VA loan, now buying another, depending on down payment) can face a hefty 3.6% funding fee, as shown on VA’s website: https://www.benefits.va.gov/HOMELOANS/documents/circulars/26-23-06-exhibita.pdf
Who should and shouldn’t utilize a VA loan?
In general, any eligible veteran with a VA disability rating would benefit the most from a VA loan, as would those who don’t have (or don’t care to make) a down payment. Veterans with “less than outstanding credit scores” also find VA loans more beneficial, since credit scores influence VA interest rates far less than on conventional loans.
Veterans who have down payment funds (particularly if 20% or higher), great credit scores, and low debt ratios should compare conventional and VA loan options, since they will be paying a VA funding fee that will be thousands of dollars. Home buyers in a highly competitive market (which areas aren’t these days?) often find sellers more amenable to conventional loan offers over VA offers, which is another reason to consider not opting for a VA loan.
As always, consult your mortgage professional for more exact details. They’ll be able to give you specifics and offer their recommendations.