When Veterans Should (and Shouldn’t) Use a VA Loan

If you’re a veteran who’s thinking of purchasing a home or refinancing the home you have, you may want to consider a VA loan instead of conventional financing. This government loan program was created to help members of the armed forces, veterans, and eligible surviving spouses become homeowners.

VA loans come with plenty of perks. According to the U.S. Department of Veterans Affairs, VA loans used to purchase a property come with competitive interest rates and don’t require a down payment or private mortgage insurance (PMI). Cash-out refinance loans come with equally generous terms, except they let you take out cash to pay down debt or fund other financial goals.

Another popular VA loan program, the Interest Rate Reduction Refinance Loan (or IRRRL, also called the Streamline Refinance Loan), lets you refinance your current VA loan to a new loan with a lower interest rate with no appraisal or credit underwriting. There are also special VA loans for Native American veterans and disabled vets.

At the end of the day, all VA loans offer special terms to veterans, and may be more affordable than other options.

When You Should (and Shouldn’t) Use a VA Loan

To qualify for a VA loan, your length of service or service commitment, duty status, and character of service are considered. Once you determine that you’re eligible, it’s up to you to decide whether to work with the VA or pursue traditional financing for your home or refinance.

Unfortunately, this is where things get tricky, since not all realtors or even mortgage brokers work with VA loans enough to understand them. Kathy Partak, a realtor and former mortgage broker from California, says that she has seen real estate agents talk eligible buyers out of using a VA loan when doing so would have been in their best interest.

“They tell veterans that sellers will not accept their offer because the seller is expected to pay everything,” she said. “There are a couple of things that veterans can’t pay for, and there are so many ways to write an offer to take care of a seller and make the transaction fair and more than equitable.”

While real estate agents may be unnecessarily wary of working with buyers using this option, some loan originators may have their own reasons for steering consumers away from VA loans as well. We reached out to experts to find out when a veteran should — and shouldn’t — consider a VA loan. Here’s what they said:

When a Veteran Should Use a VA Loan

Before we dive in, let’s go back over the benefits of VA loans. One of the biggest is the fact that borrowers don’t have to have a down payment, nor do they have to pay private mortgage insurance (PMI). Since PMI can cost around 1% of the mortgage amount every year, not paying for this coverage can easily save you hundreds of dollars per month.

“VA loans are also more forgiving for people who have had some credit missteps in the past,” says Patton Gade, Phoenix branch manager at BBMC Mortgage. “The waiting period for a previous bankruptcy or foreclosure is much shorter for a VA loan.”

With these benefits in mind, here are some of the instances where an eligible consumer should absolutely consider a VA loan:

• You don’t have a down payment: “If a veteran is purchasing a home and doesn’t have the traditional down payment available to them, the VA loan will allow you to purchase with no down payment,” says Gade. This could help a buyer get into a home they couldn’t buy otherwise, which can help them start building equity faster.
• You don’t want to pay PMI: The single most important benefit to a VA loan is that a veteran can purchase the home at 100% financing with no private mortgage insurance, said Partak. “Not only is private mortgage insurance incredibly expensive to set up, it also adds hundreds of dollars to the monthly payment.” Keep in mind, however, that VA loans usually come with an upfront funding fee between 1.25% and 3.3% of the loan amount based on your loan details and level of service.
• You have credit issues. According to Andy Elder of First Securities Mortgage in Michigan, VA loans are more forgiving if you’ve made some credit mistakes in the past. Generally speaking, you need a credit score of around 620 to qualify.
• You want low closing costs. Corey Vandenberg, a mortgage banker from Platinum Home Mortgage in Lafayette, Ind., says that closing costs on VA loans tend to be lower than those on conventional financing, partly because some of them are regulated. Also, the seller can credit back up to 4% of your loan back to you to cover closing costs.
• You want to refinance to secure a lower interest rate. If you have a VA loan already but could qualify for a lower interest rate, it almost always makes sense to use an Interest Rate Reduction Refinance Loan (IRRRL). These loans don’t require an appraisal or credit underwriting, and the closing costs can be wrapped into the loan.
• You’re a disabled veteran. Disabled veterans receiving compensation for a service-connected disability are often much better off with a VA loan compared to traditional financing, because they’re exempt from having to pay the upfront funding fee.

In short, a VA loan is good for most eligible borrowers since costs are low, PMI is not required, and credit score requirements may be more manageable for borrowers who’ve had credit mishaps in the past. For that reason, almost any veteran who can qualify would be better off with a VA loan provided the property they want to buy is eligible.

When It Doesn’t Make Sense to Use a VA Loan

Still, the experts we spoke to said there are some scenarios where a VA loan would be less advantageous than traditional financing. You may want to pursue a conventional mortgage if:

• You’re using a VA loan for the second time: Because the VA funding fee is based on several factors, including whether you’ve had a VA home loan in the past, it can make sense to go with traditional financing for a second property purchase. Gade says that, if the veteran does not have a VA disability and has used a VA loan in the past, there will be a 3.3 percent funding fee from the VA. “This may offset any of the benefits of using a VA loan and may make a conventional loan more attractive.”
• You’re buying an investment property. Gade notes that VA loans cannot be used for investment properties or second homes.
• You’re buying a property that isn’t eligible for a VA loan. Not all properties are eligible for VA loans, although all single-family homes are or should be eligible, notes Elder. “Some condos will not allow them because they are similar to FHA loans in that they need a special VA approval,” he said. “If they aren’t on VA approval list, a lender can request or get them to be, but this is a challenging process and one that takes a lot of time.”
• You have a 20% down payment. If your down payment is big enough to avoid paying PMI already, you should definitely compare rates and terms on both VA loans and conventional home loans. That’s because the upfront funding fee for VA loans could make the loan more expensive overall.
• The home you want to buy is too expensive. VA loans come with limits that can make it difficult for veterans to buy in expensive real estate markets. These limits are determined by the county you live in and vary widely. The loan limit for a single-family home in all counties of Alabama, for example, is $453,100, while the limit for single families in every county of Alaska is $679,650.

The Bottom Line

At the end of the day, most borrowers eligible for a VA loan would be smart to consider it. With more lenient credit requirements, low interest rates, and no down payment requirement or PMI, what’s not to like?

But as you move through the mortgage process and start comparing your options, experts say you should make sure you’re speaking to someone who has a wide breadth of experience with VA loans. This is important because not all loan officers have experience with all types of funding.

Gade, who is a military veteran himself, says that both his loan originator and realtor advised him not to use a VA loan when he purchased a home as a young Army officer.

“In retrospect, I know that was bad advice,” he said. “VA loans have gotten a bad rap over the years, mainly because people don’t understand the process.  In reality, it’s no more difficult than a conventional or FHA loan, and often times it can be easier.”

Consider all the costs, interest rates, and the monthly payment for all your loan options, says Gade. “You should also take into consideration your short- and long-term plans,” he says.

By crunching the numbers and working with professionals who are knowledgeable about VA loans, you can figure out which path to choose.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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