Understanding the Pros and Cons of VA Loans: A Brief Guide

VA Loans have become increasingly sought home financing option among veterans and active servicemembers - thanks to easy qualification and down payment requirements. Guaranteed by the US Department of Veterans Affairs (VA), these flexible loans come with significant financial benefits that are not available in standard mortgage programs available for civilians. However, like every other loan option, there are certain pros and cons of VA loans, and therefore, wishful lenders need to be aware of both, before they file their application. Let’s take a look.

Pros of VA Loans

1. Zero Down Payments

The VA home mortgage requires no down payment; saving consumers minimum 20 percent of the loan value as compared to a traditional loan. The ultimate goal of this loan program is to help American Military Veterans or their spouses, in the event of their death from a service-related cause, to receive long-term financing. They need not pay any down payment in the lack of private financing.

2. No Prepayment Penalty

Conventional home loan programs may involve unfavorable terms such as prepayment penalties while VA loans don’t have such terms. As a home loan borrower, you can pay off your VA loan early without any fear of prepayment penalty.

3. No Closing Costs

Besides the basic loan origination fee, the VA home loan borrower need not pay any closing costs. Some of the closing costs that borrowers need not pay include lender document fees, recording fee above $17, transaction coordinator fee, notary and broker fees, and termite inspection fees. The seller of the home can pay all of the closing costs and prepaid penalties; amounting to six percent of the sales price.

Cons of VA Loans

1. Mandatory Funding Fee

VA Loans carry a mandatory funding fee that borrowers need to pay directly to the US Department of Veterans Affairs. The VA funding fee refers to a set fee that is charged on every purchase loan or refinance. This fee varies if the military veteran already has a VA loan and making down payments for the same. Borrowers with service-related disabilities need not pay this fee.

2. Limited Number of Sellers

There may be a few sellers ready to sell their homes to VA home loan borrowers. One of the reasons behind these limited number of sellers is the stringent regulations of the department of Veteran Affairs. Another reason is buyers who are refinancing with a VA Loan may choose not to pay any closing costs, thereby forcing sellers to pay for them.

3. Funding Fee Increase

If you use your eligibility for a VA loan more than once, be prepared for an increase in the funding fee. Although you can use and reuse your VA mortgage benefit, after the first time, doing so becomes dearer for you. Let us take an example to understand this better. If you are a military veteran who buys a home with zero down payment and uses your home loan benefit for the first time, your funding fee is 2.15 percent. The funding fee, however, will be 3.3 percent if you use your home loan benefit for the second time.

Conclusion

If you qualify for a VA home loan program, you need to understand that the advantages of this type of loan greatly outweigh its disadvantages. If you are yet unsure about applying for this smart mortgage, it is prudent to get in touch with mortgage experts. However, before you hire an expert, make sure that you conduct a thorough research to verify their capabilities.