Posted on: September 19, 2018
There are plenty of different mortgage options to pick from. After choosing a product, home buyers then have to decide on how large a downpayment they should make, and they’ll be shopping for lower mortgage rates as well.
Available to veterans, the VA loan is just like any other mortgage product in that it has its pros and cons. But there are traits specific to the VA loan that can make it seem better than other products – and, at times, potentially worse.
Prior to applying for a mortgage, it’s best to understand some of the main reason why home buyers do or don’t choose to use the product.
Affordability is one of the biggest hurdles for modern home buyers. With a VA loan, affordability can be much easier.
The VA home loan allows for 100% financing, meaning home buyers don’t need to make a downpayment. This is possible through the VA’s guarantee of the program.
But just because VA loans don’t require financing doesn’t mean home buyers can’t make a downpayment. Most VA home buyers will make a downpayment to lower their monthly payments. With VA loan financing, there’s plenty of flexibility.
Another factor affecting home affordability is the rate attached to the loan. Mortgage rates have been trending upward lately, and this pushes monthly payments higher.
The good news with VA loans is that VA rates are consistently lower than those attached to other products. But all mortgage rates are always changing, and while VA rates will usually be lower than other rates, they can still go higher. To get the best mortgage rates for VA loans, home buyers should keep track of rate changes.
Conventional and FHA loans require mortgage insurance if a downpayment of less than 20 percent is made on the loan. But the VA loan, which is guaranteed, doesn’t require any type of mortgage insurance, even with 100% financing. This further reduces monthly payments, making it easier to afford a home.
VA home loans are the most popular product offered by the VA, but they aren’t the only option. The VA offers two refinance: the VA cash-out refinance and the IRRRL. Both have their own set of benefits, including erasing mortgage insurance from an FHA or conventional mortgage and reducing your mortgage rate. With a VA cash-out refinance, homeowners can even take cash out of their equity and spend it on whatever they want.
Of all required aspects of the VA loan, the appraisal can be the most frustrating part for all parties involved. To guarantee the loan, the VA needs to know that homes meet their standards and are priced correctly. This means that they have fairly strict standards with their appraisal process.
While the VA appraisal can slow down the entire process – or bring the purchase to a halt – they shouldn’t scare home buyers away from the VA loan. A good VA agent should be able to help you navigate through the appraisal process with little to no stress.
One closing cost specific to the VA is the funding fee. This is a flat fee that is due at the time of closing, and the fee changes depending on how many times you’ve used the VA loan.
While the funding fee is a closing cost, home buyers are able to roll this cost into their loan. So, technically, this closing cost can be “avoided” at closing, although it will be factored into monthly payments.
There are plenty of horror stories surrounding VA loans, and these reach the ears of homeowners. Some homeowners looking to sell will try to avoid VA home buyers strictly because they’re concerned about the loan.
Of course, the loan going through will depend more on the buyer than the product. But homeowners are allowed to choose who they sell their home to, and some may pick a different, similar offer just because it isn’t VA.
Comparing loan products
All loan products have their benefits and drawbacks, so the cons of a VA loan shouldn’t prevent home buyers from taking advantage of the pros.
The biggest difference between VA loans and other popular products is that VA loans have strict eligibility beyond credit scores and DTI. This is how the program is able to offer benefits with relatively small drawbacks.
Those that have military experience but aren’t sure if they’re VA eligible can always check their eligibility.