Thinking of using a VA loan? Consider these VA loan pros and cons

VA home loans can be the most advantageous financing option for a veteran looking to buy or refinance a home, but some sellers have shied away from them in recent years because they often come with smaller down payments and less upfront money. Seller suspicion can make it harder for veterans using VA loans to get their offers accepted, but sellers need not worry.

VA loans offer as many benefits to sellers as they do buyers — like higher closing rates, increased purchasing power, and more lenient underwriting. If you’re thinking about using this type of financing to buy a house or accepting a VA loan offer on your home sale, weigh these VA loan pros and cons so you know what to expect.

What is a VA loan?

VA loans are a type of government backed home loan available to qualified veterans, administered by the Department of Veterans Affairs (VA). While the VA backs these loans, they are issued from VA-approved lenders like select banks, credit unions, and mortgage companies. Through this system, the VA guarantees a loan — meaning that if a borrower defaults, the VA will refund a portion of the outstanding balance to the lender.

This guarantee allows lenders to provide great terms for these loans geared toward veterans. Most VA loans come with the following benefits:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

Because of such outstanding terms, veterans, active-duty military, and surviving spouses must qualify for a VA loan. For active duty, that means 90 consecutive days of service. For National Guard or Reserve members, it’s 90 consecutive days if you’re activated, or six consecutive years if you aren’t. For veterans, the required service times vary based on when you served.

Are VA loans good?

VA loans are often the best option for qualified buyers, especially as compared to conventional loans, because of their low interest rates and little-to-no down payment requirements. They also benefit sellers by closing at a higher rate than other types of mortgages and giving homebuyers more purchasing power.

Pros of a VA loan for buyers

VA loans offer a long list of benefits for buyers, including:

Low-to-no down payment required

An ideal down payment for conventional mortgages is 20% or more. Those who can’t afford a down payment of that size have to purchase private mortgage insurance (PMI) — a policy that only protects your lender and which can add thousands of dollars to your homebuying costs over the lifetime of your loan. 

VA loans, however, allow homebuyers to put as little as 0% down without having to buy PMI. This can save homebuyers hundreds of dollars on their monthly mortgage bills and help them purchase a home sooner, since they don’t need to worry about coming to the table with a large sum of cash. 

Low interest rates

VA loans also offer lower interest rates than both fixed-rate or adjustable-rate mortgages. Usually, it’s about a half-percent lower. Again, across a 30-year mortgage that could mean thousands in savings.

→ Learn more about what affects mortgage rates

No minimum credit score required

Additionally, the VA doesn’t impose a minimum credit score requirement on borrowers, and accepts a higher debt-to-income (DTI) ratio. Many lenders will require a FICO score of 620 or higher, however, so buyers with low credit scores may find their options limited. Still, it’s easier to qualify for than a conventional loan.

Lower closing costs

Finally, VA loans tend to have lower closing costs since the VA limits the origination fee a lender can charge to no more than 1% of the mortgage.

Pros of a VA loan for sellers

VA loans are obviously beneficial for buyers, but their advantages don’t stop there. VA loans offer sellers a number of advantages, too:

More lenient underwriting

VA loans have less stringent underwriting criteria. Because the government guarantees VA loans, VA-approved lenders approve more applicants compared to conventional lenders. So, if a seller has two comparable offers, someone with a VA loan may have a much easier time qualifying for a loan (even for an eventual higher amount) than someone who is going through conventional lenders.

Higher close rate

VA loans also close at a higher rate than conventional ones despite having a few extra steps. Sellers, then, can feel confident that closing will go through without a hitch when working with a VA home loan buyer.

More buying power

The increased purchasing power allotted to buyers through VA loans can also benefit sellers. 

For example, a buyer using a conventional loan would need at least a 3% down payment for a $400,000 home, or $12,000. If they wanted to increase their offer to $450,000 to outbid another buyer, they would have to increase their down payment to $13,500. That required down payment can sometimes be prohibitive and prevent conventional buyers from upping their offer amount.

A buyer using a VA loan, though, wouldn’t have to worry about the down payment. As long as the bank agrees, a VA buyer could raise their offer to $450,000 without changing the amount of money they put down — even if that amount was $0. In turn, this helps sellers by allowing serious buyers to put the most competitive offers forward.

Disadvantages of VA loans

VA loans do come with some drawbacks, though, like specific property requirements, a unique appraisal process, and their own funding fees. These can be deal breakers for some buyers and sellers, but for those who are able to work around these caveats, VA loans still offer some of the most competitive rates to qualified buyers.

Cons of a VA loan for buyers

Like anything in real estate, VA loans are not perfect. Here are some of the drawbacks for buyers:

Funding fee

First, despite not paying for mortgage insurance, you will pay a funding fee at closing. If you’re taking out your first VA loan and not making a down payment, the funding fee is 2.3% of the total amount you’re borrowing. If you do put money down or you’ve gotten a VA loan in the past, the fee may range from 1.4% to 3.6%. Closing costs may be less, but they’re not absent.

Only available for primary residence purchases

VA loans may also only be used for a primary residence, not for an investment property or vacation home. For most people, that isn’t a big deal, but if you’re looking for a wealth creation opportunity, a VA loan won’t work for you.

Less flexibility

VA loans also offer less flexibility in the purchasing process. You can’t waive contingencies like the home inspection or appraisal. While some conventional buyers waive these rights to make their offer more attractive to sellers, VA home buyers cannot do so.

→ Learn about VA loan credit requirements

Cons of a VA loan for sellers

While selling your home to someone using a VA loan isn’t the best option for most sellers in a very competitive market when you’re fielding multiple increasing offers, in a normal market, there aren’t many cons. Still, you should understand how basic elements of VA loans work so you’ll have an easier time selling.

Minimum property requirements

First, the VA has Minimum Property Requirements (MPRs). It mandates that properties have baseline levels of habitability, meaning they must be safe, sound, and sanitary. To meet these objectives, the VA has MPRs that all homes must meet in order to qualify for a VA loan. Again, most sellers won’t have to worry about this as the typical buyer doesn’t want to buy a shanty for a primary residence. Still, it’s important to know the VA will inspect a home.

VA appraisal

Likewise, the VA also completes an appraisal for any home that a VA loan buyer wants to buy. In addition to MPR compliance, the VA appraises the property to ensure it’s selling for a fair price and the buyer won’t default on the loan. In a competitive market, this might be a pain for sellers. In a normal market, it’s standard operating procedure.

→ Learn about VA appraisal and inspection requirements

VA loan alternatives

If you don’t qualify for a VA loan, you’re not out of options. Consider the following options the following types of mortgages instead:

• Conventional loan: As we’ve explored in this piece, conventional loans don’t have the same perks that VA loans do, but with so many options on the market, you can search for a good loan that works for you.
• FHA loan: FHA loans are backed by the government and require an upfront mortgage insurance premium, sort of like the VA loan’s funding fee. You will also pay a mortgage insurance premium, however, and you may have a higher interest rate.
• USDA loan: USDA loans require zero down payment but are only for borrowers in designated rural areas. There are income and property restrictions and they only support 30-year fixed-rate financing.

Is a VA loan right for you?

VA home loans have gotten a bad rap in a seller’s market. But as the housing market slowly normalizes, they’ll continue to be a useful tool for veterans and active service members looking to buy a primary residence. While sellers may prefer the flexibility of conventional home loans in a hot market, VA loans can actually be more appealing in a normal one. In the end, when using a VA loan, buyers and sellers can both benefit.