What are VA loans? What are pros and cons?
With so many mortgage products available on the market, the Veteran’s Affairs have developed a specific type of loan designed to offer long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry).The VA loan program offers advantages to our active military and veterans, who have an increasingly more difficult time building the credit and assets necessary to move forward with conventional home financing. Although there are a few disadvantages, the option should be considered based on each particular situation.
VA loans are designed for military personnel, veterans, and military families. The list of those who are eligible for this home-buying military benefit include:
- Active-duty personnel
- Reserve members
- National Guard members
- Some surviving spouses
In order to qualify, you must have suitable credit, sufficient income, and a valid Certificate of Eligibility (COE). The COE verifies to the lender that you are eligible for a VA-backed loan. You can apply for your COE on-line, via mail or through your lender.
The VA loan can be used to buy a home (including townhouse or condominium unit in a VA-approved project), to build a home, to simultaneously purchase and improve a home, to improve a home by installing energy-related features, or to buy a manufactured home and/or lot.
On manufactured homes, there must be land included with the home and the home must be at least 24 feet wide. The manufactured home must have an identifiable tag. The home must also be used for your own personal occupancy.
Advantages include the following:
- No down payment. FHA requires a 3.5% down payment while a conventional mortgage requires at least 5% down payment, however qualified veterans may obtain a VA loan without making any down payment.
- No private mortgage insurance. FHA requires both an upfront and monthly mortgage insurance, while conventional borrowers putting down less than 20% are also required to pay private mortgage insurance, while a VA loan does not require a monthly mortgage insurance.
- Low interest rates – compared to conventional rates, VA rates are traditionally lower.
- Relaxed credit requirements – the credit requirements are much looser and forgiving than conventional;
- Credit scores as low as 620 may qualify for VA loans
- Use your basic allowance for housing toward your monthly mortgage costs
- Limits on closing costs the VA caps what fees veterans can be charged.
- No pre-payment fee or penalty;
- Seller contributions up to 4% are allowed;
- Ability to finance the VA Funding Fee,
- Lifetime benefit – it is NOT a one-time benefit, but can be used multiple times.
While there are not many disadvantages, the following should be factored in when deciding which loan is best:
- VA lenders may have more strict and tighter guidelines than set out by the Department of Veteran Affairs;
- Although there is a lifetime benefit, the funding fee increases if eligibility is used more than once.
- Sellers don’t always like the VA loan as sometimes the process can be a little lengthier and the VA requires homes to be move-in ready while any problems with the property generally have to be corrected by the seller before a loan closes.
While purchasing or refinancing a home can be overwhelming at times, it should be a pleasant experience overall and the way to ensure that is to go with a lender whom you can trust and that will equip you with all available resources to move forward.
At Fellowship Home Loans, we treat every borrower as if they are a family member. Our goal with everyone is to arm him or her with information, tools and support to ensure an informed decision and a happy ending.