Pros and Cons of VA Loans
Veterans Affairs, or VA, loans have been around for over 70 years.
This loan program is one of the rewards service men and women get to take advantage of for their valiant service to our great country. It makes homeownership a tangible goal for many who would otherwise not be able to afford to buy a home. Over 22 million people have benefitted from VA loans since their inception in 1944.
Active duty military personnel, veterans, and their families can purchase a home without down payments or excellent credit. This is particularly helpful for today’s families as lending companies enforce stricter lending requirements in response to the housing market collapse. There are many advantages to taking out a VA loan. There is also a bit of a downside. Here, we look at both, beginning with the upside.
No Down Payment Required
Conventional home loans usually require a substantial down payment. This can be as much as 20% in some instances. Many would-be homebuyers are unable to secure this amount of money. For qualified borrowers, VA loans remove the down payment obstacle. To find a loan with 0% down payment is rare. The VA loan is one of the last of its kind.
Government Loans Don’t Require PMI
PMI is Private Mortgage Insurance. For buyers who are financing more than 80% of the home’s value, PMI is required by the bank. This monthly expense is added on to the loan payment. Those who use the VA loan do not have to pay PMI because the VA loan is backed by the government.
Lowered Risk for Lenders
In the case of private loans, the bank takes on more risk. This can mean a less-competitive interest rate on the loan. Since the VA loans are backed by the government, lenders have a lowered risk and more flexibility. This means they can offer a more competitive rate than other types of loans.
Qualification Requirements
To get a loan, certain qualifications must be met. These qualifications have become stricter since the housing market crash. For many non-military families, this means that they will not be able to qualify or afford a home. VA loans are backed by the government, so they are less risky. The rules regarding qualification for getting a VA loan are not as stringent as a conventional loan. This makes homeownership easier and within reach for military families.
You Can Prepay Your VA Loan
Conventional loans can make it difficult to pay off the loan early. Prepayment penalties discourage homeowners from trying to pay off the loan sooner. VA loans, on the other hand, have no prepayment penalties. If you can make extra payments on your loan and pay it off early, you are free to do so. Homeowners with conventional loans don’t have this opportunity.
Debt to Income Ratio
VA loans allow a higher Debt to Income (DTI) ratio. When you apply for a loan how much you owe and how much income you have are both a big part of the equation. The 41 or less DTI that the VA allows for loans is much higher than that of conventional loans. Occasionally the VA will allow an even higher DTI for qualified buyers.
Thorough Home Inspections
Those who are getting a VA loan can expect the home to undergo an extensive inspection. It’s always advisable to have an independent home inspection when settling on a house to buy regardless of the type of loan you are taking out. The VA has minimum requirements for a home. The VA appraiser will need to inspect many things about the property. Among them will be heating and cooling systems, the roof, hot water system, ventilation and a few other items. The more extensive inspections required by the VA are beneficial to the homebuyer with a VA loan.
Refinancing
You have options for refinancing with a VA loan. These options allow you to lower the monthly mortgage payment or you can get cash back from the equity of your home. The refinancing loan is known as the Interest Rate Reduction Refinance Loan or Streamline Refinance. This loan is available for military families who have a VA loan. The VA Cash-Out Refinance is open to non-VA homeowners also. It allows homeowners to pay down their debt or handle other expenses by getting cash at the closing.
Recovery from Bankruptcy or Foreclosure
It can take several years for conventional homeowners to come back from bankruptcy or foreclosure. For those who qualify, they can apply for a VA loan two years after foreclosure or bankruptcy.
The Downside of VA Loans
For the buyer not having to make a down payment is a good thing; however, to the seller, it is often a red flag. No down payment signals to the seller that the buyer may not qualify for mortgage approval. Another potential problem is with the VA inspections. These inspections tend to be more rigorous than conventional inspections. Sellers may be concerned that the property may not pass.
Since VA home loans have a higher rate of appraisal issues, some sellers choose to avoid selling to VA homebuyers. Another big issue that can cause VA homebuyers to lose out is the fact that sellers often choose to go with buyers who make larger down payments and those with conventional FHA loans.
Getting a loan is a complex process. At Galaxy Lending Company we can help you through the complexities. Contact us for information on how you can qualify for a home loan.
