Pros and Cons of the VA Loan: What Are They?

I’m here to help give you my honest opinion, having dealt with VA loans, conventional loans, and seeing it from multiple different angles. My name is Evan Kaufman, your VA loan originator. Here are a few things that you want to know about the pros and cons of the VA loan.

Background About Me

Before we dive into VA loans, here’s a quick background on myself. I was in the military, serving in the Air Force for several years. After I got out, I built a real estate brokerage, so I’ve seen deals from the perspective of a real estate agent. Then, building a mortgage company, I’ve experienced things as a real estate loan originator—specifically working heavily with VA loans and conventional loans. With that experience, there are some pros and cons that I’d definitely outline regarding VA loans.

Obviously, my marketing shows that I’m a VA loan originator, which is what we focus on. Seventy percent of our business is with active duty military, and 90% of those loans are VA loans. So, it’s our “bread and butter.” While I’m very pro-VA loan, there are still cons, and I’m more than happy to point those out. In some situations, a VA loan might not be the best loan type for you. You just need to be aware that some perceived issues with VA loans might not really be issues at all.

Pros of the VA Loan

Let’s start with some of the pros. If you’ve watched any of our courses, like the VA Crash Course 101, I break down the big three advantages:

1. No Down Payment: Because the VA guarantees these loans (similar to an insurance policy), you can make a down payment of 0% if you choose, effectively financing 100% of the loan.

2. No Private Mortgage Insurance (PMI): If you put less than 20% down on a conventional loan, you typically get hit with private mortgage insurance—a monthly penalty. FHA loans have mortgage insurance premiums that are almost permanent. With a VA loan, even with less than 20% down, you won’t face PMI.

3. Lower Interest Rates: VA loans usually have lower interest rates due to the VA guarantee. However, some institutions don’t differentiate rates between conventional and VA loans, seeing VA loans as more challenging. But, mortgage companies often get paid better for VA loans, which should translate to more competitive rates.

Additionally, the VA loan offers an Interest Rate Reduction Refinance Loan (IRRRL) or a Streamline Refinance. This allows you to refinance with no appraisal, no income documentation, and, in some cases, without a hard credit check, as long as rates have come down by at least half a percent.

Even in situations like job loss or being underwater on your home, you can still use the VA Streamline Refinance. This flexibility isn’t available with standard conventional refinancing.

Cons of the VA Loan

Now, let’s address some of the cons:

1. VA Funding Fee: The VA charges a funding fee at closing, ranging from 1.25% to 3.3% of the loan amount, depending on factors like down payment, frequency of VA loan usage, and existing VA loans. The good news is that this fee is waived if you receive VA disability compensation of 10% or greater. If you’re eligible for this waiver, the VA loan is a no-brainer, as it becomes even more cost-effective.

2. Less Competitive on 15-Year Mortgages: VA loans tend to be less competitive when compared to 15-year conventional loans, where the rates can be quite similar. If you have high credit scores, are putting a good down payment, and plan to use a 15-year mortgage, a conventional loan could edge out the VA loan due to the lack of a funding fee.

3. Stigma from Sellers: Unfortunately, some sellers and real estate agents may still see VA loans in a negative light, based on outdated perceptions. These perceptions include slower processing or tougher appraisal requirements. While the VA loan has improved significantly over its 80-year history, including recent enhancements like no county loan limits and better appraisal processes, the stigma still exists in some areas.

4. Minimum Property Requirements (MPRs): VA appraisers must ensure the property meets habitability standards, which can sometimes lead to repair requirements from the seller. While this benefits the buyer, it can also be seen as an obstacle by sellers.

Is the VA Loan Worth It?

In most cases, the VA loan is the best option, especially when considering the lower down payment requirements, no PMI, and lower interest rates. It’s typically the right loan option about 85-95% of the time. However, if you’re planning on making a large down payment, have an 800+ credit score, and are subject to the VA funding fee, a 15-year conventional loan could be more advantageous.

If you have questions or want a personalized analysis, feel free to reach out. My name is Evan Kaufman, your VA loan originator. I hope this information helps you succeed in purchasing your home with a VA loan. Take care!