VA Mortgage Pros and Cons
As added benefits, VA mortgage rates are usually lower than other mortgage programs and the VA program does not require borrowers to pay monthly mortgage insurance, both of which reduce total monthly housing expense for borrowers. On the other hand, the VA mortgage program requires borrowers to pay an upfront VA funding fee and the program imposes relatively strict borrower qualification requirements.
Borrowers should understand both the positives and negatives of a VA mortgage to determine if it is the right program for them. We review the full list of the pros and cons for the VA mortgage program below.
VA Mortgage Pros
No Down Payment Required
The VA mortgage program enables eligible military personnel and veterans to buy a home with no down payment. Saving money for a down payment can be one of the biggest challenges to buying a home, especially for people who earn a decent monthly income but who struggle to save money. By enabling borrowers to finance 100% of the purchase price of a home, the VA program makes home ownership more attainable.
Low VA Interest Rate
VA mortgage rates are typically 0.250% - .0500% lower than the interest rate on a regular mortgage and are among the lowest of all loan programs. The interest rate for a VA loan is lower for several reasons. First, the federal government guarantees 25% of the loan amount, which protects lenders against losses in the event that borrowers default on their mortgage. Second, military personnel tend to be more financially responsible and credit-worthy which also enables lenders to offer lower rates on VA mortgages. The lower interest rate on a VA mortgage reduces your monthly payment and possibly saves you thousands of dollars in interest expense over the life of your loan.
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No Ongoing Monthly Mortgage Insurance Fee
Unlike most low or no down payment mortgage programs, the VA mortgage program does not require borrowers to pay an ongoing monthly mortgage insurance fee. For example, the government-backed FHA mortgage program requires that borrowers pay an ongoing monthly FHA mortgage insurance premium (MIP) and most conventional mortgages require borrowers to pay private mortgage insurance (PMI) if you make a down payment of less than 20% of the property purchase price. FHA MIP and private mortgage insurance (PMI) are extra costs borrowers are required to pay in addition to their monthly mortgage payments. By not requiring monthly mortgage insurance, the VA mortgage program offers borrowers lower total monthly housing expense (mortgage payment plus property taxes, homeowners and mortgage insurance) as compared to other no or low down payment programs.
No Loan Limits for Most Applicants
As of January 1, 2020, the VA mortgage program does not apply loan limits to applicants with their full VA entitlement, which includes most borrowers. This enables program participants to buy a home with no money down regardless of the property purchase price or loan required. This also means that jumbo mortgages are eligible for the VA program. VA loan limits only apply to borrowers without their full entitlement.
No Income Limits
The VA mortgage program does not apply a limit to how much money borrowers can earn. Other low or no down payment mortgage programs use a maximum income limit to determine borrower eligibility. By not applying a borrower income limit, the VA program is accessible to more eligible military personnel and veterans.
No Property Location Requirement
Many no or low down payment mortgage programs require the property you are buying to be located in a certain area to qualify for specific elements of the program. For example, with some programs borrower income limits apply if the property is located in one area but the limits do not apply if the property is located in a different area. The VA mortgage program does not have a property location requirement, making it available to more borrowers. The VA program applies to one-to-four unit owner-occupied primary residences located anywhere in the United States.
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VA Mortgage Cons
Upfront VA Funding Fee Increases Borrower Costs
The VA mortgage program requires that borrowers pay a one-time, upfront VA funding fee. The VA funding fee is calculated as a percentage of the loan amount and may be added to the loan. The amount of VA funding fee depends on your down payment amount (if any), loan program and if this is your first time using the VA mortgage program. An eligible veteran may use the VA mortgage program multiple times but the funding fee increases after the first use. For applicants using us the VA program for the first time, the funding fee ranges from 2.15% of the loan amount if you make a down payment of 0% - 4.99% to 1.25% of the loan amount if you make a down payment of 10% or more.
Stricter Borrower Qualification Requirements
The VA mortgage program uses relatively stricter borrower qualification requirements as compared to other low or no down payment mortgage programs, although most eligible borrowers should be able to qualify for the program. To qualify for a VA mortgage, borrowers are typically required to have a minimum credit score of 620 as compared to the 580 minimum credit score required for the FHA mortgage program.
Residual Income Requirement
In addition to using a lower debt-to-income ratio to determine what size mortgage you can afford, the VA program requires that borrowers have a minimum level of residual income leftover after paying total monthly housing expense as well as other expenses such as child care and bills. The required borrower residual income level depends on loan amount, the region of the country in which property is located and the number of people in the borrower's household. Applicants with a tight monthly budget may find it more challenging to qualify for a VA loan due to the residual income requirement.
Related FREEandCLEAR Resources
VA Mortgage Guide
Review our informative overview of the VA mortgage program including eligibility guidelines, borrower income requirements and other key program information.
VA Mortgage Qualification Calculator
Use our VA Mortgage Qualification Calculator to determine how much home you can afford with a VA loan. The calculator also shows you the upfront VA funding fee based on your down payment and the number of times you have used the program.
VA Mortgage Rates
VA loans are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our VA rate table to review updated VA mortgage rates and fees for lenders in your area. Comparing rates and fees from multiple lenders is the best way to save money on your mortgage.
Comparison of No or Low Down Payment Mortgage Programs
Review and compare multiple government-backed and conventional no or low down payment mortgage programs to understand key program benefits and borrower eligibility requirements.
Sources
"VA Purchase Loan." VA. U.S. Department of Veterans Affairs, 2020. Web.