A VA loan may be one of the best deals in the mortgage industry. But despite its benefits, including no down payment, relaxed credit guidelines, and less restrictive income requirements, there are some potential disadvantages to be aware of.
It’s best to understand both the pros and cons of VA loans before applying so that you can make the best decision for you.
Key Takeaways:
- Advantages of using VA loans include no down payment, flexible credit requirements, and lower overall costs.
- Potential disadvantages of using VA loans include zero down payment risks, usage restrictions, seller challenges, and paying the VA funding fee.
- Compare your situation with the guidelines below and speak with your lender to determine if a VA loan suits you.
The Pros and Cons of VA Loans
The purpose of this list isn’t to discourage you from applying for a VA loan if you’re a veteran. After all, the benefits of a VA loan likely outweigh the disadvantages for most. Some of the potential disadvantages are even avoidable. Rather, this list is intended to help you make an informed decision.
A big part of The Military Wallet’s “mission” is to equip you with all the information you’ll need to purchase a home with a VA loan successfully. That requires knowing all the aspects of the VA loan, including those that may present challenges.
But armed with this information, you should be able to successfully work around the disadvantages of VA loans and purchase the home of your choice. Below, we discuss the advantages and disadvantages of using a VA loan.
Pros
No Down Payment
The VA loan allows veterans and servicemembers to finance 100 percent of a home’s value without any down payment, which is a significant advantage. This is particularly helpful for those who may find it challenging to save money due to frequent relocations.
This key feature of the VA loan enables veterans to achieve homeownership without accumulating the sizeable lump-sum payment that is typically required.
Lower Interest Rates and Fees
The VA limits the fees and closing costs that can be charged during the mortgage process, saving the borrower money. Additionally, other parties must cover certain costs often covered by the borrower when using other loan types, making homeownership more accessible and affordable for qualified buyers. VA loans also tend to have the lowest average interest rates on the market.
No Private Mortgage Insurance (PMI) Required
VA loans stand out from conventional loans by not requiring PMI, which conventional lenders typically mandate unless a borrower can put down at least 20 percent.
This exemption from PMI presents a significant financial advantage for veterans, making VA loans a more affordable and accessible option for veterans seeking homeownership.
Flexible Credit Score Requirements
VA loans offer more lenient credit requirements than conventional mortgages, allowing veterans to secure home financing at competitive rates without needing a higher credit score.
Additionally, VA loans are more accommodating for veterans recovering from financial setbacks such as foreclosure, short sales, or bankruptcy, making them a forgiving option for those looking to rebuild their financial standing.
No-Hassle Refinancing Options
The VA offers two primary programs to help you refinance your mortgage:
- Interest Rate Reduction Refinance Loan (IRRRL): Also known as the VA Streamline Refinance, this option allows you to refinance your existing VA loan to a lower interest rate with minimal paperwork and no appraisal or income verification in some cases. It’s a quick and easy way to reduce your monthly payments. Learn more about the VA IRRRL here.
- Cash-Out Refinance: This program allows you to refinance your mortgage and take out cash from your home’s equity. You can use the funds for home improvements, debt consolidation, or other financial needs. Unlike the IRRRL, the cash-out refinance is available to both VA loan holders and those with other types of loans, as long as they qualify for a VA loan. Learn more about the VA cash-out refinance here.
These refinancing options provide flexibility and can help you manage your mortgage more effectively, making VA loans an attractive choice for many veterans and servicemembers.
Cons
While the benefits are numerous, VA loans do come with some potential disadvantages to be aware of.
Zero Down May Mean Less Equity in Your Home
Buying a home with little or no money down is one of the biggest advantages of a VA loan. However, buying a home with no down payment can also pose risks.
Once you move into the home, you’ll own a property that’s 100% financed. When the VA funding fee is added to the loan amount, you can be in a negative equity position from the beginning.
If the property you’re purchasing is in a rising market, that’s likely only a temporary problem. As the value of your home increases and you begin paying down your mortgage balance, you’ll gradually build equity. However, if the market is flat or declining, this can pose a problem, as negative equity can lead to difficulty selling or refinancing the home and other potential issues.
While making regular mortgage payments will gradually reduce the loan balance and potentially build equity, this process can take a while – especially if the market is declining. Home values may decrease faster than you can pay down the principal on the house, prolonging the negative equity period.
In cases like this, your lender should be able to explain your unique situation to you and advise you on the best path forward.
VA Loans Cannot be Used for Vacation or Rental Properties
One of the primary downsides of VA loans is that you can only use them to purchase owner-occupied properties. If you want to purchase a vacation home or investment property, you’ll need to use conventional financing.
However, you can use a VA loan to purchase a home with up to four units, meaning you can rent out three. But, again, you must occupy one of the units. If you purchase the same property with the plan to rent out all four units, it won’t be eligible for VA financing.
Check out our guide for more on VA loan-eligible and ineligible property types.
Problems Sellers May Have With VA Loans
Some home sellers and real estate agents are reluctant to accept VA loan offers on homes. Much of their reluctance is rooted in misconceptions or misunderstandings about how the benefit works and what is actually required of home sellers.
The VA has streamlined the homebuying process, but not all sellers or real estate agents know this.
There still are some VA loan factors that might deter a seller from accepting your VA offer:
- VA appraisals. The VA appraisal includes assessing minimum property requirements (MPRs), which require a home to meet agency guidelines for safety and livability. The home value must also be appraised for the purchase price to qualify for a VA loan.
- Seller-paid closing costs. These are common in some markets, but they’re extremely typical with VA loans. A veteran purchasing a property with no down payment might also seek seller-paid closing costs. If sellers are reluctant to pay these, they may be wary of accepting a VA loan offer.
- Perception of zero-down buyers. Sellers may perceive buyers who are not putting any money down as less committed or serious about the purchase. This misconception may make sellers hesitant to accept VA loan offers, even though the government backs VA loans and offer robust protections for both buyers and lenders.
The VA Funding Fee is Higher for Subsequent Use
VA loans come with an upfront charge known as the VA funding fee. The Department of Veterans Affairs collects the VA Funding Fee to help insure the loans made under the program. For example, if a VA borrower defaults on their mortgage, the VA will reimburse the lender for a certain percentage of the loan.
One disadvantage of the VA funding fee is that it’s higher for subsequent use if you have a down payment of less than 5%.
The increased fee looks like this:
| Down Payment | First Use of VA Loan | Subsequent Use of VA Loan |
|---|---|---|
| 0% to 4.99% | 2.15% | 3.3% |
| 5% to 9.99% | 1.5% | 1.5% |
| 10% or more | 1.25% | 1.25% |
To translate those percentages into dollar figures, a first-time use of the VA loan for $200,000 will result in a VA funding fee of $4,300. A subsequent use on the same loan amount will be $6,600.
In most cases, the funding fee is added to the loan amount. The total loan amount, including the funding fee, will be $204,300 on the first use. However, upon subsequent use, it will be $206,600.
That said, check to see if you are a qualifying veteran exempt from paying the VA funding fee. Exempt veterans include those receiving compensation for a service-connected disability, Purple Heart recipients, and others. Your Certificate of Eligibility (COE) will let you know if you’re exempt.
Not All Lenders Offer – or Understand – VA Loans
There are hundreds of mortgage lenders nationwide, but not all offer VA loans. This is often the case for banks and some online lenders. The relatively limited number of VA lenders could potentially narrow your options for funding sources.
This is why it is so important to work only with lenders that do a substantial amount of VA loan business. These lenders should have specialists who work primarily or exclusively with VA loans. That concentration streamlines the process and can make VA loans no more complicated than conventional mortgages.
If you’re going to apply for a VA loan, do some serious research on the lender. Get referrals from other veterans who obtained VA loans from local lenders, visit our list of recommended VA loan providers, or work with a military bank or credit union.
VA Loan Alternatives
So, what if you decide that a VA loan is not right for you? Don’t worry; you have other options.
- Conventional Loans: These loans typically require a higher credit score and a down payment, but they can offer competitive interest rates and avoid some of the fees associated with VA loans. Learn the differences between conventional loans and VA loans here.
- FHA Loans: Backed by the Federal Housing Administration, FHA loans are popular among first-time homebuyers. They require a smaller down payment than most conventional loans and have more flexible credit requirements. Check out our guide to VA loans vs. FHA loans to learn more.
- USDA Loans: USDA loans might be a good fit if you’re looking to buy in a rural area. They offer low interest rates and zero down payment options for eligible buyers. Learn the key differences between USDA loans and VA loans here.
- State and Local Programs: Many states and local governments offer homebuying assistance programs. These can include down payment assistance, favorable loan terms, or grants for first-time buyers.
Check out our guide to VA loan alternatives to learn more.
Is a VA Loan Worth it?
Despite the potential disadvantages, the VA loan is still likely the best deal in the mortgage industry because of its numerous benefits.
Armed with this information, you should be able to successfully work around the disadvantages of VA loans and purchase the home of your choice.
Be sure to talk through your options with your lender so that you make the best decision for yourself.
More Reading
2024 VA Loan Limits by County – How Much House Can You Buy?
Equal Housing Opportunity. The Department of Veterans Affairs affirmatively administers the VA Home Loan Program by assuring that all Veterans are given an equal opportunity to buy homes with VA assistance. Federal law requires all VA Home Loan Program participants – builders, brokers and lenders offering housing for sale with VA financing – must comply with Fair Housing Laws and may not discriminate based on the race, color, religion, sex, handicap, familial status, or national origin of the Veteran.
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Denny Donnersberger says
Can you build a small home with a V A loan. Less than 100,000. Do not need a large home. I am a single retired veteran of 23 years.
Jennifer Dunbar says
If the seller is asking for $200.000 and the appraisal is less. Will the VA loan pay the lesser amount?
Donnie Johnson says
Your information is fine for a veterans that don’t have disability. What you need to add is if you are a disabled Veteran you don’t have to pay for Funding fee or PMI and in some states you don’t have to pay Property Taxes as a disabled Veteran!!! State that!!
Brittany Crocker says
Hey Donnie, you’re right. Added that in.
kristal foster says
some communities downright discriminate against VA loans. If you lose property after property. It’s time to look somewhere else or go conventional.