A VA loan may be one of the best deals in the mortgage industry. But despite VA loan 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 in case you may need to apply for a different type of financing.
What are the Disadvantages of a VA Loan?
The purpose of this list isn’t to discourage you from applying for a VA loan if you’re a veteran. Rather, it’s to help you make an informed decision.
A big part of the “mission” at The Military Wallet 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 top five disadvantages of using a VA loan.
1. 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. One-hundred percent financing means zero down payment. If the seller or lender pays the closing costs and escrows, you can essentially buy a home with minimal cash outlay.
But buying a home with no down payment can also be a disadvantage.
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 actually be in a negative equity position from the very 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. But if the market is either flat or declining, it can be a serious problem.
2. 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 providing rental income, but you must occupy one and rent out the other units. If you purchase the same property with the plan to rent out all four units, it won’t be eligible for VA financing.
3. Sellers May be Hesitant About VA Financing
Some home sellers and real estate agents are reluctant to accept VA 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 their real estate agents are fully aware of the improved application process.
There still are some VA loan factors that might deter a seller from accepting your VA offer:
- VA appraisals. The VA appraisal includes an assessment of minimum property requirements (MPRs), requiring 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 be likely to seek seller-paid closing costs as well. If sellers are reluctant to pay these, they may be wary of accepting a VA loan offer.
- Delays due to paperwork. Because VA loans involve dealing with a government agency, paperwork delays can extend the closing process. In a competitive market, sellers will not want to delay their home sale.
4. The VA Funding Fee is Higher for Subsequent Use
VA loans come with an upfront charge known as the VA funding fee. Some qualifying veterans may have the funding fee waived, including those receiving compensation for a service-connected disability.
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 of the disadvantages 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:
|First Use of VA Loan
|Subsequent Use of VA Loan
|0% to 4.99%
|5% to 9.99%
|10% or more
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. But upon subsequent use, the loan amount will be $206,600.
That said, check to see if you are a qualifying veteran and exempt from paying the VA funding fee.
5. 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 working only with lenders that do a substantial amount of VA loan business is so important. They should have specialists on staff 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.
Is a VA Loan Worth it?
Despite the potential disadvantages, the VA loan is still a great option for eligible individuals. There are a variety of aspects that make the VA loan advantageous for the majority of borrowers who choose it.
With the VA loan, there is no down payment required and no PMI. Many borrowers are also able to negotiate seller-paid closing costs as well, meaning no money down initially. Additionally, VA loans often offer relaxed credit requirements and a higher allowable debt-to-income ratio, meaning you don’t have to have a perfect credit report or be debt-free to obtain a VA loan.
Regardless, talking through your unique circumstances with a lender who is well-versed and practiced in VA loans is ideal.
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.
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.