Being able to qualify for a VA loan can put you on the fast track towards homeownership. VA loans are one of the most powerful home financing options on the market, allowing active military personnel, veterans, and surviving spouses of veterans to seek flexible, no-down payment home loans backed by the U.S. Department of Veterans Affairs.
While VA loans may seem like a great mortgage option for service members and veterans, they are not necessarily the best one out there. Listed below are a few instances where a VA loan may not be the best way to buy a home.
You’re Flush with Cash and Have Good Credit
As mentioned earlier, VA loans are one of the few true 0 percent down payment mortgage options on the market. This benefit translates to lower monthly payments for borrowers.
But this doesn’t mean VA loans are free, borrowers still have to pay an upfront funding fee, which can be anywhere between 1.25 to 3.3 percent of their loan amount. So, if you were to take out a loan of $300,000 with a funding fee of 2.5 percent, you would be required to pay $7,500 upfront.
But here’s the thing. If you go for a conventional mortgage and pay 20 percent down, you would end up avoiding both the upfront fee and private mortgage insurance fee altogether. Bottom line? A VA loan is not always the cheapest option.
You Want to Buy a Home with a Non-Veteran
You may qualify for a VA loan with a non-veteran who is not your spouse, but there are special rules you need to be aware of.
- If you’re the military homebuyer, you must have enough income to cover your half of the payment. This is important because your non-veteran counterpart’s income cannot be used to make up for your insufficient income.
- The VA will only guarantee half of the loaned amount if you are co-borrowing with a non-veteran. Because of this, lenders will ask for 12.5 percent down on the non-VA-backed part of the loan.
In cases like this, alternatives like the FHA home loan (allows for 3.5 percent down), the Conventional 97 mortgage (as low as 3 percent down), and the USDA home loan (homes must be in a USDA-eligible area) may be more affordable in the long run.
You Want to Buy an Expensive House
There are no rules against veterans and service members buying expensive homes with a VA loan. The basic entitlement for every eligible veteran is $36,000, with lenders loaning up to four times that amount without requiring a down payment, provided of course the borrower’s credit and income checks out and the home’s appraisal matches its asking price. For loan amounts beyond VA loan limits, be ready to pay the 25 percent of the overage as down payment.
While VA loans are a powerful mortgage option, they’re not applicable to all home buying situations. If you have questions about VA loans, get in touch with Chris Lamm for answers.