VA Home Loan- Pros and Cons
Positives & Negatives of a Mortgage With The Veterans Administration
Jul 7, 2009
When purchasing a home, veterans are often encouraged to utilize the VA home loan.
While it is a great program for many veterans to use, it should be noted that there are good points and bad when using this mortgage product.
The Pros of a VA Home Loan
There are many reasons that people should buy a home. For veterans who meet the qualifications, a home mortgage through the VA makes it easier.
Other reasons for taking advantage of the VA home loan are:
- Easier access to mortgage products
- No down payment required
- No PMI
A VA loan is not a loan through the Veterans Administration, but a loan through a traditional lender that is backed by the VA. Having the backing of the government, veterans do not have to jump through as many hoops to get a mortgage.
In addition to having the backing of the VA, there is no requirement to put down any money toward the principle of the home. While buying would not make sense in most scenarios when no down payment is available, veterans can forgo years of renting for years of equity.
Unlike conventional loans that permit this practice of putting no money down, the VA forbids lenders to hamper their clients with any PMI payments, which is a form of insurance for owners who do not hold 20% equity in their home.
According to Bankrate.com, a $126,000 mortgage will have a PMI range of up to $64 a month that may require five years to pay off. The result is almost $4,000 spent that did not go into the equity of the home, or for anything else that is to the benefit of the owners.
Most home buyers can think of many ways to utilize $4,000 to their advantage. The VA home loan keeps that money in the pockets of those who use it.
The Cons of a VA Home Loan
When choosing the path toward home ownership, buyers must consider both sides of the coin, lest they find out later.
For the path taken in using a VA loan, the negatives include:
- Encouragement to buy a home with no money down
- VA funding fee
- Availability of variable rates
There are several reasons not to buy a home. One of the deciding factors should be financial stability.
While lenders will gladly shell out every dollar they qualify borrowers for who are backed by the VA, borrowers must be wary of what it will cost to live in a home for the amount they qualify for.
Just as buying a home with no money down can be a positive, it also has downsides, such as a funding fee of 2.15%. If a borrower purchases a home for $100,000, the mortgage from month one will be $102,150, leaving the home owners upside down on their mortgage for possibly a year or more.
Additionally, buyers are being offered the option to borrow with variable rates that will be subject to change in five years or less. According to Clark Howard, a consumer advocate and the host of The Clark Howard Radio Show, rates are historically low, and are not likely to be lower in the next five years. Borrowers who use this option of variable rates may find themselves in a situation where their rates are rising so high that they may miss a payment, damaging their ability to refinance with a favorable market rate later.
The VA home loan is a great option for veterans to consider when purchasing a home. The key, though, is to know what is on both sides of the coin when engaging in long-term business deals, such as home buying.
Sources
Peterson, Erin. "Debt-to-Income Ratio as Important as Credit Score". bankrate.com
Howard, Clark. "Accelerated Mortgage Program". ClarkHoward.com
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