If you’re a military borrower, why not join the 22 million who have benefited from VA loans and move into the home of your dreams more easily than you might imagine. Take a look at this frank breakdown of the advantages and drawbacks of using VA loans rather than more conventional types of financing. You’ll be able to see at a glance whether VA loans would make sense for you.
Pros of VA Mortgage Loans
• 100% Financing with No Down Payment: Regular loans and FHA loans come with a down payment of 3% to 20% as standard. Unless you’ve got a particularly aggressive timeline for paying down your loan, it makes sense to take advantage of the zero down offers that come with VA loans.
• No PMI: Any time borrowers put less than 20% down on a mortgage, PMI (private mortgage insurance) is a mandatory policy that mitigates a lender’s loss in the event you default on payments. While relatively modest, this monthly premium still bumps up your costs. VA loans, on the other hand, come backed by Uncle Sam so you do not need to pay out for PMI.
• No Prepayment Penalty: Circumstances change with time and there’s every chance you might have the opportunity to pay your mortgage down sooner than expected. With VA loans, you can make extra payments and pay off the loan early without any crippling prepayment penalties.
• Lower Interest Rates: A 2017 Ellie Mae report showed that interest rates for VA loans were lower by up to 0.25% than FHA loans and other conventional loans. As long as you meet the lender’s income and credit requirements, VA loans generally offer you the most competitive rate you’re likely to find.
• Higher DTI Ratios Accepted: With VA loans, lenders generally want to see a DTI (debt-to-income) ratio of less than 40%. This DTI figure is arrived at by comparing your gross income before tax to your monthly outgoings including the loan payment.
This is significantly higher than the figure of 36% in place for most conventional and FHA loans and is just one more solid reason to think about VA loans if you qualify.
Cons of VA Mortgage Loans
• Don’t Forget The Funding Fee: With all VA loans, you’ll be liable for the funding fee. This fee is 2.15% of the overall loan amount for anyone using VA loans for the first time. This jumps up to 3.3% for subsequent VA loans. The fee is lowered if you make a down payment. If you’re a veteran getting disability compensation from the VA, this fee is waived. You can choose to pay the fee in cash when closing or you can roll it over into the total loan amount.
• Lender Overlays: Even if the VA approves you for a VA loan, sometimes the lender insists on additional requirements being met. This is understandable since the VA actually only underwrites 25% of these VA loans so the lender is still shouldering some risk. Lender overlays often include a minimum credit score, a maximum DTI, minimum loan amounts and restrictions when it comes to some types of manufactured homes.
• VA Loan Limits: This is another instance like lender overlays where there’s no limit set by the VA on loan limits, but the limited exposure they assume for the debt means private lenders simply won’t come through for multimillion-dollar mansions.
• For Personal Properties Only: It’s no use thinking about VA loans if you want a second home to rent out or a holiday property for occasional use. This is a loan program purely for primary residences. You’ll need to move in within 6 months and stay in the home for 12 months so be aware of these restrictions in advance.
Fixed Rate Loans
If for whatever reason VA loans are not for you, fixed rate mortgages are by far the most popular type of program because of the certainty you’ll get with interest rates locked in for the whole term.
• No Chance Interest Rate Will Increase: Since the interest rate cannot change over the lifetime of the loan, you can feel a lot more confident in your financial planning with fixed-rate loans than if you took a chance on a 2-year ARM instead.
• Plan Ahead With Fixed Monthly Payments: That inflexible rate of interest means fixed rate loans offer the reassuring certainty of a fixed monthly payment. You’ll be able to look ahead without trepidation knowing your outgoings won’t suddenly spike.
• More Flexible Term Options: Fixed rate loans are incredibly flexible, and you’ll be able to take on a mortgage for a term of anywhere from 10 years to 30 years or more. The more extended the term, the higher the rate of interest you’ll pay. Opting for shorter-term fixed-rate loans might mean higher payments, but you’ll end up paying dramatically less interest over the course of time.
• Fixed Rate Loans Are Ideal When Rates Are Low: If you’re looking to buy property when interest rates are low, fixed-rate loans are the perfect way to capitalize on this by locking that rate in.
• Total Peace of Mind: Since interest rates and consequently monthly payments remain static with fixed-rate loans, you can forge ahead with your house purchase with very little by way of risk or uncertainty.
Cons of Fixed Rate Mortgages
• Fees Tend To Be Higher: Fixed rate loans typically attract higher fees, so it’s worth checking this out in advance to make sure you’re not hit with a nasty surprise.
• Higher Interest Rates: Interest rates tend to be substantially higher with fixed-rate loans than with ARM or interest-only mortgages. You might find this restrictive as it can impact the size of the mortgage you can secure.
• Higher Monthly Payment Overall: Since you’ll be paying more interest, your monthly payment will be higher with fixed-rate loans. While this is less than ideal, you should perhaps consider this the price tag for that peace of mind we mentioned.
• Stuck With Fixed Rate Unless You Can Refinance: Another advantage that can end up working to your detriment is the fixed rates of this type of home loan. Imagine this, interest rates start declining rapidly, but you’re unable to refinance, and you’re locked into those previously higher rates. Make sure you think about all elements of fixed-rate loans before committing yourself.