A VA loan can be the best way for veterans and military service members to buy a home. The interest rate is usually lower than a conventional loan, neither a down payment or mortgage insurance are needed, and closing costs and lender fees are limited, among other benefits.
But sometimes those advantages aren’t enough to make a VA loan, which is backed by the U.S. Department of Veterans Affairs, the best home loan for veterans or active service members.
Here are five situations where a VA loan may not be the best home buying option:
You can put 20 percent down
While a down payment isn’t required on a VA loan, putting down 20 percent on a conventional mortgage will help you avoid the funding fee of a VA loan. The fee varies from 0.5 percent to 3.3 percent of the loan amount, with the highest fee for 100 percent financing.
Such a down payment will also allow you to avoid paying for mortgage insurance, which isn’t required with a VA loan but can be a significant cost on conventional mortgages.
Most VA loans range from $200,000 to $300,000, and the funding fee ranges from $6,000 to $10,000 on an average loan, says Jason Skinrood, a loan officer at Supreme Lending in Salt Lake City, UT. The funding fee is used to help guarantee the loan in absence of mortgage insurance or a down payment — or at least a large down payment.
“The VA allows the funding fee to be rolled into the loan,” he says. “They don’t have to come up with it.”
In his seven years of being in the VA loan business Skinrood says he has worked with less than a dozen buyers who put money down on a house with a VA loan.
“A lot of veterans don’t put money down on their homes,” he says. “It’s not because they don’t want to. It’s because they don’t have the money.”
A variety of factors determine the lending fee, including the down payment percentage. Sometimes even with a 10 percent down payment, an active duty member can pay a 1.25 percent lending fee, Skinrood says. Disabled veterans can have the fee waived.
You’re buying an expensive house
VA loan limits range from $417,000 to $721,050, based on housing costs in the geographical area, with the lower end being the maximum amount in most counties, Skinrood says. For loans above the VA limits, the veterans would have to come up with a down payment above the limits.
A jumbo mortgage may be easier to qualify for, and the rates may be lower than conforming loans.
You have high debt
The VA has tighter debt-to-income level requirements, which can mean approval for a lower amount if you have a high amount of debt, says Paul Sian, a real estate agent at HER Realtors in Cincinnati.
A better option may be an FHA loan, which allows 43 percent debt-to-income, compared to 41 percent for VA debt, Sian says.
The FHA allows higher debt with justification from the lender, “which could mean they can get a larger loan with an FHA loan compared to a VA loan when their debt levels are high,” he says.
You defaulted on previous government loans
Two important requirements of a VA loan are that you’ve paid taxes and have made good on other government-backed debts, such as federal school loans.
If you’ve landed on a list in the database called the Credit Alert Verification Reporting System, or CAIVRS, it means you’ve defaulted on government obligations and aren’t eligible for a VA home loan. If your name shows up, you must repay the loan or you’re ineligible.
Being on the CAIVRS list means you’ll have to apply for a conventional mortgage, requiring at least 3 percent down and possibly need a higher credit score. There are some CAIVRS exceptions, including divorce or bankruptcy.
You want to “flip” a house
If you’re looking for a short-term loan for a short-term investment to “flip” a house in foreclosure, then a VA loan isn’t for you, says Evan Harris, co-founder of SD Equity Partners in San Diego.
“VA loans often take a long period of time to complete,” Harris says. “Sometimes these loans take even longer than traditional bank loans. In a situation where capital is needed in seven to 20 days, leveraging a VA loan is almost always out of the question.”