If youre a qualifying veteran or servicemember, a VA mortgage can be one of the best deals going. But is it always the best way to buy a home if other options are available?
VA mortgages offer a lot of benefits, including being one of the few ways you can still buy a home with no down payment. However, there are certain situations where you may be better off going with a different option, such as an FHA mortgage or a conventional loan backed by Fannie Mae or Freddie Mac.
Advantages of a VA home loan
First, some of the advantages of a VA mortgage. The government guarantees at least one-quarter of the loan amount on a VA mortgage, which is why you dont need to put up a down payment. Its also why you dont have to buy mortgage insurance, which is required on FHA loans and conventional mortgages with less than 20 percent down.
Closing costs are also limited on VA loans, with the lenders fees limited to 1 percent of the loan amount and restrictions on the types of fees that can be the buyers responsibility. On the other hand, the seller may pay all closing costs plus an additional 4 percent in concessions, which effectively reduces the purchase price of the home.
In addition, the maximum you can borrow is typically greater than what you can get in an FHA or even conventional Fannie Mae or Freddie Mac loan. Although the standard loan limit is only $144,000, in reality you can borrow far more, up to $1,000,000 in certain high-priced markets. By comparison, the maximum you can get on an FHA or Fannie/Freddie loan in even the most expensive areas is $625,500.
Finally, if you eventually run into financial difficulty, its usually easier to obtain forbearance on a VA mortgage than on other types of home loans.
Downsides of a VA mortgage
On the downside, you do have to pay an upfront fee to obtain a VA loan, which varies from 0.5 percent to 2.8 percent of the loan amount, depending on your service background, down payment or whether youve previously obtained a VA loan. By comparison, the upfront fee on an FHA loan is a flat 1 percent. However, on FHA mortgages you have to pay mortgage insurance equal to as much as 1.15 percent of the loan balance annually, so the VA loan will still likely be the better deal.
Conforming loans backed by Fannie Mae or Freddie Mac dont charge additional fees beyond the regular closing costs, but you do have to obtain private mortgage insurance (PMI) if youre putting less than 20 percent down. However, if you are putting down 20 percent or more, a conventional mortgage could be the better deal.
Could pay higher price for home
That VA cap on buyer-paid closing costs can also come back to bite you. Because sellers end up paying some of those costs the VA doesnt allow buyers to pay, it means those costs will likely get folded into the price of the home as part of negotiating the sale. So you end up paying them anyway. And if the appraisal comes in below the sales price, thats more money youll have to come up with up front to obtain the loan.
VA mortgages can also take longer to close, because of time required to get all the paperwork approved. In addition, the home has to pass an inspection before the loan will be approved, which can delay or even end up canceling the sale.
FHA might be better choice for fixer-uppers
This can make VA loans a less-desirable choice when buying a fixer-upper. In addition, you cant borrow additional money in excess of the property value to make repairs or improvements at the time of the purchase. By contrast, the FHAs 203(k) loan program allows you to borrow up to $35,000 for repairs or improvements as part of the purchase loan, based on the additional value theyll bring to the property. You can, however, borrow up to an additional $6,000 on a VA loan to make energy efficiency improvements.
Finally, both VA and FHA mortgages are assumable, meaning you can simply transfer them to a buyer when selling your home, rather than the purchaser having to take out a new mortgage. With mortgage rates currently as low as they are, this could be an attractive selling point a few years down the road, if interest return to more normal levels (the buyer would still have to take out a second loan to cover any difference between balance on the assumed mortgage and the sale price).
On VA loans though, youre still responsible for the mortgage if the person assuming the loan is not a qualifying veteran or member of the armed forces. If they default, youre on the hook. On FHA mortgages, the mortgage can be assumed by any qualified borrower and youre free of any further liability for it.