VA loan pros and cons: Is this the right choice for you?

Veterans and active-duty service members have access to a powerful home buying tool: The VA home loan program which allows buying a house with no money down.

VA loans may be the best loan program for most military buyers, but this loan program still has a few downsides borrowers should know about.

Some veterans may find a better deal with another loan type.

Pros and cons of VA home loans

VA loans remove some of the traditional home buying hurdles like the need to make down payments and pay monthly mortgage insurance premiums. 

These loans also add new layer of regulations and a few limitations for borrowers to contend with. 

Let's take a close look at the pros and the cons of the VA home loan program.

...in as little as 3 minutes – no credit impact

Advantages of VA home loans

VA home loan eligibility gives buyers access to mortgages with the following benefits:

No private mortgage insurance (PMI)

Built-in insurance from the Department of Veterans Affairs eliminates private mortgage insurance entirely. In contrast, conventional loans with less than 20 percent down require PMI, typically costing between 0.5 percent and 1.5 percent of the loan amount annually.

For a $300,000 mortgage, avoiding PMI saves $125 to $375 monthly. That's $1,500 to $4,500 annually. Over a 30-year loan, this benefit alone can save veterans up to $135,000. 

No down payment required

VA loan rules allow eligible veterans to finance the entire purchase price of the home. This means buying a home with no money down. This benefit removes the biggest hurdle to homeownership—saving tens of thousands for a down payment.

Typical first-time borrowers pay about 10 percent down, according to the National Association of Realtors. For a $400,000 home, that's $40,000 in upfront cash.

Veterans and active duty service members can use this money for moving expenses, home improvements, or emergency reserves instead. .

Lower interest rates

VA loans tend to offer interest rates that come in lower than conventional loan rates for the same borrower. Lenders can provide better terms because the Department of Veterans Affairs insures veteran borrowers.

So how much money does 0.5 percent interest save? Borrowing at 6.5 percent instead of 7 percent can save $30,000 over the life of a 30-year loan on a $300,000 home.

More flexible credit score rules

Unlike other loan programs, the VA doesn't set minimum credit score requirements for borrowers. VA-authorized lenderscan set their own rules. Most require a FICO score of 620, but lenders have the freedom to be more flexible.

Veterans also qualify faster after financial setbacks:

• After bankruptcy: 2 years (vs. 7 years for conventional loans)
• After foreclosure: 2 years (vs. 7 years for conventional loans)

This flexibility helps veterans with imperfect credit histories achieve homeownership when other loan programs would require years of waiting or credit repair.

Closing costs rules

The Department of Veterans Affairs caps how much lenders can charge in closing costs. These caps can protect borrowersfrom excessive lender's fees. Also, the VA allows a home's seller to contribute up to 4 percent of the sales price to borrower closing costs. 

Streamline refinancing option

The VA's Streamline Refinance, known as the IRRRL loan, helps VA homeowners refinance into a lower interest rate after rates fall. Often, this refinance process can skip the home appraisal and the credit check.

Disadvantages of VA home loans

Veterans and active duty service members should also know about the VA home loan program's disadvantages:

VA funding fee adds upfront cost

The most significant drawback of VA loans is the mandatory funding fee, a one-time charge that ranges from 1.4 percent to 3.6 percent of the loan amount. First-time users with zero down payment pay a 2.15 percent funding fee. For a $300,000 home, that's $6,450 for first-time buyers.

Borrowers don't have to pay this fee in cash. They can roll it into the mortgage loan amount, but this increases total borrowing costs and monthly payments. The VA exempts veterans with service-connected disabilities from this fee, making VA loans even more valuable for those who qualify.

Primary residence requirement

VA loans work exclusively for primary residences and not for investment properties, vacation homes, or rental properties. This restriction differs from conventional loans, which allow financing for various property types. 

VA borrowers can convert a primary residence into a rental property by refinancing a VA loan into a conventional loan.

Stricter property standards

The VA appraisal inspects any home under contract to make sure it meets the program's Minimum Property Requirements (MPRs). MPRs ensure homes are safe, sanitary, and structurally sound. This makes the appraisal process more rigorous than conventional loans. Common issues that can delay or derail VA loans include:

• Peeling paint or lead-based paint concerns
• Loose handrails or safety hazards
• Evidence of termites or pest damage
• Electrical or plumbing problems
• Missing smoke detectors

These stricter standards sometimes limit your housing options, particularly with fixer-uppers or older properties that need work.

Extended closing timeline

VA loans typically take 45 to 60 days to close compared to 30 to 45 days for conventional loans. The extended timeline comes from additional paperwork, specialized appraisal requirements, and military service verification. This longer process can put you at a disadvantage in competitive markets where sellers prefer quick closings.

Sellers sometimes view VA offers less favorably due to perceived complications, even though most transactions proceed smoothly once all parties understand the process.

Limited lender availability

Not all mortgage lenders offer VA loans, particularly in rural areas where fewer institutions have experience with VA lending. This limited availability can make it challenging to shop for competitive VA loan rates in certain regions, potentially reducing your options for the best terms.

Is a VA home loan worth it?

For most eligible service members, the numbers will favor using a VA loan, but individual circumstances should determine the best choice.

Let's look at some scenarios:

When a VA loan is best

A VA loan would be an obvious choice for a typical first-time buyer who has little in savings and an average credit score. Buyingwith no money down and no PMI is a game changer for this veteran.

This buyer could get into a home a lot sooner. Paying the VA funding fee is money well spent.

When a VA loan isn't the best choice

A repeat home buyer who is selling another home may prefer to make a large down payment on a new home. Paying more than 20 percent down on a conventional mortgage eliminates PMI, making conventional more comparable to VA on this front.

Once PIM goes away, the VA funding fee starts to seem like a bigger liability for many buyers, especially when the VA charges its higher, 3.6 percent fee for repeat VA loans. 

A buyer in this situation may prefer a conventional loan, especially if the buyer has excellent credit.

What about an in-between scenario?

The scenarios above represent extremes. What would happen to someone in the middle?

One of the best ways to answer that question: Get a mortgage preapproval to find out how the numbers work for you. Better's preapproval can show results within three minutes without requiring a hard credit check.

...in as little as 3 minutes – no credit impact

VA loan alternatives

The VA loan makes home buying easier for veterans and active duty service members, but it military families aren't required to use VA loans. 

Sometimes, another loan program fits better. Other options include:

FHA loans

FHA loans help buyers with lower credit scores. They require at least 3.5 percent down, but borrowers with FICO credit scores as low as 580 can still get competitive interest rates.

FHA borrowers pay the FHA's mortgage insurance. This includes an upfront mortgage insurance fee of 1.75 percent and then an annual insurance fee that totals 0.55 percent of the current loan amount for most borrowers. 

When should a veteran use an FHA loan? When their credit score limits their VA eligibility. 

Conventional loans

Conventional loans work best for borrowers with excellent credit scores and larger down payments. Borrowers with these credentials can often lock in the lowest interest rates. 

Conventional mortgages can also finance second homes and investment properties.

When should a veteran use a conventional loan? When they can make large down payments or when they want to financea second home.

USDA loans

Like VA loans, USDA Guaranteed loans offer zero-down financing. But unlike VA loans, location and household income matter with USDA loans.

Only homes in USDA-designated rural areas, and only borrowers with moderate incomes, can use the USDA program. The USDA's upfront fee of 1 percent is lower than the VA funding fee, but the USDA charges an annual mortgage insurance fees of 0.35 percent while the VA charges no annual fee.

When should a veteran use a USDA loan? When they're USDA eligible and a USDA loan's rate can beat a VA loan rate.

VA loan FAQs

These answers address many common concerns about using this military benefit.

What is the 4% rule on VA loans?

The 4 percent rule allows sellers to contribute up to 4 percent of the loan amount toward the buyer's closing costs, prepaid expenses, and VA funding fee. This flexibility gives VA borrowers more negotiating power than with conventional loans, which typically cap seller contributions at 3 percent for primary residences with less than 10 percent down.

For example, on a $400,000 VA loan, the seller could contribute up to $16,000 toward your expenses, potentially covering most or all of your closing costs and funding fee.

Can I use a VA loan more than once?

Yes, you can use VA loan benefits multiple times throughout your lifetime. Your eligibility renews when:

• You pay off the previous VA loan in full and sell the property
• Another qualified veteran assumes your existing VA loan
• You pay off the loan but keep the property (requiring a one-time restoration of entitlement)

Some veterans maintain multiple VA loans simultaneously if they have remaining entitlement and qualify income-wise for both properties. 

What are loan limits for VA loans?

VA loans set no maximum loan amounts for borrowers with full VA loan entitlement — meaning you could finance homes well above conventional loan limits without a down payment. 

That said, the lender still has to approve the loan based on borrower income and debt. The lender won't approve a loan the buyer can't afford. 

Who pays closing costs on a VA loan?

Closing costs are split between the buyer and the seller, but VA rules protect buyers from certain charges. You typically pay the VA funding fee, credit report, origination charges, and any discount points you choose. Sellers usually cover title fees, recording fees, and home appraisal process costs.

Lenders cannot charge a settlement fees or prepayment penalties.

What are the main advantages of a VA loan?

The primary benefits of a VA loan include no down payment requirement, no need for private mortgage insurance, lower interest rates compared to conventional loans, and more flexible credit score requirements.

What is the VA funding fee and can it be avoided?

The VA funding fee is a one-time payment ranging from 1.4 percent to 3.6 percent of the loan amount. It can be financedinto the loan. Veterans with service-connected disabilities may qualify for exemptions from this fee.

A Better way to use VA home loan benefits

VA home loans open doors for military home buyers. For many home buyers who qualify for the VA loan program, these loans' strengths far outweigh their weaknesses. 

Pairing this powerful tool with Better's fast, AI-driven mortgage process can help military borrowers save even more while closing their homes sooner.

A preapproval from Better can estimate loan costs within three minutes.

...in as little as 3 minutes – no credit impact