What Are the Disadvantages of a VA Loan?

VA loans represent a homeownership benefit for eligible service members and veterans, known for features like no down payment requirements. While these loans offer advantages, understanding their potential drawbacks is important for prospective borrowers.

The VA Funding Fee

Most individuals using a VA loan pay the VA funding fee to the Department of Veterans Affairs. This one-time fee helps sustain the VA loan program, offsetting program costs. It is calculated as a percentage of the total loan amount, not the home’s purchase price.

The funding fee percentage varies based on factors like loan type (e.g., purchase, refinance), whether it is the borrower’s first or subsequent VA loan, and the down payment amount. For instance, a first-time VA loan user with no down payment might pay a funding fee of 2.15% of the loan amount, whereas a subsequent user without a down payment could face a 3.3% fee. Making a down payment, even a small one, can reduce this fee; for example, a down payment of 5% or more can lower the fee to 1.5%. The most common practice is to finance the funding fee into the loan itself, which avoids an upfront out-of-pocket expense at closing. However, financing the fee increases the total loan amount, leading to more interest paid over the life of the mortgage.

Exemptions from the VA funding fee exist. Veterans receiving compensation for a service-connected disability are exempt, as are Purple Heart recipients and surviving spouses of veterans who died in service or from a service-connected disability. Many borrowers will still be required to pay the fee.

Property and Occupancy Requirements

VA loans come with specific property and occupancy requirements. The Department of Veterans Affairs requires the property to be the borrower’s primary residence. This means the loan cannot be used for investment properties, vacation homes, or multi-unit dwellings unless the borrower occupies one unit. Borrowers are expected to move into the home within 60 days of the loan closing, though some exceptions exist for situations like active duty deployments or retirement.

The VA appraisal is more rigorous than a standard appraisal. This appraisal ensures the property meets Minimum Property Requirements (MPRs) for safety, sanitation, and structural soundness. MPRs cover areas such as a sound roof, functional utilities, and the absence of health or safety hazards like exposed wiring or lead-based paint in older homes.

MPRs can introduce disadvantages. If a property does not meet these requirements, repairs must often be completed before the loan can close, which can lead to delays in the purchasing process. This can be challenging in competitive housing markets, as sellers might be reluctant to accept offers with VA financing due to the potential for required repairs or complexities associated with the VA appraisal. Some properties, especially those in poor condition, may not qualify for VA financing at all, narrowing housing options.

Lender Specific Requirements and Loan Timelines

Beyond the Department of Veterans Affairs’ guidelines, individual lenders often impose additional requirements, known as “lender overlays.” These overlays include stricter criteria than the VA’s minimum standards, such as higher credit score requirements or lower debt-to-income ratios. While the VA itself does not set a minimum credit score, many lenders may require a score of 620 or higher. These lender-specific rules can make it challenging for some eligible veterans to qualify for a VA loan, even if they meet the broader VA criteria, limiting their choice of lenders or loan terms.

Concerns about longer processing times for VA loans exist. While the average closing time for a VA loan is comparable to conventional mortgages, ranging from 40 to 55 days, certain aspects can prolong the process. The VA appraisal process, especially if repairs are mandated to meet Minimum Property Requirements, can introduce delays. In competitive markets, an extended timeline can make a VA offer less appealing to sellers seeking a quicker closing.

Securing a VA loan requires submitting specific documentation to verify eligibility and financial stability. Borrowers need to provide a Certificate of Eligibility (COE), proof of military service like a DD-214, recent pay stubs, two years of tax returns, and bank statements. While necessary for loan approval, gathering and processing this paperwork can add to the complexity and burden for applicants.