A VA loan's main advantages are no down payment and no monthly mortgage insurance. Its main costs are a one-time funding fee, unless you are exempt, and a loan that starts with little or no equity. The VA's own Buyer's Guide says it is often the best home loan product for veterans, and every loan has costs. This guide lays out the pros, the cons and one worked example, so you can judge it on your own numbers.
What are the pros of a VA loan?
The main pros are no down payment, no monthly mortgage insurance and no loan limit with full entitlement. The VA's Buyer's Guide lists these benefits:
- No down payment as long as the sales price is at or below the appraised value.
- No loan limit with full entitlement, if you can afford the loan. Our San Diego VA loan guide shows how the county limit works when your entitlement is reduced.
- No monthly mortgage insurance. The guide says PMI is usually required on conventional loans with less than 20 percent down, and that a VA loan does not need it.
- Closing costs that others can pay. The seller, lender or another party can pay fees and charges on your behalf. Seller concessions are capped at 4 percent of the home's reasonable value, the value set by the VA appraisal, and normal closing costs the seller pays do not count toward that cap. Our guide to VA seller concessions vs closing costs explains the 4 percent rule.
- No penalty for paying off the loan early.
- No VA minimum credit score. Lenders set their own, so read our guide to a VA loan with a 580 credit score.
- Assumable. The guide says anyone who qualifies can take over a VA loan, with servicer approval and, in some cases, VA approval, which can help when you sell. If the buyer is not an eligible veteran who substitutes their own entitlement, yours stays with the loan until it is paid off.
What are the cons of a VA loan?
The main cons are the funding fee, a small equity cushion and the VA's property and entitlement rules. Each one costs money or limits what you can buy.
- The funding fee. The VA's funding fee page lists these rates, effective April 7, 2023. For a first-use purchase with less than 5 percent down it is 2.15 percent of the loan. For later use with less than 5 percent down it is 3.3 percent. It is 1.5 percent at 5 percent down and 1.25 percent at 10 percent down. You can finance it into the loan.
- Little or no equity. With nothing down, you start with no cushion, and a financed fee adds to the balance.
- A required VA appraisal. The appraisal is mandatory for purchases, and the home has to meet the VA's minimum property requirements. The appraisal can also help you negotiate or walk away.
- A county limit with reduced entitlement. With full entitlement there is no limit. With reduced entitlement you may need a down payment on the part above what your entitlement supports.
- Occupancy and credit rules. The VA says you must meet credit, income and occupancy requirements from both the VA and your lender.
- Lender overlays. A lender can add its own rules on top of the VA's.
What does the VA funding fee cost, and how is it different from PMI?
The first-use funding fee on a $500,000 home with nothing down is $10,750, which is 2.15 percent of $500,000. You pay it once, and it can be financed. Financed into the loan, it brings the loan to $510,750, and you pay interest on that $10,750 for as long as you carry the loan. PMI is a monthly charge with no set price, so it needs a written quote to compare.
You do not pay the fee if you receive VA compensation for a service-connected disability, among other exemptions the VA lists. Check the VA funding fee page for the full list.
PMI is a different kind of cost. It is a monthly charge on a conventional loan, usually required with less than 20 percent down. How much it costs depends on your score, your down payment and the lender, so it cannot be compared fairly without a written quote. Ask for both loans on the same home. Our guide to VA vs FHA shows the same method with FHA.
What is the risk of buying with no equity?
If you put nothing down, you start with no cushion. If you then sell early and the home has not gained value, selling costs can leave you owing money at closing.
Here is an illustration, not a prediction. Suppose you buy a $500,000 home with nothing down and finance the $10,750 fee, for a loan of $510,750. If you sold soon after closing, with the home still worth $500,000 and selling costs of 6 percent, or $30,000, you would need about $40,750 at closing to pay off the loan. Each payment lowers that gap, but in the early years a large share of each payment goes to interest, so a sale after a few years can still leave you owing money at closing.
That risk is real for any loan with a small down payment. It matters most if you expect a short stay, such as a three-year tour. Home values can rise or fall, so your result could be better or worse. If you might move within a few years, run the numbers before you decide, and plan for the cash you could need.
Is a VA loan worth it?
For many veterans with full entitlement, yes. You avoid a down payment and monthly mortgage insurance, and the fee can be financed or may not apply to you at all. It is worth less if you will move soon on a no-down loan, if you have cash for a down payment that lowers the cost on another loan, or if your entitlement is reduced.
Use this short checklist:
- Check your entitlement. Full or reduced decides whether a limit applies.
- Check the fee. Find out whether you are exempt, or what the fee would be on your home.
- Price a second loan. Get a written quote on a conventional or FHA loan for the same home.
- Think about how long you will stay. The longer you stay, the less the early equity gap matters.
- Keep a cash cushion. Plan for repairs and moving costs after closing.
To see VA numbers for your state, start on our VA loans page. You can test the payment in the VA loan payment calculator and see what your budget supports in the VA loan affordability calculator. If you have used the benefit before, read how to restore your VA entitlement.
Who can run a VA loan comparison for me?
We will price a VA loan against other options on your actual home and show you the cash to close, the monthly payment and the fee. Start your pre-approval or call us at (888) 957-8387. If you want to know who you would be working with, read about Renaldo Wilson.
