Home loans guaranteed by the Department of Veterans Affairs have been a staple in the home mortgage business since the program began after World War II. Borrowers who have the proper military qualifications for a VA home loan often see it as their first choice because the loan can be obtained without a down payment and the closing costs can be rolled into the loan amount.
These borrowers may not, however, be considering the total costs of the loan nor any of the possible downsides. If you have been leaning toward a VA home loan, here are three reasons why it may not be your best mortgage option.
An unsettling lack of equity
The first reason to approach a VA home loan (or any nothing-down home loan) with caution is because it puts the buyer into a potentially dangerous no-equity situation. Depending on the loan value of the home and the amount borrowed, it is not uncommon for borrowers to find they have very little or no equity in their home for the first few years of their ownership.
If the market becomes depressed within that time frame, the borrowers can easily owe more on their home than it is worth and be trapped in the type of underwater mortgage that caused so much pain during sub-prime loan debacle a few decades ago.
Higher fees and interest rates
VA home loans have higher fees and interest rates than a comparable FHA or conventional home loan typically has. Most VA borrowers must pay a funding fee at closing, on top of closing costs. If the borrower chooses to also roll this fee into their loan amount, they increase the risk of owing more for their home than they could expect get from it, if selling.
More financial risk during a foreclosure
Another potential problem for those who opt to use a VA home loan is the fact that the Veterans Administration actively pursues owners who default on their loan obligations. Unlike FHA home loans, which rarely result in a borrower's being pursued in an attempt to recoup the loss after a foreclosure, VA borrowers can expect to be held responsible for the difference between what the home sold for during the foreclosure and the loan amount that was left against it. Borrowers in this situation cannot use their VA loan eligibility again until they fully reimburse the VA for the loss.
To learn more about home loans, as well as other loan options, prospective home buyers should discuss their needs and concerns with a trusted mortgage lender in their area.
Share8 July 2019
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