Considering a VA loan? Ask these 5 questions first.

One of the most popular benefits of military service is the ability to access home loans backed by the U.S. Department of Veterans Affairs, or VA. In fact, VA loans are more popular than ever: Over 400,000 purchase or refinance loans for military veterans were backed by the VA in 2023 Opens in a New Window.‍ ‍ ^{See note 1}

An active or veteran member of the armed forces, or his or her surviving spouse, may already know some of the basics if they are eligible for a VA loan Opens in a New Window:‍ ‍ ^{See note 1}

• VA loans are provided by traditional lenders, but because they're backed by the VA, these loans for military veterans offer some unique benefits.
• Most VA loan scenarios don't require a down payment, and mortgage insurance, or MI, is never required.
• To be eligible for a VA loan you’ll need to contact the VA for a Certificate of Eligibility Opens in a New Window.‍ ‍ ^{See note 1} You also need to meet the requirements of the lender offering the VA loan.

Even for those who are eligible, the benefits of a VA loan might fall short of the benefits a conventional loan offers. How can you tell if a VA loan is the right choice for you? These five questions can help.

1. Can you afford a 20% down payment?

With most conventional mortgages, if your down payment is less than 20% of the total home price, you'll likely be required to pay private mortgage insurance, or PMI, an additional fee that's added to your monthly mortgage payment, which is typically 0.5% to 1% of your loan amount per year.

In the case of the Federal Housing Administration, or FHA, all loans – except in limited situations – are required to pay mortgage insurance premiums, or MIP. A down payment of less than 10% will require MIP to be paid for the life of the loan. Down payments over 10% will require MIP payments for 11 years.

You can sometimes avoid those costs by choosing a mortgage guaranteed by the VA. But there may be a VA funding fee, which can range from 1.25% to 3.3% of the loan. Some VA loan scenarios require a down payment, such as if you don't have enough entitlement, if the sales price exceeds the conforming loan limit or if the sales price exceeds the appraised value.

• Choosing to put $0 down with a VA loan means your total loan amount and your monthly payments will be higher. You can include a down payment with your VA-backed mortgage to help, but you'll still need to pay the funding fee, unless you're exempt Opens in a New Window.‍ ‍ ^{See note 1}
• If you can afford the 20% down payment, you can avoid PMI and reduce the VA funding fee. However, you should make sure that you won't hurt your overall financial situation with this option. Don't exhaust your emergency fund to make the down payment.

2. Are you likely to move or be redeployed within three years?

If you're currently serving and there's a chance you could be redeployed within the next three years, you may want to be cautious about choosing a $0 down VA loan.

Why? Putting no money down means you have no equity in the home when you first take ownership. If you need to sell your home within a handful of years, this could mean you'll be putting more cash into the sale of the home than you're likely to get out of the sale. This is especially true if the home's value has decreased because the market has changed.

3. Will you be able to afford the typical increases in taxes and insurance?

First, here’s a lesson in escrow: An escrow account is set up by a mortgage lender to pay property-related expenses like hazard insurance and property taxes. A portion of each mortgage payment is deposited in the escrow account, and the necessary payments are made from that account. With an escrow account, your total monthly payment is more than the basic principal and interest on your loan, as you're building a fund to pay those necessary property-related expenses. But your lender takes care of processing those payments for you, so you can focus on one monthly payment.

While the VA doesn't require the use of an escrow account, it requires that property taxes be paid, and adequate hazard or flood insurance is in place on the home. Because of these requirements, most lenders opt to require escrow accounts with VA loans.

That means you're likely to see yearly increases in your mortgage payments due to increases in property taxes or hazard insurance requirements. Make sure you're prepared for those increases.

VA loan pros

• No down payment required (certain exceptions may apply)
• No PMI required
• Potential for better-than-average interest rates
• Higher debt-to-income ratio OK in some instances
• No minimum credit score required but lender may set a minimum

VA loan cons

• VA Funding Fee (determined by down payment)
• VA Funding Fee may increase after first use
• Only for primary residences
• Minimum property requirements for appraisal
• Finding an agent who knows VA loans

4. Are you expecting to outbid other potential buyers?

All VA purchase loans and cash-out refinances require an appraisal done by a licensed VA-approved professional. This is coordinated by your lender to provide an opinion of the value of the home you hope to purchase. This opinion is based on market research and a close review of the home against the VA's minimum property requirements.

At the end of this process, you'll receive a notice of value, or NOV, that documents the value and includes a list of any items needing repair to meet minimum VA property requirements. Make sure you’re aware of the implications of a home that appraises below purchase price. In these instances, you have a few options.

• Request a reconsideration of value, where you or your real estate agent provide additional documentation to support your claim that the property's value is different than what the appraiser found.
• Renegotiate the sale price. The NOV can provide ammunition to back your claim. But if other buyers are bidding, the seller is unlikely to change the price.
• Pay the difference at closing. If the seller's unwilling to negotiate, you can pay the difference between the appraisal price and the accepted price in cash at closing.
• Cancel the contract. This is one of times when you can back out of any agreements to purchase the home.

5. Is the loan for a second home or vacation home?

You can only obtain a VA loan for your primary residence. You can't get a VA loan for vacation homes or investment properties, unless you're refinancing an existing loan with no cash out on a residence that used to be your primary.

That said, you can reuse this benefit. If you sell a home you purchased using a VA loan and are looking to purchase another home to be used as your primary residence, you can do so with another VA loan. But if you have enough remaining entitlement, you may not necessarily have to sell your home. Note that your VA funding fee is likely to increase with each new VA loan you get.