Disadvantages of VA home loans
- Loan limits and overlays – While the VA imposes no loan limits and no minimum credit scores, and doesn't require an appraisal for a streamline refinance program, most lenders do. These additional requirements are called “overlays.” By law, VA lenders cannot have guidelines that are less strict than those set out by the Department of Veterans Affairs – but they can be more strict. Why would lenders, which are protected from losses by the government's guaranty, make it harder to get VA mortgages? Because they are afraid of losing their VA approval. If lenders experience higher-than-usual defaults of their VA loans, they could lose their VA approved status, even if they always follow VA guidelines. To be safe, they tighten up guidelines to reduce the chance of high default rates.
- Funding fee increases if you use your eligibility more than once. You can use and re-use your VA home loan benefit. However, after the first time, it gets more expensive to do so. For example, in 2012, if you're a veteran buying a home with zero down, and you're using your mortgage benefit for the first time, your funding fee is 1.4 percent. If it's your second time using a VA mortgage, your funding fee is 2.8 percent. The fees are slated to drop a bit after October 2012, and again in October 2013.
- Sellers don’t always like VA loans. If you want to take advantage of poor housing market conditions and buy a short sale property or foreclosure property, you may have trouble getting your offer approved if you require VA financing. In addition, almost every seller and real estate agents require buyers to put a substantial deposit (referred to as “earnest money”) into escrow if they accept a buyer’s offer – the fact that you plan to use VA financing doesn’t matter.
There is a perception among sellers and real estate agents that VA mortgages take longer, to close, are more complicated, and prone to stingy appraisals. That perception is largely outdated – VA mortgages, like FHA and conventional home loans, are unwritten mostly by automated underwriting systems (AUS), and take no longer to close than other loans. Your lender may be able to educate agents and sellers about this when you make your offers.