VA Loans: Benefit or Burden?
VA loans are a largely misunderstood loan product. Operating a real estate firm in the Manhattan area, I encounter VA loans frequently. VA loans are commonly referred to as a military ‘benefit,’ but oftentimes they do nothing but burden the borrower for years to come.
Before we talk about the pros and cons, let’s first clarify what a VA loan is. A VA loan is a loan guaranteed by the US Department of Veteran Affairs. It is important to understand that the VA does not issue VA loans; they guarantee them. If the borrower of a VA loan defaults, the VA “assumes the sale” of the loan. In other words, the VA buys out the bank that issued the loan. Many lending institutions take the ‘assume the sale’ tactic to a predatory level by pre-qualifying borrowers because they know the VA will assume the sale if the borrower defaults. Pre-qualifying with certain national brands makes it appear that you are pre-qualifying with the VA themselves, but don’t be misguided; the national brands are just another lending institution.
The appeal of a VA loan is that you can put 0% down. This is a huge benefit because you can scarcely find that same borrowing scenario outside of a VA loan. Another appeal is that you can ‘pay no closing costs,’ so there is absolutely no money needed to purchase the home. However, it is important to remember that someone has to pay those costs. Just because it is a VA loan, doesn’t mean that the Title Company, inspector, and appraiser work for free. To pay for associated closing costs, up to 4% of the purchase price can be financed into the loan. In addition to that, the VA requires a funding fee that ranges from 2.15-3.3% according to the VA benefits website. This can also be rolled into the loan.
Oftentimes, VA loans can provide a huge benefit to our military personnel, but use caution. If you are only anticipating being at that location for a short amount of time, it is easy to be buried in debt. My recommendation is to not purchase a home on a VA loan if there is a strong possibility of only staying for a couple of years. Otherwise, expect a hefty bill to get out from under the property, or the headache of renting, which also makes it much harder to purchase another home at your next location. Usually three or more years provides enough of a buffer to sell the house and to ensure that you are not paying to sell the property. Three or more years usually ensures the combination of property value appreciation (hopefully) and principal reduction on your loan. Conclusion: a VA loan is an excellent option in certain scenarios, but is not always the best or even a good option if you are only planning to live in your purchased home for less than three years. Working with a reputable local lender and Realtor® is crucial to finding the best lending options for you.
Written by: David Renberg