The most attractive part of VA loans is the no down payment option; however, there are some disadvantages.
According to Bankrate, in 1982 Congress allowed for a “one-time funding fee." This fee can range from one percent to three percent with most lenders charging an average of two percent. Bankrate offers an example on how the one-time funding fee works:
“Many buyers simply finance the fee along with the home. But that can have a hidden cost. On a $129,245 mortgage a 2-percent fee can bloom into $14,474 over the 30-year life of a 6-percent loan. The option to finance the fee with the home is the best idea here."
VA lenders look at income and credit worthiness much like a conventional loan so the myth that if you are a veteran or active duty military you will automatically qualify is not true. A bad credit score means you won’t qualify. On average, a VA lender will require a credit score of 680 or higher.
Along with having a good credit score, remember that another myth - interest rates are lower is also just that - a myth. Most VA loans have interest rates that are comparable to rates on conventional or FHA loans, so there’s really no break on interest.
As Bankrate warns, the biggest advantage is the no down payment; however, many lenders reviewing VA loans seek out VA households with at least $50,000 of income per year, and around $5,000 in available cash for a down payment. In other words, a down payment, while not needed, can help in getting VA “lender" approval.