Current or former members of the military who are shopping for a mortgage can choose VA home loan vs conventional. A VA loan is guaranteed by the U.S. Department of Veterans Affairs. VA loans are designed to offer some advantages, but there are certain situations where a conventional loan may be the better choice. Outlined below is a look at the difference between these two types of loans to help guide this important decision.
How Do VA Homes Loans Differ From Conventional Home Loans?
A conventional loan is a home mortgage that is not insured or backed by the government. These loans are originated and serviced by a private mortgage lender such as a bank, credit union or other financial institution.
A VA loan is insured by the U.S. Department of Veterans Affairs. The VA does not actually lend the money to the borrower; instead, it insures qualified lenders. In cases where the borrower defaults on their loan, the lender will be protected by the VA. Both lenders and borrowers must meet certain qualifications in order to be eligible for VA loans.
Type Of Property
One of the primary factors in determining the correct type of loan is the type of property in question. A VA loan is strictly for primary residences. That means that those veterans who are buying a second home, vacation home, rental property or investment property will need to use a conventional loan. Conventional loans can also be used to purchase a primary home.
One of the biggest benefits of a VA loan is the fact that a down payment is not usually required. However, there are some exceptions, such as when the purchase price of a property is currently higher than its market value; in this case, the buyer may have to put some money down. This situation often arises in a competitive housing market where multiple bids are being placed on a home.
Conventional loan providers generally prefer a larger down payment, but it is possible to find conventional mortgages with down payments as low as 3%.
Although the Department of Veterans Affairs and other lenders sometimes claim that VA-insured loans do not have a minimum credit score or maximum debt to income ratio, VA lenders do often use credit score benchmarks. Many VA-approved lenders look for a credit score of at least 620.
According to mortgage industry software provider Ellie Mae, the average FICO credit score for a VA home loan in 2016 was 707; the average for conventional mortgages was 7531. Those whose credit scores fall in the lower end of the range might want to consider another type of loan, such as an FHA loan.
Another point in favor of VA loans is that they typically have lower interest rates than conventional loans. For example, Ellie Mae reports that VA loans had an average 3.67 percent rate in November 2019, while conventional mortgages for the same term had an average rate of 4.04%1.
Borrowers who place a down payment of less than 20 percent are required to take out private mortgage insurance on a conventional loan. This protects the lender if the borrower defaults on the loan. It may come in the form of a one-time charge that is paid upon closing, an ongoing fee built into their monthly payment or some combination of upfront and recurring fees. This can vary depending on the lender, the borrower’s credit score and the specific size of the down payment.
VA loans, in contrast, do not require any mortgage insurance.
Another way these loans differ is when it comes to fees. With a VA-insured loan, there is a funding fee that helps defray the costs of any loans that default. This comes in the form of an upfront charge of somewhere between 1.4 and 3.6 percent of the loan amount. This will depend on the down payment and whether the borrower has already used their VA loan benefit in the past. This fee may be rolled into the amount of the loan, which can make the payments higher and add to the interest paid throughout the life of the loan.
However, it is important to note that veterans who are receiving VA disability compensation will be exempt from paying the funding fee.
When Is A VA Loan A Good Option?
A VA loan might be the right choice for a person who is a military service member, is veteran or veteran’s spouse who does not have the money for a down payment, or has a credit score that is fair to poor and plans to occupy the home as their primary residence.
However, borrowers who do have enough money for a 20 percent down payment may find that a conventional loan can save some money in the long run because they will be exempt from the conventional loan’s private mortgage insurance and will not have to pay the funding fee that would be seen on a VA loan.
Reach Out To Learn More About VA Home Loan Vs Conventional Loan
If you are unsure which type of loan is best for your circumstances, get in touch with the loan experts at My Lending Pal to learn more about your options.