Are VA loans better than conventional loans? It’s certainly easy to find fans of the home loan program offered by the Department of Veterans Affairs (VA). However, it’s even easier to find a homeowner who financed their purchase with a conventional loan. Which loan is better?
Are VA Loans Better Than Conventional Loans?
Mortgage Calculator reports that fixed-rate conventional loans account for some 75 percent of home loans, so conventional loans are obviously a popular choice. Meanwhile, the VA home loan program has helped millions of families buy or refinance a home by serving up more than 24 million government-backed loans, according to VA.org.
Are VA loans better than conventional ones? That depends. After all, the home loan product that is perfect for one person’s needs may be a poor fit for someone else. To decide which loan is best for you, it’s important to weigh several considerations.
A Borrower’s Eligibility
Conventional loans are available to any person who can win the lender’s approval. VA loans are different. A benefit earned through military service, these loans are only available to service members, reservists, veterans, surviving military spouses, and other individuals who meet the program’s eligibility requirements. The details of these requirements vary depending on the time and nature of your service. If you want to find out if you qualify, the VA provides a breakdown of the eligibility requirements and information on how to secure a Certificate of Eligibility.
The borrower isn’t the only one who will face scrutiny before a lender agrees to extend a loan; the property will also be a consideration. As NerdWallet explains, if flexibility is important, you’ll likely find a conventional loan is the better bet. Conventional loans can be used to purchase primary residences, second homes, vacation homes, and investment properties. While the lender will check that the property’s appraised value is enough to offset the risk of making the loan, they aren’t overly concerned with the property’s condition. There are stricter standards in place for properties purchased with VA loans. Borrowers can only use these loans to purchase a primary residence. In addition, the property must meet the VA’s Minimum Property Requirements, which are used to ensure that the property is safe, sanitary, and sound.
Credit Scores, Interest Rates, and Down Payment Requirements
Your financial situation can have a major impact on your ability to get a loan. As Mortgage Calculator points out, the financial standards set for conventional and VA loans have some noticeable differences. For conventional loans, the credit requirements are stricter. In addition to suitable income and assets, potential borrowers will generally need a credit score of at least 620 and a front-end debt-to-income ratio of no more than 28 percent. In contrast, the credit vetting for a VA loan is much more relaxed. While some lenders may set their own requirements, the VA doesn’t insist on a minimum credit score, and higher debt-to-income ratios are considered acceptable. Plus, VA loans generally come with lower interest rates.
What about down payments? It’s possible to find a conventional loan with a down payment demand as low as 3 percent, but a down payment of less than 20 percent will have financial consequences. In contrast, VA loans can provide up to 100-percent financing, so no down payment is no problem.
Fees and Mortgage Insurance
What about the costs involved in taking out the loan? As NerdWallet reports, conventional loans generally require origination and other fees that are paid at closing. Using a VA loan will mean paying a funding fee and other closing costs, but the VA does set limits on how much borrowers can pay in closing costs. Mortgage insurance is another cost of borrowing, and borrowers who opt for a conventional loan while making a down payment of less than 20 percent will need to pay an insurance premium on top of their monthly mortgage payment until they have at least 20 percent equity. Borrowers who use a VA loan don’t need to worry about mortgage insurance or its added costs. No mortgage insurance is needed when using a VA loan.
When you have questions about conventional loans, VA loans, or other mortgage products, turn to PrimeLending: Manhattan, Kansas. We would be happy to help you explore your financing options and guide you through the loan process. To get started, send us a message online.