The Benefits of a VA Loan vs. Conventional Loan
It’s an interesting matchup: the benefits of a VA loan vs. conventional loan. When you’re trying to decide which loan product can help you reach your housing goals, exploring these two popular forms of financing can make it easier to select the one that’s best for your situation.
One of the first things borrowers interested in VA loans are encouraged to check is their eligibility. That’s because using these loans is a privilege earned with service, so not everyone has the option to use them. As MyMortgageInsider points out, you can only get a VA loan with a Certificate of Eligibility from the VA. In contrast, conventional loans are available to all U.S. citizens. No military service is required. If you are eligible for a VA loan, you can choose between the two. If you aren’t, the matter of borrower eligibility settles the question for you.
What type of property are you hoping to buy? As Credible indicates, a VA loan can only be used for a home that will be your primary residence. In addition, the home must meet certain minimum property requirements set by the VA that are designed to ensure that it is safe, sanitary, and habitable. If you’re planning to buy a primary residence, this isn’t a problem, and the added restrictions function as a form of consumer protection. What about a conventional loan? That offers more flexibility. It can be used to purchase a primary residence, a second home, a vacation home, or an investment property.
Because VA loans are government-backed loans, they have relaxed standards for qualifying. As Forbes reports, the VA has no formal requirement for a minimum credit score for its loans. However, it does allow lenders to set their own standards, so you may encounter a lender’s expectations. As a result, shopping around can be especially useful if you have your heart set on using a VA loan because a score that one lender deems too low may be perfectly acceptable to another lender. Of course, a higher credit score is likely to be offered better terms no matter what kind of loan you’re using. How does your credit score affect your chances of getting a conventional loan? You’ll generally need a credit score of at least 620 to be considered for a conventional loan.
Down Payment and Private Mortgage Insurance
When it comes to down payments, it’s tough to top the appeal of the VA loan. That’s because the VA loan doesn’t require one. It offers 100-percent financing, and there’s never any need to worry about mortgage insurance because it’s not required with a VA loan. As The Simple Dollar indicates, you won’t get the same deal with a conventional loan. You’ll need to make at least a 3-percent down payment, and any time your down payment is less than 20 percent, you’ll pay a price in the form of private mortgage insurance (PMI). PMI doesn’t benefit you. It protects the lender if you default. However, its cost is attached to your monthly mortgage payment, and it can add hundreds of dollars to your payment.
Fees and Closing Costs
How do loan fees and closing costs compare? You may need to run the numbers. As NerdWallet explains, borrowers using a VA loan will likely pay an origination fee and other assorted fees. They’ll also be expected to pay the VA funding fee. This one-time charge, which is somewhere between 1.4 and 3.6 percent of your loan amount, is determined by a variety of factors, including your loan type, whether you made a down payment, and whether you’ve used your loan benefit before. It’s worth noting that the VA also limits the amount that a borrower using a VA loan can pay in closing costs. What can borrowers using conventional loans expect? Fees vary by lender, so it’s important to check. As for closing costs, there are no limits on closing costs when you’re using a conventional loan.
Both VA loans and conventional loans have their pros and cons. What appeals to one homebuyer may be a dealbreaker for someone else. Understanding the ins and outs of these loans can help choose the right product for your needs. If you have questions, contact the loan experts at PrimeLending: Manhattan, Kansas, today.