It’s a matchup many aspiring homebuyers are interested in exploring: VA loans vs. conventional loans. Which loan product offers a better deal? That depends on the borrower, their financial situation, and the property that they hope to purchase. Keep reading to learn how these two popular home loan options stack up.
VA Loans vs. Conventional Loans
VA loans and conventional loans both have pros and cons, so the right loan for you depends on your circumstances. Understanding how these loan products compare can help you make a smart decision.
Private vs. Governmental
Conventional loans are mortgage loans made by private lenders. VA loans are also made by private lenders, but as part of the home loan program established by the Department of Veterans Affairs (VA), they’re backed by the VA. This government backing reduces the risk to lenders and prompts them to provide borrowers who use VA loans with appealing terms.
VA loans offer many appealing advantages, but many people are not eligible for them. Access to VA loans is earned through military service. The exact requirements depend on the nature, type, and length of your service, but any borrower who hopes to use a VA loan must qualify for a Certificate of Eligibility. As VA.org points out, conventional loans aren’t tied to service. Instead, factors like income, credit history, down payment, and financial stability determine whether a borrower will qualify for a conventional loan.
Using the Loan
As USA Today notes, the property that you hope to buy plays a major role when you’re weighing the matter of VA loans vs. conventional loans. VA loans can only be used for properties that meet the VA’s Minimum Property Requirements and will serve as the borrower’s primary residence. Conventional loans offer greater freedom; the standards for the property’s condition are typically more relaxed. In addition, you can fund the purchase of more than just a primary residence. Borrowers who qualify can also use conventional loans to buy vacation homes, real estate investments, and rental properties.
Both VA and conventional loans require would-be borrowers to provide certain documentation and have the income and credit needed to be approved for the loan that they’re requesting. However, it’s worth noting that the VA loan program was designed to make buying a home easier for service members and veterans. As The Mortgage Reports states, the guidelines for these loans encourage lenders to be more flexible and to take a relaxed approach to the borrower’s credit.
While whispers about the need for 20-percent down payments persist, neither VA loans nor conventional loans require such a sizable down payment. As NerdWallet reports, VA loans offer 100-percent financing, so no down payment is necessary. As for conventional loans, eligible borrowers can sometimes find conventional loans that accept a down payment as low as 3 percent.
Speaking of down payments, borrowers who opt for a conventional loan while making a down payment of less than 20 percent will generally be required to pay for private mortgage insurance, according to The Simple Dollar. Borrowers who opt for a VA loan, on the other hand, never have to get mortgage insurance. Why does this matter? Mortgage insurance only benefits the lender, and paying for it can significantly increase your monthly mortgage payment.
A lower interest rate can result in substantial savings on both your monthly payment and the total cost of your loan. VA loans tend to have lower rates than their conventional counterparts, which is a large part of their appeal. Consider the rates for a 30-year fixed-rate loan closing in November 2019. NerdWallet reports that the average rate for a VA loan was 3.67 percent. Meanwhile, comparable conventional mortgages featured an average rate of 4.04 percent.
What about funding fees? As Forbes explains, borrowers who use a VA loan will need to pay a small, one-time funding fee, which helps to fund the VA loan program. However, the cost of the funding fee is waived for certain borrowers. Others may find that it’s offset by the restrictions the VA places on closing costs and the absence of a mortgage insurance requirement. Conventional loans don’t require a funding fee, but they do come with closing costs and other fees.
If you’re interested in learning more about VA loans, conventional loans, and other financing options, PrimeLending: Manhattan, Kansas, can help. Contact us today to talk with one of our loan experts.