Homeowners can choose from several types of mortgages to obtain their homes, especially if they have good credit. Two of the top choices are VA loans and conventional loans. While the VA loan program has eligibility requirements that surround military service or having a spouse who served in the military, conventional loans do not have those restrictions in place. This guide will explore the strengths and weaknesses of each financial product so you can determine which one is right for you.
Overview of VA Loans
VA loans are offered by the Department of Veterans Affairs to make homes more accessible for service members, veterans, and their families.
What is a VA Loan?
A VA loan is a type of mortgage that has no down payment requirement and competitive rates and terms. These loans tend to have more competitive rates and terms than most types of mortgages.
How Does a VA Loan Work?
These loans tend to have fewer requirements than traditional mortgages. While the VA does not have any credit score requirement for its loans, VA lenders often want you to have a 620 FICO score to obtain a loan. However, some lenders will work with you if you have a credit score below 600.
Overview of Conventional Loans
Conventional mortgages are a common path to homeownership. Here’s what you should know about them.
What is a Conventional Loan?
A conventional loan is a conforming loan that fulfills the requirements established by Fannie Mae and Freddie Mac. Many financial institutions offer these loans, but you must have a credit score of at least 620 to get financing. These loans also require down payments, and you will have to pay private mortgage insurance if you have less than 20% equity in your home.
How Do Conventional Loans Work?
Conventional loans allow you to break down the purchase of a home into monthly payments over the course of 15-30 years. Homeowners can choose the term length and whether they receive a fixed-rate or a variable-rate loan.
How Does a VA Loan Differ from a Conventional Loan?
While both loans fulfill the same objective, they have different approaches. VA loans do not require down payments, and you won’t have to worry about private mortgage insurance at any point. However, conventional loans require down payments, and you will have to pay insurance for those loans if you have an LTV ratio above 80%.
Both loans have closing costs, but you will also have to pay a VA funding fee if you use a VA loan. This fee helps to fund the VA loan program so the Department of Veterans Affairs can continue to offer these financial products. The VA funding fee compensates for competitive rates and the fact that borrowers never have to contend with monthly mortgage insurance premiums.
Key Differences Between VA Loan vs Conventional Loan
These are some of the other key differences to keep in mind when assessing VA loans and conventional loans.
Eligibility
The VA loan has eligibility requirements around your service or your spouse’s time in the military. Conventional mortgages are open to any qualifying person who is 18 years or older. The individual didn’t have to serve in the military or buy a property in a specific part of the country to obtain a traditional mortgage.
Down Payment Requirements
Each conventional mortgage requires a 3% down payment. However, you can take out a VA loan without putting any money down.
Interest Rates
Both mortgages have competitive rates that are based on your credit score, debt-to-income ratio, and other factors. However, VA loans have lower interest rates than conventional mortgages.
Mortgage Insurance
VA loans do not have any mortgage insurance premiums. However, a borrower with a conventional mortgage will have to pay private mortgage insurance premiums until they have 20% equity in their home.
Mortgage insurance premiums make it more difficult to accumulate home equity. It’s best to make additional monthly payments toward your mortgage if you are paying private mortgage insurance. That way, you can get rid of this additional expense sooner.
Funding Fees and Closing Costs
Only VA loans have funding fees, which add an additional expense to your closing costs. You will have to contend with appraisal fees, origination fees, and other closing costs when you secure a traditional mortgage or a VA loan.
Loan Limits
Eligible military borrowers do not have loan limits when they take out VA loans. However, conventional mortgages have maximum loan amounts since they are conforming loans. While this amount changes each year, the current conforming loan limit is $766,550 for a one-unit property in most parts of the country. The limit varies depending on your area’s cost of living.
Refinancing Options
Both loans offer refinancing options that let you modify the rate and terms of your loan. VA loans also have the VA Interest Rate Reduction Refinance Loan (VA IRRRL). It’s a lengthy acronym, but you don’t have to worry about it. The financial product is also known as a VA Streamline Refinance. It allows borrowers to secure lower interest rates and requires less paperwork than traditional refinances.
Pros and Cons of VA Loans
These are some of the pros and cons to consider before getting a VA loan.
Pros
- No down payment requirement: You can buy a house without worrying about one of the biggest obstacles for many home buyers.
- Competitive rates and terms: VA loans have some of the lowest interest rates in the industry.
- No private mortgage insurance if you have less than 20% home equity: Private mortgage insurance adds up and makes it more difficult to pay off your mortgage.
- More flexibility with DTI ratio and credit score: You don’t need a 620 FICO score to obtain a VA loan.
Cons
- VA funding fee: This extra fee keeps the VA loan program going, but it’s not present for conventional mortgages.
- Eligibility: You must be a service member, veteran, or spouse of someone who served to obtain a VA loan. Not everyone has fulfilled this eligibility requirement, but that’s also why the program offers some of the best loans in the industry.
- This loan is only for a primary residence: Real estate investors will have to pursue other loan options.
Pros and Cons of Conventional Loans
Conventional loans are another popular financial product for aspiring home buyers. These are some of the pros and cons to keep in mind.
Pros
- Competitive rates and terms: You can receive a good annual percentage rate (APR) from a conventional mortgage.
- More options: Consumers can choose from several types of conforming mortgages that abide by Fannie Mae and Freddie Mac’s guidelines.
- Low minimum down payment requirement: You only need to make a 3% down payment to get started.
Cons
- Conforming loan limits: These limits only apply to consumers who want to buy high-end properties.
- You must put 20% down to avoid private mortgage insurance premiums: It can take a while to free yourself from private mortgage insurance premiums unless you have enough cash ready to go for a big down payment.
- More stringent FICO score and DTI ratio requirements: These financial products have more challenging requirements than VA loans.
VA Loan vs Conventional Loan: Choosing the Right Loan for You
Buying a house is a significant decision, and the mortgage you choose will impact your monthly payments, eligibility, and other factor. These are some of the details to consider before choosing the right mortgage for you.
Assessing Your Eligibility
VA loans have eligibility requirements that require you to have an appropriate affiliation with the military. However, VA loans and traditional mortgages also have additional requirements around your FICO score, debt-to-income ratio, and other factors. If you or your spouse previously served in the military, a VA loan is typically easier to obtain.
However, borrowers can only use a VA loan for a primary residence. You will have to use a conventional mortgage for a real estate investment property or a vacation home.
Financial Considerations
VA loans offer a significant advantage since you do not have to make a down payment. These financial products offer a lower barrier of entry for aspiring homeowners. It’s still good to compare rates and terms for each type of financial product before deciding which one is right for you. VA loans also tend to have lower FICO score requirements than traditional mortgages.
Long-Term Goals
Traditional mortgages are more optimal for building a real estate portfolio and acquiring multiple properties. VA loans are more suitable for first-time home buyers, but it’s also important to review each lender’s rate and terms.
When to Choose a VA Loan
VA loans make more sense when you are getting started and don’t have much capital to put into a down payment. Rising housing prices make it more difficult to fulfill the minimum 3% down payment from a traditional mortgage, and that’s before private mortgage insurance comes into play.
If you’re considering homeownership and are eligible for a VA loan, The Federal Savings Bank is ready to assist you in every step of the process. Their commitment to veterans, active duty service members, and their families is unmatched as they strive to make your journey to homeownership as smooth as possible. With a streamlined application process and expert guidance from knowledgeable professionals, The Federal Savings Bank can help you navigate the unique benefits of VA loans.
Whether you’re a first-time homebuyer or looking to refinance your existing mortgage, The Federal Savings Bank offers personalized solutions tailored to your financial situation. Reach out to The Federal Savings Bank today by filling out this simple form and take the first step towards owning your dream home.
When to Choose a Conventional Loan
A conventional mortgage is more suitable if you want to buy multiple properties or can make a 20% down payment. You can skip the VA funding fee if you take out a traditional mortgage. You can buy a vacation home if you use a conventional loan.
A seller’s market can also prompt borrowers to gravitate toward a conventional mortgage. That’s because conventional loans have shorter application timeframes than VA loans. Traditional mortgages have less complex underwriting processes.
Frequently Asked Questions (FAQs) About VA Loan vs Conventional Loan
Yes. It is possible to qualify for both a VA loan and a conventional loan. You must fulfill the FICO score and DTI ratio requirements for each of them. However, you can only obtain a VA loan if you or your spouse previously served in the military and qualify for the VA loan program.
VA loans are the better choice for most first-time homebuyers due to the zero down payment requirement and no private mortgage insurance premiums.
VA loans have lengthier underwriting processes, which results in a longer process. If you need to get a loan quickly to secure a deal, a conventional mortgage is the better option.
