Section 2.11

VA Loan Qualifications & Requirements

Veterans can potentially qualify for any loan program out there, including conventional, FHA, USDA, and—most importantly—VA loans.

However, despite this full range of choices, we still believe that VA loans are the best home loan option for our servicemembers. But you don't have to just trust our word for it. In this article, we'll compare VA loans against each of the different loan types so you can see how the VA wins almost every time.

VA vs. Conventional Loans

When it comes to buying a home, conventional loans are usually what people first think of when considering home loans. And while they're a great loan type, they don't quite have all the benefits a VA loan has.

Down Payments

Unlike VA loans, conventional loans always require a down payment. If you have really good credit, the down payment could be as small as 3%. However, 3% of a $300,000 loan, for example, still comes to $9,000.

And that's just the best case scenario!

Many borrowers don't qualify to put down just 3%. In fact, it's more typical for conventional loans to have a down payment of 5–10%. These higher amounts will take longer to save, which means it could take even longer for you to get into a home.

Compared to a VA loan, where there's no down payment, saving up for a conventional loan requires a pretty big chunk of change. Because you can get a VA loan with $0 down, you'll be able to get into a home faster since you don't have to worry about putting thousands of dollars away into savings.

Private Mortgage Insurance

Conventional loans also often come with an extra monthly cost called private mortgage insurance (PMI). PMI is a type of insurance policy that protects lenders in case you default on your loan, and it is usually required if you make a down payment below 20%.

On conventional loans, PMI typically ranges from 0.5–1.5% of your total loan amount. According to Freddie Mac, this usually translates to paying $30–$70 per $100,000 of your home's value each month. On a $300,000 home, this means you could expect to pay anywhere from $90 to $210 each month in PMI.

As we mentioned, PMI is paid monthly on conventional loans as part of your mortgage payment in addition to your principal, interest, property taxes, and homeowners insurance. You'll continue paying PMI until you have 20% equity in the home.

In comparison, VA loans never have any type of private mortgage insurance. No PMI means your monthly mortgage payment could be hundreds of dollars cheaper each month AND you would save thousands of dollars each year.

Interest Rates

Conventional loans can have great interest rates. However, it's simply a fact that VA loans still tend to have even lower options available.

For a single borrower with the exact same profile, including credit score, DTI ratio, etc., VA loans tend to have, on average, rates that are anywhere from 0.25%–0.42% lower than conventional loans.

On a $300,000 mortgage, even just a 0.25% difference in your interest rate could save you hundreds of dollars each year and thousands over the life of the loan.

reduce closing costs

Closing Costs

While conventional and VA loans tend to have similar closing costs amounts (usually between 3–5% of the total loan), VA loans still have three distinct advantages over conventional loans in this category:

  • VA loans have a list of non-allowable fees
  • Loan origination charges are also limited
  • You can roll the funding fee into the loan

Though we already talked about the VA's allowable and non-allowable closing costs in section 2.8 of this series, as a quick reminder, the VA does not allow lenders to charge you fees that may be common on conventional loans, including attorney fees and broker commissions.

In addition, lenders can only charge you up to 1% for loan origination. This amount can either be a flat fee of 1%, or it can be an itemized list whose total doesn't exceed 1%.

Finally, you have the option to not pay the funding fee in cash at closing. Instead, you can choose to roll it into your loan balance and pay it off over time. Just be aware that doing so does mean you'll end up paying interest on it.

Conventional loans, on the other hand, don't have any of these benefits regarding their closing costs. There are no limits on what they can charge you at closing, and you have to be careful of lenders who nickel-and-dime you at closing by charging a bunch of unnecessary fees.

Financial Qualifications

Conventional loans have some of the highest underwriting standards when compared to other loan types.

For starters, in order to qualify, you usually have to have at least a 620 credit score. However, most borrowers tend to have above a 700, and the best rates are only available to those with a score above 740.

VA loans, in comparison, don't have a minimum credit score requirement that's set by the VA. However, it's important to note that some VA lenders do set their own—usually it's around 620–640.

If you are finding your credit score to be a barrier with getting a VA loan, the good news is that you should be able to find a lender who follows the VA standards of no set minimum. At Low VA Rates, for example, we care more about the why behind your score and not the exact number.

In addition to your credit score, the other financial qualifications for VA loans, including your debt-to-income ratio, also tend to be more flexible than they are for conventional loans.

Prepayment Penalties

Though penalties for paying off your mortgage early have largely gone out of fashion, they still sometimes find their way into the terms of conventional loans.

This can be a problem, especially if you decide you want to refinance your mortgage or simply put extra towards it in order to pay it off early.

VA loans, on the other hand, never have prepayment penalties, so you're always free to refinance or make extra payments without worry.

Loan Limits

Conventional loans are all subject to the FHFA's conforming loan limits for each county. If you want to buy a home that's more expensive than your county's limit, you have to meet even stricter requirements for your credit, income, DTI, and more.

For VA loans, however, the FHFA's conforming loan limits aren't an obstacle for first-time home buyers. The VA's credit and DTI requirements for a million dollar home are the same as what they are for a $200,000 home. The only difference is that you'll, obviously, need to make enough income to support the larger mortgage payment.

VA vs. FHA Loans

FHA loans are one of the most common loan programs for first-time home buyers. However, that doesn't mean they're the right choice for you, especially when you could qualify for a VA loan. Let's see how these two contenders stack up against each other in various categories.

Down Payments

Like conventional loans, FHA loans also require a down payment. The lowest option is for 3.5%, but in order to qualify for that, you'd have to have a 580 or higher credit score. If your credit score is lower than 580, you'll need a down payment of 10%.

The 0% down payment for a VA loan option is available to every qualified servicemember or veteran, regardless of their credit score. As long as they qualify for a VA loan, they don't have to make a down payment if they don't want to.

Mortgage Insurance

If you thought the private mortgage insurance for conventional loans was bad, we have even worse news for you.

With FHA loans, you pay what's called a mortgage insurance premium (MIP). Not only do you pay this fee every month as part of your mortgage payment, but you also pay a separate, one-time MIP when you close the loan.

And these fees aren't very cheap, either. The upfront fee is for 1.75% of your loan amount, and the monthly fee can range from 0.8%–1.05%.

To make matters worse, the recurring portion of the MIP never goes away, no matter how much equity you earn in your home. The only way to get out of it is to refinance into another loan type.

Now that no-mortgage-insurance thing for VA loans is looking even better, isn't it?

Interest Rates

Once again, VA loans have, on average, lower interest rates than FHA loans.

Though the margins can be tighter between VA and FHA loans than between VA and conventional, you can still expect them to be at least 0.25% lower, and sometimes more.

Even though this is a fairly small difference, it's important to remember how much it can save you each year and over the life of the loan. (Hint: Hundreds and thousands, respectively.)

Closing Costs

As we've already mentioned, VA loans have limits on what closing costs a borrower is allowed to pay. Just like with conventional loans, those limits don't exist on FHA loans. Just as one example, lenders can't charge you a notary fee on a VA loan, but they can charge you for it on an FHA loan.

However, both VA and FHA loans do cap origination fees at 1%, and they both allow you to finance at least some of the closing costs into the loan amount.

Loan Limits

FHA loans are also subject to loan limits, though these are set by the FHA and are referred to as FHA lending limits. Though they are influenced by the FHFA's conforming loan limits, they are technically separate.

The FHA's lending limits are updated every year and are often lower than the FHFA's loan limits. Because of this discrepancy, you may be very limited on the houses you can buy using an FHA loan. Even if a home is listed for an average price in your area, it could still potentially be too high for your county's FHA lending limit.

A loans, on the other hand, aren't subject to any loan limits for first-time borrowers with their full VA entitlement.

VA vs. USDA Loans

Like VA loans, USDA loans tend to be a little more uncommon when compared to both conventional and FHA loans. However, despite their unique features, USDA loans still don't quite compare with all the benefits of a VA loan.

Down Payments

In the down payment arena, USDA loans are the only other loan type that's able to compete with a VA loan, as neither of them have any kind of down payment requirement.

Because you can get both types of loans with $0 down, you're able to save up for a home faster.

Mortgage Insurance

Even though USDA loans can compete with VA in regards to down payment, VA loans win out once again when considering mortgage insurance.

Just as a quick reminder, VA loans don't have any type of mortgage insurance payment, either at closing or as part of your monthly mortgage payment.

The same can't be said for USDA loans.

Like with the FHA program, USDA loans come with two types of mortgage insurance payments. Similar to an FHA loan, the first is made at closing and the second is made annually and paid monthly. The upfront fee costs 1% of your loan amount, while the fee that gets paid monthly is for 0.35%.

The monthly fee payment also never goes away, unless you refinance into a different loan type that doesn't carry insurance fees for the full life of the loan.

For this to happen, you'd either have to refinance into a VA loan or wait until you have at least 20% equity before refinancing into a conventional. Wouldn't it just be easiest to go with a VA loan from the start, so you don't ever have to worry about mortgage insurance? (Yes. The answer is yes.)

Interest Rates

Since both USDA and VA loans are backed by the government, they're typically able to offer lower interest rates than the other loan programs.

And while they often compete with each other, rates for VA loans usually edge out the rates for USDA loans. While this gap isn't always significant, it is still something to consider.

Financial Qualifications

Once again, like VA loans, USDA loans also tend to have more flexible financial requirements. However, there is one financial area where the USDA is really strict. If you make too much money, you might not qualify.

Yep, you heard us right. USDA loans actually have income caps, and if your gross monthly income (adjusted for your family size) exceeds 115% of the median income in your area, you won't be able to get a USDA loan.

VA loans don't have this problem. It's not possible to make too much money for a VA loan, and you won't be disqualified for your financial success.

Location Restrictions

Another unique aspect of USDA loans is that they come with geographic restrictions in addition to their financial ones.

You see, USDA loans are considered "rural development loans," so the USDA often restricts their loans to, you guessed it, rural areas. If you want to live closer to a big city, you'll probably be out of luck.

Understandably, some borrowers would prefer to live closer to all the amenities a city can offer. Luckily, VA loans can be used anywhere in America. Whether you've dreamed of the countryside or love city life, as long as the home is located in America, VA loans don't ever restrict where you can buy a home.

Exceptions for Choosing a VA Loan

While we hope we've made a really clear case for VA loans being the best choice for veterans, we do recognize that there are situations where another option may better meet your needs or goals.

For example, VA loans do have an occupancy requirement and can only be used for a home that will be your primary residence.

So, if you wanted to buy a vacation home or investment property, then you wouldn't be able to use a VA loan, and in this situation a conventional loan might be better.

However, these kinds of unique circumstances are pretty rare, since most people want to buy a home for their family to live in. But it is still something to be aware of.

VA Loans Are King

When it comes to choosing the right loan type for your situation, VA loans almost always come out on top.

Compared to the other three loan types—conventional, FHA, and USDA—VA loans offer no down payment or mortgage insurance requirements, typically lower interest rates and closing costs, greater financial qualification flexibility, and no loan limits or geographic restrictions.

They beat out other loans, again and again, so if you're interested in claiming your VA loan benefits and enjoying all these perks, drop us a line. We'll be happy to help you take advantage of all the VA loan program has to offer.