VA Loan vs Conventional

VA vs Conventional LoansVA loan vs conventional whats the better option? Many veterans or other VA-eligible borrowers decide not to use their VA loan benefits because they’ve heard that the benefits of the VA loan program aren’t worth the hassle. That is not true. The VA loan program is far superior to conventional loans, and it is definitely worth it to use a VA loan instead of a conventional if you are eligible. VA loans are better than conventional loans in a number of ways, but we’ll cover the three main ways in this article. The three ways a VA loan is superior are that a VA loan is easier to qualify for, allows you to get better terms, and is more friendly to people in tight financial situations.

 

VA Loans are Easier to Qualify For

The heart of the VA loan program is the VA guaranty – the Department of Veterans Affairs guarantees a percentage of the loan to the lender in case the borrower defaults on the loan. The VA doesn’t actually fund loans; it simply insures them. This lowers the amount of risk that a lender is taking on with a VA loan because they know a huge portion of the mortgage will be paid back no matter what. Because of the lowered risk, VA loans are generally easier to qualify for. This is especially true when you are working with a lender that specializes in VA loans.

Some of these easy qualifications include the following:

  • Credit score of 620 or higher (Low VA Rates has no minimum)
  • DTI ratio of 41 percent
  • Adequate residual income
  • No down payments

The VA loan program and conventional loans are very different, so you’ll maximize your benefits if you work with a lender that specializes in VA loans, rather than a lender that doesn’t know the VA program very well. Lenders that specialize in VA loans often have very relaxed credit requirements, which makes homeownership accessible to even those that don’t have great credit. If you do have great credit, you can expect to be offered a stellar interest rate – especially compared to a conventional loan.

A few conventional loan qualifications, in contrast, include the following:

  • Credit score of at least 660
  • DTI ratio of anywhere from 36 percent to 50 percent depending on how well you meet other qualifications
  • At least 5 percent down payment (20 percent in order to waive PMI)

 

The VA Loan Program Allows You To Get Better Terms

For the same reason that VA loans are easier to qualify for, you can also get much better terms on VA loans than on a conventional loan. When lenders take on a VA-eligible borrower, they aren’t taking on as much risk as they are with a conventional borrower since the VA is willing to guarantee a percentage of the loan amount. So a borrower with great credit that’s able to make a down payment can get much better terms on a VA loan than a conventional, and a borrower who doesn’t have the credit to qualify for a conventional loan at all can still get a VA loan. Anything you can qualify for on a conventional loan, you can qualify for a better version of through the VA loan program.

When we talk about loan terms, we are generally referring to the type of interest rate you get and how you pay back the loan, more specifically, how often you make payments and for how long. Types of interest rates do factor into the terms of the loan. You can choose between fixed rates and adjustable rates or even get a mixture of the two with a VA hybrid ARM. For the most part, loans come with terms ranging from 10 to 30 years, meaning that if you make all of your scheduled payments, stay in your home, and never refinance, you will pay that loan off by the end of that set number of 10 to 30 years. Depending on the lender, it could be more difficult to qualify for a shorter term as this would pose more risk with the higher monthly payments. But like we said, it is much easier to qualify for the loan terms you want with a VA loan than with a conventional.

 

The VA Loan Program is More Friendly to Borrowers with Tight Finances

The single biggest barrier to a young couple, or any potential buyer for that matter, when buying their first home is saving up for a down payment. With conventional loans, home buyers can get away with only making a 5 percent down payment. However, with a down payment of anything less than 20 percent, PMI (private mortgage insurance) payments are required. To make a 20 percent down payment on a $300,000 home, you would need to save up more than $60,000 (especially since closing costs on that loan will probably be around $10,000). While many people can make monthly mortgage payments with little financial difficulty, forking out over $60,000 all at once is much less feasible.

The VA loan program addresses this barrier by offering a no-down-payment option. You can get a mortgage with a 0 percent down payment through the VA loan program. With a new purchase loan or a cash-out refinance, you’ll still have some closing costs to pay, but in most cases, closing costs can be financed into the loan. Even when the borrower makes no down payment, the VA loan program does not ever require any mortgage insurance, which helps keep your monthly payment lower. Instead, they will charge the VA funding fee, but this is only paid upfront and can be waived entirely for service members with service-related disabilities.

Another huge financial benefit of VA loans is the lower interest rates. VA loans tend to have the lowest interest rates of any home loan program. This difference could save you thousands by the end of your loan.

In summary, here are a few unique financial benefits of the VA loan:

  • No down payment
  • Lower interest rates
  • No PMI
  • Closing costs can be financed into the total loan amount

 

Apply for a VA Loan Today

In short, the VA loan program trumps the conventional in every way that matters. Because of the VA guarantee, VA loans are easier to qualify for, come with better terms than you could get elsewhere, and have much better options for borrowers in tough financial situations. You really should pursue a VA loan if you are VA-eligible and are looking to purchase a home. The best thing you can do is look for a lender that specializes in VA loans, since they know the program well enough to know all of the great advantages available for you to take advantage of. There are more advantages to the VA loan program than what we have discussed in this article, and you can learn more about them by reading more of our articles or by giving us a call here at Low VA Rates.

 

 

FAQ Cash back at closing

Can I Get Cash Back at Closing on a VA Loan?

 

This is a common question that we get about VA loans. It’s an important question to have answered; how can you make a good plan for the future and your home if you don’t know how much cash you’ll still have after closing on the loan? The thing that complicates this question, however, is that the answer is different depending on what type of loan you’re getting. If you’re doing a new purchase loan, the answer is different than if you’re doing a VA streamline refinance (IRRRL), and the answer for the streamline refinance is different from the answer for a cash-out refinance. To keep things simple, we’ll cover each situation one at a time.

 

If you’re looking to get a VA new purchase loan, then you can only sort-of get cash back at closing. This isn’t much different from a conventional or FHA loan – generally the only way to get cash out on a mortgage is to take advantage of equity you already have in the home. If you’re just purchasing the home, whatever equity you have is being gained from the down-payment, so if you’re wanting to keep more cash in your pocket at the moment, the path is usually to just make a smaller down payment. Even on a new purchase VA loan however, you do have one option to get cash back, and that is by getting the amount you paid in earnest money back at closing. Generally the earnest money goes towards the down payment, but paying the earnest money now, then getting it back at closing could provide enough wiggle room to get out of a financial crunch right around closing on your house.

 

VA Cash BackThe situation is quite different when you are getting an Interest Rate Reduction Refinance Loan (IRRRL), which is the VA’s streamline refinance option. In the case of an IRRRL, there are two possibilities when it comes to getting cash back at closing. The VA allows the borrower to apply for an Energy Efficiency Mortgage (EEM), which acts as an add-on to the main loan. An EEM is a loan for energy efficient improvements to the home, and requires that the borrower specifically outline what improvements he or she would like to make to the house, get quotes or pricing for the work and supplies, and submit the information to the lender. An EEM can only be made for the combined cost of all the projects the borrower wishes to do, and cannot exceed $6,000. A lot can be done with $6,000, and keeping the amount small helps keep the underwriting process simpler and easier, especially on an IRRRL. The only other way to get cash back on an IRRRL is through mathematical or computational differences that came up in the underwriting process. The VA prohibits any amount greater than $500 being given to the borrower for this reason. Most loans go through without any of these computational errors that would cause cash to go back to the borrower.
Quite different from both situations already discussed is the cash-out refinance loan. “Cash-out refinance” is the broad term that covers every type of refinance other than the IRRRL. This category covers cash-in refinances, what would be considered debt consolidation refinances, and, of course, actual cash-out refinances themselves. Since the only difference between debt consolidation refinances and cash-out refinances is the purpose of getting money out, and getting cash out on a cash-in refinance would defeat the purpose of one, using the term “cash-out refinance” for this situation is perfectly suitable. Getting cash back on a cash-out refinance is purely a matter of convincing the lender that you want the money for a suitable purpose. The VA has no restrictions on how much money you can get or what you can do with it, but no lender will give you more cash than you have equity in your home, and they won’t give it to you unless you have a good reason. Common uses for getting cash out include making improvements to your home (EEMs are also available on a cash-out refinance), consolidating high-interest rate debt into your mortgage, and making large expenses like paying for college or purchasing a new car.

FAQ: What is a VA loan

 

What is a VA Loan?

VA Loans

 

A VA loan is different from a conventional or FHA loan. A conventional loan is what most people think of when they think of a mortgage – you go to a lender, make a down payment, get offered an interest rate, and start making your payments. Conventional loans require at least a 20% down payment. FHA loans are a small step closer to VA loans but still a far cry. FHA loans are partially guaranteed by the Federal Housing Administration (FHA), and enable borrowers to buy a house if they can’t make a 20% down payment. FHA loans, however, require mortgage insurance, which can add hundreds of dollars each month to your monthly payment.

 

VA loans are better in pretty much every way. Just like the FHA guarantees FHA loans, the VA guarantees VA loans. Also, just like the FHA doesn’t actually make the loan (a normal lender does), the VA does not actually loan any money for a VA loan. A VA loan is a home loan that is guaranteed (not offered) by the Veterans Administration. VA loans are obtained through VA-approved lenders who choose to offer them. The VA will force no lender to offer VA loans, and any lender who does so has discretion as to what loan types they will offer. For example, right now it is very difficult to find a lender who is willing to offer a VA construction loan, even though the VA is perfectly willing to guarantee one. The amount of discretion given to the lender may seem odd, or even unfair, but lenders need to have the ability to make only the loans that are a safe bet for them or they’ll go out of business – or none would choose to offer VA loans.

 

The VA guarantees a portion of the loan amount to the lender in case of default to lessen the risk and enable them to offer veterans more favorable loan terms than they could otherwise qualify for. The VA does not guarantee the entire loan amount, and the percentage of the loan that they guarantee depends on how much the loan is being made for. The percentage is always between 20% and 50% – never more than 50% and never less than 20%. The percentage being guaranteed may affect the interest rate the lender offers you – but it may not; hybrid ARMs, for example, have their interest rates calculated differently and won’t really be affected by the percentage of the loan being guaranteed.

 

What’s even better, the VA does not require the borrower to make a down payment on the loan, and also does not require mortgage insurance even if the borrower does not make any down payment at all. Where the FHA loan program exists simply to make home ownership available to more people and situations, the VA loan program is intended to be a major benefit to those who choose to serve our country. As such, the VA loan program is far more concerned with making the loan as good a deal as possible for the borrower. That’s why, instead of mortgage insurance, every VA borrower pays a one-time VA funding fee. There are some who are exempt, but most borrowers are not. The funding fee gets less depending on how large of a down payment the borrower makes, and can even be rolled into the loan amount if the borrower wishes to take no money out of pocket for the loan.

 

In direct answer to the question at the top, a VA loan is a gateway to home ownership and thousands of saved dollars for eligible borrowers. Most veterans and surviving spouses are eligible for the VA loan program, and would be wise to utilize it if at all possible. A VA loan is guaranteed by the VA and funded by normal lenders who have gone through the application process to be approved by the VA to offer VA loans. The VA has strict requirements for approval for lenders, and does a great job at making sure that only ethical lenders are approved to offer VA loans. For more information on VA loans, visit our Frequently Asked Questions page or contact one of our representatives today.

 

FAQ VA Loan Use

What Can you use a VA Loan for?

 

This is one of the most common questions that get asked about the VA loan program. The VA tries very hard to focus on the purpose of the program while making the benefits available to veterans in as many situations as possible. The purpose of the VA loan program is to help eligible borrowers obtain suitable housing at better terms than they could otherwise get. The focus here  is “suitable housing”. The rule of thumb is that the property must qualify as a home and must be considered suitable to meet the veteran’s needs. Understanding the spirit of the program, you can probably hazard a guess at what sorts of purchases will be approved and what will not. You won’t be buying a vacant wal-mart with your VA loan, but you can buy a house in the suburbs.

 

What to use a VA Loan forThe VA will not allow a borrower to purchase a purely commercial property using the VA loan program. While the property being purchased can have a commercial unit, there must be a residential unit as well, and the commercial unit is not permitted to have more than 25% of the total square footage of the property. This means that for borrowers who would like to open a small shop or office in their home, the VA loan program will work, but for borrowers wanting to open a larger store, workshop, or office, they will have to look elsewhere for funding. In this way, the VA loan program stays true to its purpose while still staying open to as many situations as possible. Many borrowers, however, are more interested in using their VA loan benefits to purchase a property that they can then rent out for a small profit. While not a bad idea, the VA has restrictions on what you can and cannot do.

 

For a single borrower (joint loans are a bit different), the property being purchased can have no more than four residential units, and the borrower him/herself must occupy one of the units. The borrower is allowed to open up the remaining units for rent, at whatever rate they feel is appropriate. So at most, you could buy a four-unit property, live in one, and rent out the other three. While certainly a nice pad on your income, the mortgage and cost of upkeep on a property that large would probably limit the profitability for awhile. It is also permitted to have one commercial unit with up to four residential units on the same property, as long as the borrower is living in one of the units as their primary residence. Joint loans can be different; if more than one VA-eligible borrower is using their entitlement on the VA loan, the maximum number of residential  units increases accordingly, but there can still be only one commercial unit. Joining up with another VA-eligible borrower can be a good way to increase your income potential from renting units.

 

We’ve touched on it a bit already, but we need to clarify the VA’s occupancy requirement. With multiple units, the borrower must occupy one of them, yes, but no matter what the property is that is being purchased, the borrower must certify that he or she intends to occupy the home as their primary residence. The VA will not allow you to use their guarantee on a home or other property that you are not planning on using as a primary residence. You cannot use a VA loan for a summer home, vacation home, purely rental property, or anything other than what you can use as a primary residence. The VA are also sticklers about the word “suitable”.

 

You will run into trouble if you try to purchase a mobile home with a VA loan. In order to be considered suitable for a veteran, the property must have a permanent foundation.Some manufactured homes can qualify, as long as they are on a concrete foundation. If the veteran has special needs or a disability, the home must also be considered suitable to meet their needs – for example, if the veteran is in a wheelchair, a 3-story home is probably not a good call, even if it has a way to assist the veteran from going from floor to floor. For more details and to answer any specific questions, contact a VA-approved lender.

 

Advantages to a VA Loan

A VA loan offers many advantages over a non-VA loan. It can save you much more money and can it is one of the easiest loans to get approved. Below is a list of many of the advantages veterans should be aware of when looking into the VA loan.

· No Down Payment

This loan does not require a down payment.  There are no up-front out-of-pocket expenses with the VA loan.

· Low Interest Rate

VA loans typically have much lower interest rates than non-VA loans. This can significantly lower monthly payments.

· Faster Processing

Borrowers submit an applications and lenders that have VA approval can begin processing. They can finalize the loan without waiting for the VA to review everything, so the loan goes through everything much faster.

· VA Guarantee

The VA provides a guarantee on the loan, which protects the lender if the borrower defaults.

· No Prepayment Penalty

Some loans do not allow you to pay off a balance earlier than the set time without a penalty. This ensures a profit from the loan. Not so with the VA loan. There is no prepayment penalty.

· Cost Limitations/Discounted Fees

The VA loan was designed to lower costs to the borrower. The government actually limits the amount that can be charged in origination fees, closing costs, and appraisal fees on a VA loan. The funding fee may range from .5 to 3.3 percent, and can be paid out-of-pocket or rolled into the loan, (while some are exempt).

· Benefits for Disabled Veterans

If the veteran has any kind of service disability, they have the ability to get their funding fee waived. If the disability is permanent and 100% service connected, they may be able to get a $50,000 grant to have their home modified to accommodate the disability.

· Assumable Mortgage

With a VA loan, the veteran could transfer their loan to someone else. They would assume the loan.

· Loan Flexibility

A VA loan can be used for purchasing a home or buying land and/or to build a new house. It can also be used to refinance or modify a previous loan as well.

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