Why You Should Choose a VA Loan Over a Conventional Loan

Comparing VA and Conventional Loans

 

Make no mistake: the VA loan program is drastically superior to the conventional loan program. In an effort to turn this trend around, we want to do a direct comparison between the VA loan program and conventional home loans. The benefits to getting a VA loan instead of a conventional are as significant as they are numerous, and we are confident that after reading this ebook you’ll agree that getting a VA loan whenever possible is the best route to choose.

We’re going to compare the two loan programs on a variety of fronts. We’ll talk about interest rates, closing costs, down payments, qualifying for the respective loan programs, and the available loan options on each program, both for new purchases and refinances. There are other aspects we could compare the two on, but the ones above are the most important and have the most eect one way or the other. If you have questions after reading this ebook, don’t hesitate to give us a call or contact us via our website and we’ll be happy to answer them.

On every important measurement, the VA loan program is a significantly better option than the conventional loan program. If you are a VA-eligible borrower, you owe it to yourself and your family to get a VA loan instead of a conventional loan. At the very least, you should apply for a loan with a VA-approved lender and see for yourself how much money you can save over the life of the loan. Feel free to give us a call at 866-569-8272 or contact us via our website.

VA vs. Conventional Loan Down Payments

VA vs. Conventional: Down Payments

 

Saving up the money for a down payment is one of the largest (if not the largest) obstacle that first-time home buyers face. Once you’ve bought a house and begun to build up equity, a down payment isn’t as much of an obstacle, but is still present, especially if you’re looking to move to a more expensive house. Unfortunately, a down payment is just a part of buying a house and there’s nothing you can do about it – or is there? The VA loan program is designed to directly address the obstacle of a down payment that veteran home buyers face. In this article, we’re going to show how the VA loan program offers a more borrower-friendly package, especially when it comes to the down payment requirements.

 

Down Payments on Conventional Loans

Understanding Down Payments

To give us a baseline, let’s talk about what you should expect as far as down payments go on conventional loans. You may have heard that semi-recently, federal restrictions on down payments were eased up all the way to allow as little as 3% of the loan amount to be sufficient for a down payment. While that’s technically true, you won’t be happy with how few lenders you have to choose from if that’s all you’re paying, and you definitely won’t be happy with the terms offered you. You’ve probably heard that a 20% down payment is required on conventional loans, and that’s true in a sense. Making a 20% (or more) down payment is the only way you can avoid having to purchase private mortgage insurance. Mortgage insurance adds to your monthly payment, sometimes as much as hundreds of dollars each month, and for no other reason than because you didn’t pay enough for a down payment. Most lenders will take borrowers making at least a 10% down payment, but your options start to get more scarce as you get lower than that. Unless you have $50,000 just sitting in the bank, you will probably have to pay mortgage insurance for your first home.

 

The VA Loan Offering

The VA recognizes that down payments constitute the single greatest obstacle to home ownership for first-time buyers. With that in mind, the VA loan program does not require a down payment of any kind. If you are getting a VA loan, you don’t have to put in a dime on a down payment. Why? Because the VA guarantee to the lender acts as your down payment and gets you the good loan terms (with no mortgage insurance) without forcing you to make a down payment. You can, of course, still make a down payment, and if you do you’ll be rewarded by getting a discount on the VA Funding Fee as well as better terms from the lender, but it’s not required and you don’t have to pay mortgage insurance if you don’t make a down payment. This is one of the greatest benefits of the VA loan program – the ability to buy a home without having 20% to make a down payment. It’s important to remember, though, that you’ll still need to have enough saved up to pay closing costs, which can be thousands of dollars. You can roll the Funding Fee into the loan amount if you wish, but none of the other closing costs can.

 

Why the Difference?

The biggest factor in play here is the VA guarantee – it’s because of the guarantee that VA lenders are willing to make good loans to borrowers who are not making a down payment. The VA offers the guarantee as a benefit to those who have served in the armed forces. Where the conventional loan market is just that – a market – the VA loan program is a specialized benefit made for active service members and veterans to reward them for their service. If you are eligible for the VA loan program, you should definitely use it to purchase your home, and not just because of the superior down payment requirements. The VA loan program also boasts some extremely beneficial loan types and options, as well as protections that the conventional loan program does not offer. And you don’t even have to deal much with the VA when you get a VA loan – you’ll need to get your Certificate of Eligibility, but that’s pretty much it; any other dealing with the VA is taken care of by the lender, and most lenders don’t need to submit their loan packages to the VA before closing. You can get your VA loan quickly, efficiently, and easily.

 

Veteran Affairs vs. Conventional Loan Options

VA vs. Conventional: Available Loan Options

VA or Conventional Loan

Continuing our theme of establishing the superiority of the VA loan program to the conventional loan program, we are going to compare the two programs based on one very important metric: available loan options within each program. This is a factor that many borrowers do not even take into consideration when getting a loan, even though a variety of loan options can make a huge difference in how much money you save or spend over the life of the loan, or how easily you can refinance or move when the time comes. Let’s talk about some loan options that matter and what the two programs offer in each regard.

 

A Streamline Refinance Option

A streamline refinance is a fast, cheap, and easy way to refinance your loan. The primary features of a streamline refinance are that an appraisal may not be required, the credit check and paperwork is minimal and usually the borrower cannot get cash out on the equity in their home when using a streamline. Now let’s talk about each loan program. There’s no such thing as a standard “conventional streamline refinance”. However, many banks offer their own streamline refinance options to borrowers. These offerings vary greatly in just how ‘streamlined’ they really are and how expensive they are to the borrower. Generally speaking, though, streamline refinances offered by banks satisfactorily meet the goals and purposes of a streamline refinance.

 

The VA loan program has a standard streamline refinance option called the IRRRL (Interest Rate Reduction Refinance Loan), which is actually really really cool. The VA has made it really advantageous for borrowers to have access to the IRRRL. The credit check is minimal, an appraisal is usually not required, and the borrower can even get up to $6,000 to make energy-efficient improvements to their home with an EEM. The Funding Fee is significantly cheaper on an IRRRL than on a normal refinance, and an IRRRL can close in as little as 10 days. The IRRRL can be much faster, cheaper, and easier than a streamline offered by a bank for a conventional loan, not to mention more consistent.

 

An Adjustable-Rate Mortgage Option

An adjustable-rate mortgage (ARM) is the opposite of a fixed-rate; the interest rate adjusts over the life of the loan instead of remaining the same. ARM loans can save you a ton of money over a fixed-rate depending on the circumstances, but they can also cost you more. A lot of the effectiveness of an ARM depends on the terms offered you. Conventional ARMs come with an initial fixed-rate period of usually 3, 5, or 7 years, but can go as low as 1 or as high as 10. After the fixed period, however, the interest rate can adjust as far as it needs to to catch up with the market, up to 5% higher than the starting rate. After that, the rate adjusts annually with an annual cap of 2% difference each year. The lifetime cap on the interest rate on an ARM is 5% higher than the starting rate (hence the limit on the first adjustment).

 

VA ARMs are much, much better. Not only does the VA hybrid ARM offer much lower starting rates, the annual adjustments (including the first one) are limited to 1% each year, with the same lifetime cap of 5%. The VA hybrid ARM is also based off of a different index than the conventional ARM. The VA’s index is the 1-year CMT, which is much less volatile than the LIBOR used by conventional ARMs. The CMT is averaged for the last twelve months, making your interest rate adjustments very predictable, and the 1% annual cap protects you from rapid upswings in the market. It’s much more likely to save money (usually a lot of money) by using a VA hybrid ARM instead of a fixed-rate. It’s not nearly as safe of a bet to use a conventional ARM instead of a fixed-rate.

 

When it comes to loan options, the VA definitely has this one in the bag. We’ve also written articles comparing loan qualifying on each program and interest rates available on each program, and we’ll keep writing articles comparing the two so you can have a very clear and detailed picture on which loan option is going to be best for you.

 

VA vs. Conventional: Loan Qualifying

Loan Qualifications

The VA loan program is pretty awesome, but many VA-eligible borrowers don’t understand what makes it so great and underestimate its value. We are going to do a head-to-head comparison in this article to compare the VA loan program and the conventional loan program and their relative qualification requirements. There are three aspects to loan qualification that we’re going to cover: credit score, income requirements, and employment history. You’ll find that while many of the qualification requirements are generally the same, lender discretion is allowed in far more cases than with conventional loans.

 

Credit Score Requirements

The VA Lender’s Handbook does not specify a minimum credit score requirement for a borrower to be approved for a VA loan. They do, however, require that the lender make sure the borrower has “satisfactory” credit for the loan they are applying for. Most lenders interpret this to mean a minimum credit score of 620. Many lenders, however, will go as low as 580. The great thing about the VA loan program, however, is that it allows lenders to use their discretion when analyzing a borrower’s credit report to see exactly why their score is so low and see whether they can still consider the borrower an acceptable credit risk. To get a conventional loan, you’ll definitely need a minimum of 620, and at least 740 to avoid extra fees and headaches. VA wins this match-up with no problem.

 

Income Requirements

Income and employment are often blurred because they are interconnected. To differentiate this section from the one that follows, this paragraph will be talking about debt-to-income ratios, while the next paragraph will be talking about employment history. The maximum debt-to-income ratio (DTI) on both a VA loan and a conventional loan is 41%. However, just like with credit score, a VA lender has the discretion to approve a loan with a DTI higher than 41%, they simply have to provide an explanation in the loan documentation when the send it to the VA. The loan can still be processed and closed without VA’s prior approval, and simply needs to have an explanation as to why it was approved even though the DTI was higher than 41%. While this match-up is closer than the first one, VA still has the advantage.

 

Employment History

There’s a lot to analyze here: full-time work, part-time work, currently verifiable income, past employment history, second-jobs, self-employment income, etc. For the most part, however, the VA loan program and conventional have virtually identical requirements. Both require 2 years of unbroken employment history and require you to have worked at your current job for 30 days if it’s full-time, and 2 years if it’s part-time, self-employment, or similarly un-guaranteed work. The only real flexibility the VA offers here that conventional does not is the documentation they allow to be used to verify the employment, which is not a huge advantage. This match-up is more of a draw, but that still means that VA is the overall winner by a two out of three points.

 

The Why and HowGet Approved Today

So why is the VA loan program better than conventional? Because the VA loan program is set up to be a benefit to those who have served in the military. Conventional is just the process by which you buy a house, and the VA loan program is designed to be a way to make that process easier, faster, and cheaper, as well as make it easier for you to get the house you want on better terms. How do you get a VA loan? That’s pretty easy; you just call us at Low VA Rates using the number on our website or by contacting us via chat and tell us what you’re looking for. We’ll answer your questions and get you the best loan option that will work for you.

 

Being easier to qualify for isn’t the only benefit of the VA loan program. You’ll also enjoy lower interest rates, better refinance options, and built-in protections on ARMs and in the event that the market dips that conventional loans simply can’t offer. We’ll keep publishing more articles comparing the VA loan program to the conventional loan program to show you the differences.

 

VA vs. Conventional – Interest Rates

VA Interest Rates vs. Conventional Interest Rates

VA vs Conventional Discussed

This is the ever-changing, elusive question that borrowers often ask and rarely get a straight answer to. In this article, we’re going to do our best to paint a very clear picture of how VA loan interest rates generally compare to conventional interest rates. We’re going to show actual data provided by Ellie Mae, and we’re going to talk about the general rule of thumb you can follow, and then we’re going to talk about the difference between rate and APR and how the Funding Fee plays into all of this.

 

The Data

From May of last year through May of this year, VA interest rates were consistently lower than Conventional interest rates. On average, in that time frame, VA interest rates were 0.32% lower than conventional interest rates. There were times that they were even lower than that and there were times that offered rates were closer. Generally speaking, when rates go up, conventional rates go up faster than VA rates do, and when rates go down, conventional go down faster than VA rates do. This is illustrated by the data, in that the higher rates are generally, the larger the gap between the VA rates and the Conventional rates, and the lower that rates generally are, the more Conventional begins to close the gap. This is because there’s only so low that rates will ever go, and as conventional rates get closer to that point, they begin to close the gap with the VA rates.

 

The Rule of Thumb

Generally speaking, the rule of thumb is that you can expect interest rate offers between 0.5% and 1.0% lower on a VA loan than on a conventional, though you likely won’t see that big of a difference until interest rates are generally higher than they are currently. This difference exists primarily because of the VA guarantee. The VA guarantees (usually) 25% of the loan amount to the lender, which takes away a good portion of the risk that they are taking on, particularly with a borrower with less-than-perfect credit that is not making a down payment. However, the VA is not guaranteeing 100% of the loan amount, so that risk is not completely gone; it’s just mitigated. This is why interest rates aren’t constantly sitting at absurdly low amounts on VA loans.

 

Interest Rates Rule of ThumbIt’s important not to use this rule of thumb to create unreasonable expectations, however. As you saw in the data in the first paragraph, the gap between conventional and VA loans hasn’t been as big as 0.5% in the last year and a half, so just because a VA lender doesn’t offer you that much lower of a rate does not mean you’re getting a bad deal or the lender is trying to cheat you. Hopefully, you’re getting quotes from multiple lenders, so you’ll be able to see whether the rate that one lender is offering you is a good rate. Use the actual average mentioned in the above paragraph, along with the explanation of how rates generally move, coupled with the rule of thumb to make an educated guess on what you should expect for rates as you make plans to purchase a house.

 

We’re Not Talking About APR

It’s important to note that these are just interest rates. While interest rates make up the majority of APR, other things (such as discount points) also add to APR. Something to consider is the requirement of the VA Funding Fee, which can add thousands of dollars to the amount the loan costs you to get, and thus increase the APR, which is what you really want to compare across the board. For example, if you got a mortgage for $200,000 and paid the standard VA Funding Fee of 2.15%, you’d pay $4,300. If the interest rate was 4.0%, and no other factors were added in, your APR would be 4.1830%, which is still lower than you’d be offered on a conventional loan using the average from the last year and a half (conventional would be 4.32% interest, plus other fees that would push the APR higher).

 

Conclusion

VA interest rates and APRs are generally lower than Conventional. How much lower depends on market factors and your own credit and income qualifications for the loan you’re getting. Many critics of the VA loan program claim that the Funding Fee makes the VA loan less affordable than a conventional, but we have shown, using actual numbers, that this is not the case. Contact us today for more information.

 

VA Loan Benefits in 2010 Compared to Other Loans

No Down Payment

One of the huge benefits in the VA loan program is that no down payment or mortgage insurance is required. Conventional mortgages require a minimum down payment of 5 percent. The VA program allows financing of up to 105 percent of the sales price or appraised value of the home, and borrowers can finance the closing cost of the mortgage as well. So a veteran can purchase a home without any money out of their pocket with a VA loan, unlike a conventional loan.  Even with FHA loans, VA mortgages offer so much more advantages regarding interest rates, credit scores, mortgage insurance and down payments.

A lot of concerns with getting a loan is if your credit score is good enough for the type of loan you want. The best thing about the VA loan program is they have looser requirements with credit score than FHA loans, and the conventional mortgage industry.  The government sets no minimum income or credit score standards for VA loans. In most cases if a borrower has a credit score of at least 580 they are able to be accepted for a VA loan, with a conventional loan you have to have at least a 620.  In some cases with a conventional loan and a borrower has a credit score under 720, the borrower must make a larger down payment of at least 20 percent.  The great thing about a VA loan is there is no down payment necessary with a lower credit score. They’re completely open to borrowers with bad credit, and the rates are reasonable.

Rates with a VA Loan are Very Low

Interest Rates with a VA Loan are very low compared to other types of loans. With non-VA loans, borrowers pay a higher rate for every 20 points their credit score drops below 720. But with a VA loan, borrowers get the same low rate, whether their credit score is 605 or 785. That’s one of the things that make VA loans such an amazing deal for any veteran or active-duty military families who need a mortgage. Veterans don’t need to worry about being refused because they don’t have money for a down payment or have a bad credit score. Having a VA loan, there are so many more benefits than negatives.  With other types there is, so U.S veterans are most likely making the best decision when choosing a VA loan.

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