VA Loans vs. Conventional Loans – Which is better?

What should you choose?  VA or Conventional?

At some point Veterans will come to a dilemma when deciding what type of loan to use when buying a home.  This is a very valid question or concern as both have their place in the home buying process.  Having worked with Veterans for the past 7 years I can shed some light on this subject.  First let me start by saying that owning your own home is still one of the best financial decisions an individual can make if its done right.  What I mean by that is simply don’t bite off more than you can chew.  Once you sign on that dotted line you are now responsible for making payments for the next 15 to 30 yrs.  BE SMART ABOUT IT.  OK, lets analyze the VA loan and Conventional loan.

VA loans allow NO MONEY DOWN 100% financing

VA loans  allow for a Veteran to borrow 100% of the purchase price.  This now is one of the only loan programs that allow for 100% financing.  Unlike Conventional loans, you don’t have to pay any mortgage insurance premium (MIP) on Veteran Home Loans.  MIP is a separate insurance that covers the lender in case of loan default.  The amount of MIP is paid on a monthly basis and is completely risk based and can be very expensive.  The reason why a Veteran does not have to pay this is simple.  The Department of Veteran Affairs is guaranteeing a portion of the loan to the lender.  This is what is commonly known as your VA entitlement.  For the Dept of Veteran Affairs to guarantee a VA loan to the lender there is a fee assessed by the VA.  This is called a VA Funding Fee (VAFF).  The amount of this fee is usually 2.15% of the loan amount and it CAN BE financed into the loan.  This fee can be decreased if the Veteran puts money down and will also be waived is the Veteran is receiving 10% or more VA disability.  In this day and age, who has $20,000 just laying around to put down on home.  This is just my opinion, but if you have that much money saved its better left in an interest bearing account.  Besides, all the interest on home loans is tax deductible so on that $20k you will will gain interest and be able to deduct more interest on your home.

Do I need to have great credit?

Credit Qualifications on VA loans are much different than conventional loans.  With VA loans its based on timely payments within the last 12 months whereas Conventional loans are score driven.  A Veteran who has a credit score of 620 can get them same rate as someone with an 800 credit score.

How much money do I have to make?

There is an additional step with VA loans.  VA is not so concerned about Debt to Income (DTI) but rather Residual Income (RI).  The Department of Veteran Affairs has established a calculation based on family size, loan size and location and takes into account net income (after taxes).  Conventional calculates DTI on gross income (before taxes).

These are the main differences between VA loans and Conventional Loans.  If a Veteran has served his country and helped the cause of Freedom and is given the ability to use a VA loan, there is no reason why he/she should not use it.  I’ve done both VA and Conventional loans.  VA LOANS provide lower monthly payments.  This industry is changing so much. It isn’t what it used to be but the VA loan has remained constant.  Good luck and happy house hunting.

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*Annual savings calculator based on 2015 monthly average savings extrapolated year-to-date.