VA Loan vs Conventional
VA 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.