Deciding between a VA and conventional loan when you’re a veteran seems like a no-brainer, right? No money down and no mortgage insurance with a VA loan sounds like the best deal.
The decision might not be so easy.
While a VA loan is good, sometimes a conventional loan makes more sense for veterans.To help you decide, we’ve got the guide right here. Let’s answer the question of Is a conventional loan better than a VA loan?
CONVENTIONAL LOAN VS. VA LOAN
First, let’s take a big picture look at conventional loans vs. VA loans.
Conventional loans need you to put at least 3% down as a down payment. Although putting down 20% is ideal.
That’s because if you put down less than 20%, you’ll pay private mortgage insurance (PMI). It’s an extra cost that goes away once you owe less than 80% of the home’s value.
Because the government doesn’t back conventional loans, they have tougher qualifying guidelines.
Lenders might have credit score requirements and stricter guidelines for your debt-to-income (DTI), too.
But they’re generally available to everyone.
On the other hand, VA loans are only available to veterans and their spouses. They’re also backed by the government. If a veteran defaults, the VA picks up part of the tab.
This allows VA lenders to have more flexible guidelines, including not having a down payment or paying mortgage insurance.
Is a VA loan better than a conventional loan? It depends.
Here are the key differences.
The property type you choose is the most important piece of the puzzle when deciding between a conventional vs. VA loan.
If you’re buying a home for anything but your primary residence, a VA loan isn’t an option. That’s because VA loans can only be used for owner-occupied properties.
VA loans have stricter appraisal guidelines, too.
And that’s one reason why sellers hate VA loans...
All homes must pass the VA’s minimum property requirements to ensure it meets value and is safe, structurally sound and free of health hazards.
While these are things you’d want in a home, the property type can slow down or stop the homebuying process.
VA loans don’t have a down payment requirement. There’s just one exception to that: if you bid more than the home’s value, your down payment may need to make up the difference between the appraised amount and the purchase price.
Conventional loans require at least a 3% down payment.
You might need to put down more, but it depends on your qualifying factors.
Remember that you’ll need at least a 20% down payment to avoid paying PMI.
Whether you go with a VA loan or a conventional loan, higher down payments can save you money in the long run.
The more money you put down, the lower your payment and the less interest you pay over the life of the loan.
VA loans generally require you to pay a funding fee. For first-time use, most veterans pay 2.3% of the loan amount.
But if you put at least 5% down, the funding fee drops to 1.65%.
That’s significant savings on a VA loan.
Conventional loans don’t require funding fees and can be the cheapest way to borrow money for a home.
VA loans don’t have mortgage insurance. That’s true even if you take advantage of the 0% down payment option.
Conventional loans charge PMI if your down payment is less than 20%.
The amount you pay for PMI depends on your credit score, DTI ratio and down payment size.
So, how much will you pay?
You can usually expect to pay around 0.58% to 1.86% of the original loan amount for PMI.
You might have heard that VA lenders don’t look at your credit score.
But that simply isn’t true.
VA lenders can use credit scores as part of the application process. The minimum score you need can vary from lender to lender.
Although VA loans tend to have lower credit score requirements than conventional loans, higher credit scores generally mean better loan terms.
Ideally, veterans won’t have a DTI ratio over 41%. You may need some compensating factors like great credit or liquid assets on hand to make up for it if you do.
Conventional lenders can require a slightly lower DTI of around 36%.
But here’s the thing:
It depends on the lender and your other qualifying factors.
So don’t let your DTI stop you from going after your dream of being a homeowner.
MORTGAGE INTEREST RATES
VA mortgage interest rates may be slightly lower than conventional rates.
And lower interest rates can save you thousands of dollars over the life of the loan.
But rates vary from one lender to the next, so don’t let it become a hurdle.Shop with different lenders and get pre qualified for a mortgage when buying a house to make sure you get the best rate you can.
Ready to get started?
Begin your application today!
BENEFITS OF A VA LOAN OVER CONVENTIONAL LOAN
Choosing a VA loan over a conventional loan is a big decision. Many people wonder, is a VA loan worth it?
Here are some of the benefits:
WHAT ARE THE DISADVANTAGES OF A VA LOAN?
While a VA loan sounds pretty great, there are some downsides. When asking Is a VA loan really worth it, here are a few drawbacks to consider:
IS A VA LOAN BETTER THAN A CONVENTIONAL LOAN?
Is a conventional loan better than a VA loan?
What loan is best for you comes down to personal preference, property type and qualifying factors.
A VA loan might be a good choice if the house can pass the strict appraisal requirements and you plan to use it as your primary residence.
A conventional loan might be better to avoid additional fees, even if you can only put 3% down and end up paying PMI.
Buying a home is a big decision. If you’re not sure what loan program to use, the Wendy Thompson Team is happy to go over your options.
We’ll walk you through the process and help you see the big picture to know which option is right for you.