VA Loan vs. Conventional Loan
Unsure if a VA loan is really the best route for you? If you’re planning on buying a house and making it your permanent residence, we urge you to consider a VA loan if you are eligible. While conventional loans are a great option for buyers, the VA loan program is designed to benefit and reward those who’ve served in active military for our country. You DO NOT have to currently be in active military to use your VA loan benefits. If you’ve served in any branch of our armed forces, in the reserves or National Guard,you may be eligible for the VA loan program.
Below is a guide to how VA loans stack up against other regular loan programs:
VA Loans versus Conventional Loans | Guide for VA Loan Buyers
|VA Loans vs. “Regular” Loans||VA Loan||Conventional Loan||FHA Loans|
|Down Payment||$0 down||Minimum down payment of 5%. In today’s market, many require as much as 10-20% down.||3.5% down|
|Mortgage Fees||VA Funding Fee, which can be rolled into the cost of the loan.||No up-front fees, but PMI may be required.||Mortgage insurance|
|Private Mortgage Insurance (PMI)||None||May require PMI if you finance more than 80% of the home’s value.||All FHA loans require mortgage insurance.|
|Interest Rates||Banks might offer lower rates, even as much as 0.5%-1.0% lower||Standard rates based off credit scores and qualifications.||Standard rates based off credit scores and qualifications.|
|Home loan qualifications||More lenient||Strict & stringent||Flexible, but not as lenient as VA|
|Paperwork||Same paperwork as other loans – just need a few extra forms: DD214 or statement of service and COE.||Copies & records of W2s, tax records, pay stubs needed.||Copies & records of W2s, tax records, pay stubs needed.|
|Prepayment penalties||NONE||May face penalties for pre-paying the loan||No penalties|
|Qualified Loan Assumption||YES – if both parties are veterans||No loan assumption||Yes – loan assumption permitted.|
Understanding Down Payments & The VA Loan
The VA loan requires NO down payment. In today’s market, this is nearly unheard of. The days of purchasing property with 100% financing are pretty much over – that is unless you qualify for the VA loan (or another government-backed loan.) Down payments are requested because banks that providing the funding want to cover their losses in the event the property goes to foreclosure. Down payments help reduce the bank’s risk of losing ALL of their money. The Federal government backs VA loans, so the risk of losing everything is not there. When VA loans have that backing, banks do not require the down payment (since the federal government will essentially cover the losses in the event the loan goes into default.) This is one of the very few loan programs that can still offer 100% financing.
Understanding Private Mortgage Insurance (PMI) & The VA Loan
Private mortgage insurance is another feature of many conventional loans. Like the down payment, banks that provide funding often find ways to reduce their risk in the event the loan goes into default (AKA you stop paying it.) If you do not put down 20% on your down payment and still qualify for a conventional loan, you might be required to pay PMI. This is a monthly fee tagged on to your monthly payment that goes toward “insurance” on your loan. The VA loans do not carry the same risks as conventional loans since they are financially backed by the Federal government; thus banks do not charge PMI on buyers who use the VA loan.
Understanding Interest Rates
Often those who use their VA benefits to buy a house receive slightly lower interest rates (typically 0.5%-1.0% lower) than conventional loan rates. This also plays into the bank’s risk. When the government backs the VA loans, banks don’t see as much of a risk involved in lending the money for purchasing the property and are willing to lower the interest rate. A lower interest rate means a more affordable house payment (which is more cash in your pocket each month.)
Understanding Loan Qualification Standards
The credit score and qualification standards for each loan type are very different. Once again, because the VA loan is backed by the government, banks assume less risk and have less stringent qualification standards for VA Loans. This makes them easier to obtain, especially in this market. A credit score of 620 is still needed, but we can put our expertise to work for you and help you qualify if you are eligible for the VA loan program.
Understanding pre-payment penalties
On conventional loans, borrowers may be faced with penalties for pre-paying on the loan. If the loan is paid off entirely, the borrower may face a penalty for paying off the loan earlier than the term of the loan. FHA loans and VA loans do not have pre-payment penalties so that borrowers can pay back the loans as quickly as they’d like and not face any extra charges.
Understanding Qualified VA loan assumption
Veterans who sell to other veterans have the option of VA loan assumption. The buyer can assume the loan if he/she is purchasing the home from another veteran, is an approved borrower, and the two veterans can agree on the terms.
That’s how the VA loan vs. conventional loan break down stacks up, if you have any more questions please call us to speak with our VA Loan specialist Darren Copeland (816) 268-4025.