You’re probably thinking: “why would I choose a conventional loan when I can get a VA loan with all the apparent perks?”
Well, you wouldn’t be here if you didn’t sense that something might be too good to be true with these mortgage options.
Yes, with a VA loan, you may not need to pay a down payment, nor mortgage insurance, and you might get a better interest rate. However, VA loans can come with a VA funding fee. Plus, you may have other fees such as loan origination charges.
In the end, it’s not so clear when you look into the finer details of each borrowing option. So, let’s take a look at how you can determine whether a VA loan or a conventional loan will suit your needs best.
What Type of Property Are You Buying?
One of the key factors that can help you determine whether to get a VA loan or a conventional loan is what property type you intend to purchase. VA loans are exclusive to people buying a house as their primary home. These loans do not extend to buying second homes or investment properties.
You can use a conventional loan to purchase any of the property types we’ve mentioned above. Plus, you can use one to buy vacation homes, rental properties, and more. So, a conventional loan is more flexible in this regard.
If you don’t like down payments, then getting a VA loan may be right up your street. However, bear in mind; not all VA loans are down payment-free. In some instances, the lenders might need you to provide a down payment if the asking price of the property is higher than its market valuation.
Conventional loan lenders often require a downpayment from you. Yet, in today’s climate, at least, the percentage of downpayment could be anywhere below 3%.
VA-insured loans require you to pay a funding fee. The reason for this is they need it to defray loan costs that have defaulted. And here’s where things get interesting: the fees are often between 1.5-3.5% as a rough estimate.
So, in some circumstances, you may end up paying a higher funding fee for a VA loan than a downpayment for a conventional loan. Furthermore, lenders tend to add the fee into the total loan amount. This means you can end up paying higher interest amounts over the lifetime of your loan.
We should mention the Veterans Affairs department states that veterans who get VA disability compensation don’t have to pay funding fees.
People who take out conventional loans and pay below 20% downpayment need private mortgage insurance. The reason for this is the insurance protects your lender if you default from your loan.
There tend to be three options in the way you pay your mortgage insurance. The first way is you pay a one-time payment in full. Or, you can pay it as part of your monthly payments. The third option is that you might be able to pay a combination of an initial payment and then pay a proportion month-by-month.
Your private mortgage insurance amount will often be between the ranges of 0.5-2.5% of the loan amount. It may differ depending on your credit score and your downpayment size.
With VA loans, if you make a downpayment then can reduce the funding fee. However, you can’t eliminate the fee, even with a large downpayment.
The Department of Veterans Affairs suggests that you do not need to have a minimum credit score amount to get a VA-insured loan. However, in practice, a majority of lenders have a credit score benchmark of around 620.
If you have a low credit score, you might want to look into other loan options. One of these financing options could be an FHA loan.
Again, you may read that there is no benchmark for what level of debt-to-income ratio you may have to get a VA loan. But, there is a requirement that lenders should have compensating factors in place if a borrower’s debt-to-income ratio is over 41%.
The compensating factors aspect refers to your residual income. Your residual income is how much you take home at the end of the month after paying for your mortgage and general living expenses.
If you’re considering buying a new house, you should be keen to learn about mortgage rates. VA loans tend to have lower mortgage rates than conventional loans. Yet, we’re talking about fractions of a percent difference in most cases.
It’s always worth checking out a variety of sources concerning mortgage rates. The economic climate does shift, and you may be surprised at some of the current market rates you might discover.
Which Is the Better Loan?
After looking at all the info about each loan, it would be impossible to say which is better. One may be better than the other for a particular individual with specific circumstances.
For example, if you want to buy a home that has multiple offers pending, it may suit you better to have a conventional loan. This may be because the seller of the home might prefer conventional financing in these circumstances.
Yet, if you do qualify for a VA home loan, there are many perks that you shouldn’t ignore. This is especially true if you don’t have enough money for a downpayment and want to get yourself a home for yourself and your family.
Your Mortgage Options Explained
So we’ve now run through some of the characteristics associated with two mortgage options: VA loans and conventional loans. In the end, you will have to make a personal judgment based on your personal circumstances and the loans you may qualify for.
We appreciate you sticking with us through this tricky topic and wish you the best of luck finding a good deal. If you find this info helpful, there’s plenty more practical advice you can check out on our website.