As a veteran, you have a couple of choices when it comes to home financing. If you served at least 180 days during peacetime or 90 days during wartime, you have the option to secure a VA loan. This loan has many benefits including 100% financing.
Another option you have as a veteran, even if you did serve enough time, is the conventional loan. If you have great credit and a low debt ratio, you may want to consider this option as well.
We look at the differences below.
VA Loans and Their Benefits
As we discussed above, VA loans offer 100% financing for borrowers. You do not have to put any money down on the home itself. The only cash you need at the closing is the money to cover the closing costs and the VA funding fee. However, you can roll those fees into the loan if there’s room in the value. You may come to the closing with no money in hand.
VA loans also have flexible underwriting guidelines. You only need a credit score of 620, and you can have a maximum debt ratio of 43%. The VA puts their main focus on the amount of disposable income you have after you take the new loan. The disposable income is the money left over after you pay your mortgage, credit card bills, installment loans, and student loans. The VA feels if you have adequate disposable income then you won’t have to sacrifice to pay your mortgage. This lowers the risk of default.
Unlike other government-backed loans, the VA does not charge monthly mortgage insurance. This even applies to borrowers that put no money down on the home. Any other loan, including FHA or conventional loans, require some type of mortgage insurance, increasing the cost of your loan.
Finally, VA loans are assumable. This often helps homeowners that need to sell their home. They can allow a veteran or even a non-veteran to assume the loan if the lender approves them. This can help during times of low demand.
Conventional Loans and Their Benefits
Conventional loans have their benefits as well. If you have the money to put down on the home, you can save on the VA funding fee. Conventional loans don’t have any upfront fees outside of standard closing costs. The VA charges a funding fee of 2.15% on each purchase loan, which can add to the cost of the loan. If you plan to make a down payment, a conventional loan may save you more in the long run.
Some sellers look more favorably on conventional loans rather than VA loans. Unfortunately, VA loans have misconceptions that follow them even though they are no longer true. Many sellers believe the VA is very hard on appraisals and that they require the seller to cover the buyer’s closing costs. Many sellers refuse to sell a home to a VA borrower to avoid these situations.
What Should You Choose?
Deciding between a conventional loan and VA loan requires you to look closely at your qualifying factors.
- Have at least a 620 credit score
- Have at least 20% to put down on the home
- Plan to either buy the home as an investment or second home
You’ll need a conventional loan. VA loans are strictly for primary homes or the home you will live in. If you have another home, a VA loan will not be a possibility for you.
If, however, you don’t have at least 5% to put down on the home, have a lower credit score than 680, or have a total debt ratio higher than 36%, the VA loan may be the better option.
What it comes down to is determining the extra costs that the loan will entail. If you put less than 20% down on the home, you’ll have to pay PMI on a conventional loan. However, if you take the VA loan, you’ll pay 2.15% of the loan amount in a funding fee. Comparing the total amount of the PMI you would pay to the amount you’d pay for the funding fee will help you determine which loan will make the most sense.
As is the case with any loan, make sure you compare all of your options. Compare the total cost, interest rate, and the cost of interest over the life of the loan. A lender can help you compare the options side-by-side as well so that you make sure you make the most of your money.