While certain homebuyers may qualify for both loans, generally one option will benefit the borrower more than the other, depending on his or her situation. The main differences between VA loans and conventional loans are the eligibility qualifications, mortgage insurance, and down payment. For example, if you want to qualify for a VA mortgage, you must first get a certificate of eligibility from the Department of Veterans Affairs. They will review your veteran status for either the military, reserves or National Guard including how long and when you served, how you were discharged (or if you are still in service), or other requirements if you are a surviving spouse of a veteran. Even if you qualify for the VA Eligibility Certificate, that does not mean your lender will qualify you for the loan. On the other hand, a conventional mortgage will have higher credit score and income requirements, and require a down payment and mortgage insurance. However, the payments on a conventional loan may end up to be less than a VA loan because of this, lowering your overall cost over time. A conventional loan may also offer you a higher loan amount and other perks that the VA restricts on a Veterans home loan.
A quick overview of the pros and cons of VA loans vs. conventional mortgages can be found in the infograph below.
VA Home Loan Defined: Mortgage loans guaranteed by the Department of Veteran Affairs that are exclusive to veterans, military reserves, National Guard and surviving spouses of veterans that meet the requirements to obtain a VA Certificate of Eligibility. Passed by congress and signed by President Franklin D. Roosevelt as the Servicemen’s Readjustment Act in 1944, this program is also known as the GI Bill of Rights. The main purpose of a VA loan is to provide veterans, active duty members and surviving spouses the opportunity to own a home without a down payment.
Once a borrower has been determined as eligible for a VA guaranteed mortgage, one of the many perks of the program is getting 100% financing on their home purchase. This means no down payment is required. Other advantages include leniency on credit history and scores from many VA approved lenders, competitively low interest rates, no prepayment penalty and the ability to negotiate closing costs, amongst others.
One of the major disadvantages of a VA loan is the inclusion of a funding fee. This charge amounts to between 1.25 – 3% of the total loan cost, depending on the length of the veteran’s service. This charge makes the loan slightly less affordable, and while the funding fee may be added to the loan balance rather than being paid up-front, this can increase a loan’s total cost by over $10,000 dollars on home loans over $100,000, when factoring in interest over the entire loan term. However, some borrowers may be exempt from the funding fee, including veterans who have received VA compensation for disabilities related to service, veterans who would be eligible for compensation for disabilities related to service, and surviving spouses of veterans who died in service or as a result of a disability related to service. Other VA loan disadvantages include a cap or maximum loan amount of $417,500 (in most areas), some restrictions regarding eligible property types and fewer repayment options.
Conventional Home Loan defined: Mortgage loans that are not guaranteed or insured by the federal government. These loans may follow the guidelines of the government sponsored enterprises (GSE) such as Fannie Mae or Freddie Mac, in which cases they would be considered “conforming” loans. Conventional loans that do not follow GSE terms and conditions are referred to as “non-conforming.”
Conventional loans have long stood as the most popular financing option for the majority of borrowers. While the 30-year fixed rate conventional mortgage remains an industry standard, conventional loan popularity has decreased due to competition with FHA loans; however, banks and brokers frequently prefer to work with borrowers of conventional mortgages, as these loans have stricter requirements and borrowers who qualify thus tend to be less risky investments for hesitant lenders.
Conventional loans offer borrowers a surplus of options available, in terms of loan period length, interest rates, and maximum loan limits. This flexibility allows borrowers to customize their mortgages for their unique circumstances, which may be preferable to a rigid set of loan guidelines. Moreover, conventional loans apply for all types of property unlike many government-insured loans.
Large down payments disqualify conventional loans for some borrowers, while many borrowers may have difficulty qualifying due to the stricter qualifications on credit, income, financial and employment history. Furthermore, borrowers will have much difficulty in transferring a conventional mortgage loan, making it a much more significant commitment than more transferable mortgages.
While the differences between a VA loan and a conventional loan are many, VA loans tend to be the most advantageous for borrowers who are eligible. While conventional loans may appeal to borrowers making large down payments, VA mortgages are almost always preferable. In general, borrowers should decide between a conventional loan and a VA loan by the following criteria:
When searching for a VA mortgage loan, borrowers should always compare rates and lenders before making a commitment. While loans insured by the Department of Veteran Affairs tend to have lower interest rates than most other types of loans, anyone considering a VA loan should shop around for the best rates, as even small fractional differences between lenders could translate to thousands of dollars over the term of a loan. If you are considering a VA loan, start shopping today by simply filling out Lender411's VA Request a Quote form on the top of the page.
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