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VA Loans vs. Conventional Loans

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VA Loans vs. Conventional Loans

Looking to buy your first or next home but aren’t sure what type of loan to apply for?

On this page, you’ll discover the key differences between VA loans and conventional loans and which is the best choice for your circumstances.

What Is A VA Loan?

A VA loan (Department of Veterans Affairs Loan) is a government-backed mortgage that helps qualified Veterans, service members, surviving spouses, and select others to purchase, refinance, and refurbish homes.

The ultimate goal:

To make home buying easier for those who serve our great nation.

The Department of Veterans Affairs (previously known as the Veterans Administration) guarantees a portion of the loan – meaning the government will repay the lender a portion of a VA loan if the borrower, for any reason, is unable to make payments.

As a result, lenders are able to offer some of the most powerful loan options on the market with a wide range of benefits.

Although highly specialized, VA loans are provided by private lenders, such as banks and mortgage companies.

Just like a regular loan!

Who Is Eligible for a VA Loan?

As the name implies, only qualified U.S. veterans, active-duty military personnel, and surviving spouses are eligible for VA loans.

You’re eligible if you meet one or more of the following criteria:

  • You’re an active-duty military member or veteran who meets length-of-service requirements.
  • 90 consecutive days of active service during wartime.
  • 181 days of active service during peacetime.
  • 6 years of service in the National Guard or Reserves.
  • You are the spouse of a service member who has died in the line of duty or due to a service-related disability.(Spouses of prisoners of war or service members missing in action are also eligible.)
  • You meet the lender’s requirements for credit and income.The VA doesn’t set a minimum credit score for VA loans, but lenders can set their own minimum standards. The lender will also consider your income and debts to evaluate your ability to repay the mortgage.
  • The property you want to buy meets safety standards and building codes and will be your primary residence.

Please note that if you don’t meet the minimum requirements, you may still be eligible.

How Much Can You Borrow with A VA Loan?

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VA loan limits were eliminated in 2020.

In other words, there is now no limit on how much you can borrow, provided you’re on active duty or are a veteran with full VA loan entitlement.

After using a VA mortgage to purchase a home, you can even get another VA loan.

Once you earn the VA loan benefit, it’s yours for life.

You’re eligible for another VA loan under the following conditions:

  • You sell the house and pay off your original VA loan.
  • You sell the house, and a qualified veteran buyer agrees to assume the VA loan.
  • You repay the VA loan in full and keep the house. For one time only, you can get another VA loan to purchase an additional home as your primary residence.

Please note: Loan limits still apply to borrowers who already have a VA loan or have defaulted on a VA loan.

Mortgage Requirements for VA Loans vs. Conventional Loans

There are plenty of factors to consider when choosing a loan.

Although a VA loan may seem like the obvious choice for veterans and soldiers on active duty, how can you be 100% sure?

The table below shows the comparisons of VA loan requirements and conventional loan requirements.

Further down the page, you’ll find a detailed breakdown of each section.

Loan Requirement VA Loan Conventional Loan
Property Type Primary Home Primary Home, Secondary Home, Vacation Home, Investment Property
Minimum Down Payment 0% 3%
Fees VA funding fee, along with other potential fees, like loan origination Varies according to lender, usually involves an origination fee
Mortgage Insurance No mortgage insurance required Usually required if the down payment is less than 20%.
Credit Score Varies by lender, no requirement set by VA. Around 620
Debt To Income Ratio None, but preferred below 41% Maximum of 50%
Mortgage Rate Average 2.72% Average 2.99%

 

Property Type

It’s important to note that VA loans can ONLY be used to purchase, restore or refinance a primary home. 

A VA-approved appraiser will also have to evaluate the home you wish to buy.

This is so they can estimate its value and ensure it meets the VA’s minimum property requirements.

In contrast, a conventional loan can be used in a variety of ways: to purchase a new home, a new investment property, a vacation property, and so on.

Down Payment

In most cases, VA loans require no down payment at all.

The only exception is where the purchased property is higher than its current market value – as is sometimes the case when a home is bought through an auction.

Conventional loans do require down payments.

However, the exact amount will vary from lender to lender.

Traditionally, lenders prefer to offer conventional loans to people with large down payments – with 20% being the recommended amount to avoid paying mortgage insurance.

Nevertheless, it is possible to find down payments as low as 3%.

Fees

VA loans demand what’s known as the VA Funding Fee – which varies depending on your unique circumstances.

For first-time buyers, this is typically 2.3% of the purchase price of the property.

For subsequent purchases, the fee is 3.6%.

This Funding Fee goes directly to the Department of Veterans Affairs to ensure the continuation of the VA Loan program.

This fee can be rolled into the overall loan amount, should you choose not to pay it upfront – however, this will increase the interest you pay over the loan’s lifetime.

Note: in some cases, veterans and surviving spouses are exempt from paying the funding fee entirely, such as veterans who receive VA disability compensation.

This is assessed on a case-by-case basis.

Although both VA loans and conventional loans have origination fees, it’s worth noting that VA loans have a cap on this amount. Conventional loans don’t.

Conventional loans also come with a variety of other fees, which vary from lender to lender, including:

  • Appraisal fees
  • Title insurance fees
  • Credit reporting fees

Mortgage Insurance

Simply put, VA loans don’t require mortgage insurance.

With conventional loans, if your down payment is less than 20%, you will need private mortgage insurance.

This can be a one-time charge paid at closing, an ongoing fee built into your monthly payment, or a combination of both.

Credit Score

Although the VA doesn’t set a minimum credit score, lenders do in almost all cases.

However, this is still slightly lower than the typical minimum score for conventional loans.

Most VA-approved lenders are looking for between 580 and 620.

Conventional loan lenders are looking for around the 620 mark.

Debt To Income Ratio

Although you may see some marketing stating that there is no maximum debt-to-income ratio for VA loans, their official guidelines also state:

“A lender must provide compensating factors if the total debt ratio is over 41%.”

Should your debt to income ratio exceed 41%, you won’t automatically be rejected, but you may have to supply additional information to your lender, such as your residual income.

You’ll generally need a DTI of 50% or less to qualify for a conventional loan.

Under certain circumstances, you may be able to qualify with a higher DTI, but this will be at the discretion of the lender and may be limited to refinancing options. 

Mortgage Rate

Statistically, VA loans are likely to have lower interest rates than conventional loans.

The percentage difference tends to sit between 0.25% – 0.42%.

For some homebuyers, this can make all the difference, even without all the additional features of a VA loan.

Which Mortgage Is Best For Me?

If you qualify for a VA loan, the huge range of benefits that come with it is, in most cases, enough to tip the scale towards them over conventional loans.

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However, every veteran’s situation is different.

When making a decision, it’s important to consider your circumstances and think about the following factors:

  • The type of home you’re buying

(If you wish to purchase a property that will NOT be your primary residence, a VA loan is not the right choice for you.)

  • Your personal finances

(If you do not have any money available to make a down payment, a VA loan is the ideal choice)

  • Your urgency to buy a property

(Typically, VA Loans do take a little longer to pay out, which may push you towards a conventional loan instead)

If you decide that a VA loan is for you, there are several types of VA Loans available for your consideration.

What Are The Different Types Of VA Loans?

There are numerous different VA Loans available depending on your needs.

Whether you’re buying your first home, refinancing your home, or making some long overdue home improvements – there’s a VA Loan for you.

Consult the table below for an overview of your options:

VA Loan Type Features

VA Purchase Mortgage
Allows qualified service personnel or veterans to buy a home with no minimum down payment

VA Cash-Out Refinance
Replaces a VA mortgage or a conventional mortgage with a VA loan.
This option allows you to turn home equity into cash.
VA Streamline Refinance
Also known as VA IRRRL:
(Interest Rate Reduction Refinance Loan)
Replaces your current VA mortgage with a VA loan to lower your interest rate or refinance from an adjustable rate to a fixed rate.
VA Rehab And Renovation Loan Finances the cost of home improvements
Native American Direct Loan
(NADL)
Helps eligible Native American veterans buy, build, improve or refinance a home on federal trust land.

 

How Can I Apply For A VA Loan?

Applying for a VA Loan is extremely simple to help service personnel, veterans, and their families fulfil their housing needs as soon as possible.

The process can be broken down into 3 distinct steps:

  1. Obtain A Certificate Of Eligibility

A VA certificate of eligibility shows lenders that your military service history meets the requirements for a VA loan.

However, you don’t have to source this certificate yourself:

A VA-approved lender can obtain the document for you, or you can request the certificate from the VA online.

  1. Find The Right Lender

Not all VA lenders offer the same rates or ask for the same requirements.

Shop around to find a lender tailored to your situation – for example, if you have a weaker credit score or need a certain type of VA loan.

  1. Find A Home

After you’ve made an offer on the property you wish to purchase, the lender will evaluate your finances and order a VA appraisal to ensure it meets regulations.

In short, it must be clean, structurally secure, and ultimately safe for you and your family to live in.

Once your application and appraisal are approved, the only steps are to close on the loan and move into your new home.

What’s the Best Loan for Me?

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Whether you choose VA loans or conventional loans, Sprint Funding is always ready to help.

We make loan applications simple. Give us a call at 760-849-4475 or fill out our form.

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