Which is Better? VA Loan versus Conventional Loan?
What’s the difference between a VA loan and a conventional loan?
First things first. When I say conventional loan we are talking about a standard mortgage from a bank or mortgage company. It’s a conforming loan, which means it conforms to all the underwriting criteria based on income, credit score and debt to income ratio.
What is the Difference between a VA Loan and a Conventional Loan?
The VA loan is a benefit to veterans, servicemembers of the military and survivors and has a 25% guarantee by the VA. What that means is that if a VA borrower were to default then the VA would pay the lender up to 25% of the loan. Because of this guarantee, it affords servicemembers different benefits that can’t be found when using a conventional loan. Right now I am going to tell you the 6 major differences between a conventional and VA loan.
- VA loans require Zero money down whereas conventional loans typically require a minimum of 5% down. There are circumstances where you can put as little as 3% down on a conventional loan, but that’s not common.
- Conventional borrowers with less than 20% down pay private mortgage insurance. VA loans do not have private mortgage insurance EVER! PMI is determined based on the home price, your credit score and other factors, PMI can easily run a few hundred dollars per month. The PMI rate ranges between 0.55% and 2.25% of the loan amount. As an example, if you purchased a home for $500K with 10% down at a 3% interest rate on a conventional loan your PMI would run $221/month or $2652/year! Whereas a VA loan you could put $0 down and pay nothing in private mortgage insurance for the entire life of the loan. I go more in-depth about PMI insurance in another video so if you want to learn more click the link in the box above.
- VA loan rates are the best rates available on the market and are typically about .25% less than a conventional loan rate. Since VA loans are backed by the Department of Veterans Affairs it gives lenders more confidence to extend better rates to its borrowers.
- VA loans typically have easier qualifying criteria compared to conventional loans. Because VA loans have such a low foreclosure rate at 1.5% there is not a minimum credit score and the debt-to-income ratio is higher on a VA loan than a conventional loan. On a conventional loan 620 is typically the minimum score required and the max debt-to-income ratio is typically 45%. If you aren’t quite sure what a debt-to-income ratio is and want to learn more I have another video explaining it in detail that you can click above. I’ll also leave links to any pertinent videos in the description below.
- One rather large difference between VA and conventional loans is that VA loans are only for primary residences. This doesn’t rule out duplexes or fourplexes, but to use a VA loan you must intend to live in the property you purchase. Conventional loans can be used to purchase primary residences, vacation homes, rental properties and investment properties, but VA loans require you to be an owner occupier so if you are trying to buy an investment property VA loans are out!
- VA loans come with what’s known as the VA funding fee. The VA funding fee ranges from 2.3% to 3.6% of the loan, but can be rolled into the entire loan amount. However, not everyone has to pay the VA funding fee. If you have at least a 10% disability rating you are exempt from the VA funding fee. If you want to know more about the VA funding fee click the link in the box above.
Those are the six major differences between a VA and conventional loan. There is a lot of false information out there about VA loans. I know because I was told misinformation about the VA loan and ended up getting a conventional loan that cost me thousands and thousands of dollars I didn’t need to spend so that’s why I want to educate other veterans. Also, I know some amazing VA lenders that I can connect you with as not all VA lenders are created equally and you want someone who can navigate the process seamlessly for you! If you would like to know more information about the VA loan or home buying and selling process feel free to reach out to me or comment below with any questions you may have! All of our info is in the description below and I would be honored to help you with your next real estate transaction!