Deciding how to finance your dream home is a big step, especially for military veterans. This makes a thorough understanding of Veteran home loans versus traditional mortgages crucial. This decision will ensure you make the best financial choice for your family. Let’s explore the benefits, drawbacks, and key differences between these two popular mortgage options.
One of the most important factors when comparing a Veteran home loan versus a traditional mortgage is who qualifies. The Veteran loan is a special benefit available only to veterans, active-duty personnel, and some surviving spouses, courtesy of the Department of Veterans Affairs. A conventional mortgage is open to any eligible borrower regardless of military service.
Table of Contents:
- VA Loan Benefits: Your Military Service Pays Off
- Conventional Loan Considerations
- Making a Decision: VA Loan vs. Traditional Loan
- VA Loan Versus Traditional Mortgage: FAQs
- Conclusion
Veteran Loan Benefits: Your Military Service Pays Off
The Veteran home loan program helps make homeownership more accessible and affordable for veterans. Here’s how:
Zero Down Payment
The most significant advantage is that many VA borrowers don’t have to pay anything upfront. No down payment is a major perk of using the VA loan benefit, as highlighted in this overview of the VA Purchase loan. Compare this to a conventional loan, where you’d usually need at least 3%, possibly even 20% down.
Considering the average home sale price in the second quarter of 2023 hit $503,000, a conventional borrower might be shelling out $25,150 or more just for a down payment.
No Private Mortgage Insurance (PMI)
Another win for VA loans is that you can avoid the added expense of private mortgage insurance. This is normally tacked onto conventional loans if your down payment is less than 20%.
While not required for VA loans, most VA lenders require a minimum credit score of at least 620, the same standard for a conventional mortgage. According to Fannie Mae’s Eligibility Matrix, this score assesses a borrower’s ability to repay debts.
Competitive Interest Rates
VA loan rates are typically more favorable than conventional mortgages. Even small percentage differences can add up to significant savings. Think thousands of dollars back in your pocket over the long haul.
Less Stringent Credit Requirements
While minimum credit scores vary by lender, VA loans often provide more leeway than traditional mortgages. Even if your credit history isn’t perfect, you might still qualify for a VA loan.
Factors like a healthy debt-to-income ratio or steady employment history can sometimes outweigh a less-than-stellar credit score.
Funding Fee
Most VA loan borrowers pay a one-time funding fee. This fee goes towards sustaining the VA loan program and making it possible for other veterans to benefit from it. It can range from 1.25% to 3.3% of your loan amount.
You can usually roll the fee into the total loan cost, so it doesn’t come out of pocket upfront. Some borrowers qualify for complete exemptions from the VA funding fee based on specific circumstances. The details of these exemptions can be found in the guidelines on VA funding fee and loan closing costs.
Conventional Loan Considerations
A conventional mortgage is a common choice for homebuyers who don’t qualify for VA loans or seek options beyond their primary residence.
Down Payment Flexibility
Conventional loans allow you to put down as little as 3%, depending on the lender. Remember, going below 20% usually means you’re stuck paying for PMI, adding to your monthly costs.
Property Type Options
With a conventional mortgage, you can purchase almost any property – vacation homes, rental properties, or your primary residence. This flexibility sets it apart from VA loans, which primarily focus on helping veterans acquire their main residence.
Conventional loan limits are set by county, with many areas having a limit of $766,550 for single-family homes, according to Fannie Mae’s loan limit guidelines.
No Funding Fee
While conventional loans may have origination or other lender-specific fees, they don’t include a program-related funding fee as you see with VA loans. That said, remember you may be paying that undesirable PMI.
Making a Decision: VA Loan vs. Traditional Loan
So, when should you choose one option over the other? It’s a tricky question. Here’s a guide:
Pick the VA Loan If You:
- Qualify based on your service history and get a valid Certificate of Eligibility (COE).
- Haven’t built a substantial down payment yet.
- Want to avoid private mortgage insurance costs?
Opt for a Conventional Loan If You:
- Can make a hefty down payment, ideally 20% or more.
- A strong credit history allows for competitive interest rates on conventional mortgages.
- Want the flexibility to purchase investment properties or second homes?
Beyond these core aspects, you must consider the property guidelines for each loan program. VA loans have their own Minimum Property Requirements (MPRs). This means a home you’re considering must pass a VA appraisal to make sure it’s structurally sound and meets livable conditions.