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VA Loan Vs Conventional Loan: Everything You Need to Know

Are you a veteran or an active-duty member of the military who’s looking for home financing options? If so, you might want to consider a VA loan! These government-insured loans are designed specifically for veterans and other members of the US military, making them particularly great financing options if you want to have you own house

But what is a VA loan and how does it differ from conventional loans? Below, we’ll dive into everything you need to know about a VA loan vs conventional loan options, including eligibility criteria, interest rates, and more.

What is a VA Loan?

A VA loan is a home financing option provided to veterans, active duty service members, and current and former reservists. It’s a hugely beneficial type of loan compared to conventional loans, as it offers competitive interest rates and minimal closing costs. VA loans are also more flexible in terms of credit history, providing options for those with a less than perfect track record.

Similar to conventional loans, VA loans can be used to purchase new properties or renovate one’s primary residence. However, there are specific features in VA loans that make them a particularly attractive option for military members and their families. So if you’re eligible for a VA loan, best opt for it instead of other more conventional lending options.

Perks of VA Loans

No Down Payment

One of the biggest perks of VA loans is that you’re not required to make any down payment. This is a huge benefit for veterans and active duty military members who may not have the savings for to cover the down payment amount that usually come with conventional loans.

No Private Mortgage Insurance

Another VA loan benefit is that it doesn’t require private mortgage insurance (PMI). This insurance policy protects lenders in case they default on conventional loans. However, the monthly premium for a PMI can add hundreds of dollars to your monthly mortgage payment. Thus, avoiding it can save you a significant amount of money over the life of your loan.

Competitive Interest Rates

VA loans also tend to have very competitive interest rates. Because the Department of Veterans Affairs guarantees a portion of the loan, most VA lenders are often willing to offer lower rates to borrowers. Again, this can help you save thousands of dollars on the VA loan.

Flexible Credit Requirements

VA loans have flexible credit requirements as well. This means that even if you have less than perfect credit, you may still be able to qualify for the VA loan.

No Prepayment Penalty

Lastly, a VA loan doesn’t come with any prepayment penalty. This means that if you decide to sell your home or refinance your loan, you will not be charged a fee for doing so.

Differences Between VA Loan Vs Conventional Loan Options

VA loans offer several advantages compared to conventional loan options. These include lower interest rates, no down payment required and even reduced closing costs. Keep reading to learn more about the differences between VA loan vs conventional mortgage loan options:

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Down Payment

One of the biggest differences between VA loans vs conventional loans is the down payment. VA loans do not require a down payment, while conventional loans typically require a down payment of 3 to 20%.

Credit Score

Another difference between VA loans and conventional loans is the credit score requirements. VA loans do not have a minimum credit score requirement, while conventional loans typically require a credit score of 620 or higher.

Mortgage Insurance

VA loans also don’t require mortgage insurance, while conventional loans do. If the down payment involved is less than 20%, the lender might ask you for a private mortgage insurance (PMI) for their conventional loan options.

Loan Limit

VA loan limits are generally higher than conventional ones. As of 2020, the standard VA loan limit for 2020 is $510,400. Meanwhile, the standard conventional mortgage amount is only as high as $484,350. Bear in mind that both VA and conventional loan limits can vary depending on the location of the investment property and the type of loan.

Eligibility Requirements

In order to be eligible for a VA loan, borrowers must be active duty military members, veterans, or reservists. There are no such eligibility requirements for conventional mortgage loans.

Interest Rates

Interest rates for VA loans are typically lower than interest rates for conventional loans. This is because VA loans are backed by the government and lenders view them as being less risky.

Prepayment Penalties

VA loans do not have prepayment penalties, while some conventional loans require penalty fees if the borrower pays off the loan early.

Funding Fee

VA loans have a funding fee that is paid by the borrower at closing. The funding fee ranges from 1-3% of the loan amount and helps to offset the cost of the loan program. There is no funding fee for conventional loans

Choosing Between a VA Loan Vs Conventional Loan Options

Now that you know the main differences between a VA loan and other conventional loans, you might be wondering which one to pick. After all, both are great loan programs if you want to buy or renovate a house. To make you life easier, we made a list to help you determine which is better for your housing needs.

5 Signs You Need to Choose VA Loans

1. You’re a Veteran

If you’re a veteran, you may be eligible for a VA loan. VA loans are available to active-duty service members, veterans, and reservists. The main advantage of VA loans is that they offer 100% financing, which means that you can buy a home without having to put any money down.

2. You Have Good Credit

If you have good credit, you may be able to qualify for a conventional loan with a low interest rate. However, you’ll also may be able to get lower interest rates on a VA loan.

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3. You Have a Steady Income

In order to qualify for a VA loan, you must have a steady income. This can come from employment, disability benefits, or other sources. Conventional loans typically require that borrowers have a steady income as well.

4. You Want to Buy a Home in an Eligible Area

VA loans are available for homes in certain rural and urban areas. If you want to buy a home in an eligible area, you may be able to get a VA loan. Conventional loans are not restricted to certain areas.

5. You Don’t Have Much Money for a Down Payment

If you don’t have much money for a down payment, a VA loan may be the best option for you. With a VA loan, you can buy a home with no money down. Conventional loans typically require at least 3% down.

5 Signs You Need to Choose Conventional Loans

1. You Have a Good Credit Score

One of the primary eligibility requirements for VA loans is that borrowers have a good credit score. However, if you have a good credit score, you may be better off choosing a conventional loan, as you will likely qualify for a lower interest rate.

2. You Have a Large Down Payment

VA loans require borrowers to put down at least 3.5% of the purchase price of the home. If you have a large down payment saved up, you may be better off choosing a conventional loan, as you will likely qualify for a lower interest rate.

3. You Have a High Debt-to-Income Ratio

Another eligibility requirement for VA loans is that borrowers have a debt-to-income ratio of no more than 41%. If your debt-to-income ratio is higher than this, you may be better off choosing a conventional loan.

4. You Plan on Selling the Home Within a Few Years

If you plan on selling the home within a few years, you may be better off choosing a conventional loan over a VA loan. This is because VA loans typically have higher interest rates than conventional loans, and you will likely end up paying more in interest over the life of the loan if you sell the home before it is paid off.

5. You Need to Borrow More CASH

The maximum loan amount that can be guaranteed by the VA is $484,350. If you need to borrow more than this limit, you will need to choose a conventional loan over a VA loan

Tips When Applying for a VA Loan

If you’re considering getting a VA loan, there are several tips to help you out. These include:

Know the Eligibility Requirements

In order to apply for a VA loan, you must first meet the eligibility requirements. These requirements are set by the Department of Veterans Affairs and include things like having served in the military for a certain period of time or having a disability that is service-related. You can check the full list of eligibility requirements on the VA’s website.

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Get Your Certificate of Eligibility

Once you have determined that you meet the eligibility requirements, you will need to get your Certificate of Eligibility (COE). The COE is a document that proves to lenders that you are eligible for a VA loan. You can apply for your COE online, through your lender, or by mail.

Choose a Lender

After you have obtained your COE, you will need to choose a lender. It is important to shop around and compare rates, fees, and mortgage insurance from multiple lenders before making a decision. You can use the VA’s Loan Comparison Calculator to help you compare lenders.

Gather Required Documentation

Once you have chosen a lender, you will need to gather all of the required documentation. This documentation includes things like your COE, proof of income, bank statements, mortgage insurance requirements, and tax returns. Your lender will be able to provide you with a complete list of required documentation.

Submit Your Application

Once you have gathered all of the required documentation, you will need to submit your application to your chosen lender. The application will ask for information about your personal finances, employment history, and credit history. Be sure to answer all questions truthfully and accurately.

Wait for Loan Approval

After you have submitted your application, it will be up to the lender to decide whether or not to approve your VA or conventional loan. If approved, you will receive a loan commitment letter outlining the terms and conditions of your loan. Be sure to review this letter carefully before signing it.

Complete a Home Appraisal

Once you have signed the loan commitment letter, the next step is to complete a home appraisal. The appraisal is used to determine the value of the investment property that you are looking to purchase with your VA loan. The appraised value must be equal to or greater than the purchase price in order for the loan to be approved.

Complete a Home Inspection

In addition to an appraisal, most private mortgage lenders will also require that you complete a home inspection prior to closing on your VA or conventional loan. The home inspection is used to identify any potential problems with the property that could affect its value or livability. Be sure to hire a qualified inspector who has experience inspecting homes in your area

VA Loan Vs Conventional Loan: The Bottom Line

Making the decision to buy or renovate your own home can be an intimidating endeavor. So do your research and know what financing option is available before making that leap. Both VA loans and conventional ones can help you out with that.

So in conclusion, it doesn’t matter whether you choose VA loans or conventional loans. Either way, you’re sure to find something that fits your needs.

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