Conventional Vs. VA Loans
A conventional loan is not secured by the government while VA loan is a loan backed by government. Both conventional and VA loans are popular mortgage loan. Lets look into the differences, how conventional loan differs from VA loan, who is eligible and which one is the best option. I hope after going through this article you can clear your doubts regarding conventional Vs VA loan.
Conventional Vs VA Loans
In this article of Conventional Vs VA loans we are going to cover its differences, interest rates, credit score, fees, closing cost and which one will be better for you.
What are Conventional Loans?
A conventional loan is any mortgage loan or any type of home buyers’ loan that is not secured or guaranteed by the government, but instead is available through a private lender. A conventional mortgage loan is a conforming loan, which simply means that it meets the requirements for Fannie Mae or Freddie Mac.
There are two main categories of conventional loans:
Conforming loans
Conforming loans have maximum loan amounts that are set by the government. Other rules for conforming loans are set by Fannie Mae or Freddie Mac, companies that provide backing for conforming loans.
Non-conforming loans
Non-conforming loans are less standardized. Eligibility, pricing, and features can vary widely by lender.
What are VA Loans?
VA loan also known as Veterans Affairs (VA) is a mortgage loan in the United States guaranteed by the United States Department of Veteran Affairs. It is one of the most useful military benefits. If you qualify for VA home loan you can buy and build your own home. With VA loans, veteran, service members, and their surviving spouses can purchase their own homes. VA loan is quite different from regular loan. In VA loan one does not require to pay any down payment and PMI (Private Mortgage Insurance). Moreover, VA loan have lower interest rates. VA loan makes more affordable to buy homes for millions of veterans and active service members.
Also Read: Conventional Vs FHA Loans
Difference between VA loan Vs. Conventional loan
| VA Loan | Conventional Loan |
| Zero down payment required for VA loans | 3% to 20% down payment required |
| There is no Private Mortgage Insurance (PMI) for VA loans | PMI for mortgage with less than 20% down |
| VA loans typically have lower interest rates than conventional loan | Higher rates |
| VA does not set credit score but lenders often require at least a 620 FICO | Typically, a 620 FICO minimum |
| VA loan is only for primary residence | On the other hand, conventional loan is available for primary, secondary, investment property and vacation homes |
| VA loans come with what’s known as VA funding fee | Conventional loan does not have any unique fees like the VA funding fee |
| Need a Certificate of Eligibility (COE) to qualify for VA loan | No special eligibility requirements |
Applicant Eligibility
To qualify for conventional loan, consumers must meet the following requirements:
- Consumers typically must have stellar credit reports with no significant blemishes
- Consumers must have credit score of at least 620
- Debt to income ratio below 36%
- Proof of cash available for a down payment
Not all who have served in the military service is not eligible for a VA loan. To become eligible for a VA loan one needs to have to qualify the following criteria:
- You must have served on active duty for at least 90 days during wartime.
- Have at least 6 years of service either in the Reserves or National Guard.
- Have 90 days of active service under Title 10 or Title 32.
- You must be a spouse of a military service member who died on-duty or some type of service-related disability.
In order to qualify for a VA loan, one needs to provide with a Certificate of Eligibility (COE), which involves obtaining proof of service to verify if a Veteran meets the minimum service requirements.
Also Read: 13 Facts And Benefits of Pea
Mortgage Insurance
Depending on your mortgage terms and the size of your down payment, you might have to pay mortgage insurance. Unlike other types of insurance, mortgage insurance does not protect you. Mortgage insurance protects the lender in case of default i.e., it protects the lender if you stop making payments.
VA loan does not require any mortgage insurance, A down payment may reduce but does not eliminate the VA funding fee.
Whereas if your down payment is less than 20%, a conventional loan will require a Private Mortgage Insurance (PMI), which protects the lender if you default on the loan. It can be one time charged paid at closing, an ongoing fee that is built into your monthly payment, or a combination of both. That and the amount you pay for PMI, varies with each lender. You can use a PMI calculator to estimate the cost. Depending on your credit score and the size of your down payment, PMI fees can range from 0.55% to 2.25% of the loan amount, according to Genworth and the Urban Institute.
Fees and Closing Costs of Conventional Vs VA Loans
Both conventional and VA loans require an origination fee. Lenders charge this fee to cover the cost of processing the loan. It generally costs 0.5% – 1% of the loan’s total amount, and you pay it as part of your closing costs. VA loan don’t require down payments, but that does not mean you can borrow without having to pay anything. One of the costs you will have to pay for a VA loan is closing costs. VA loan come with a fee what’s known as VA funding fee. The VA funding fee is a unique cost when you take out a VA loan. This is one – time fee that you pay to the Department of Veteran Affairs. If you are using a VA home loan to buy, build, improve, or repair a home or to refinance a mortgage, you will need to pay the VA funding fee unless you meet certain requirements. The funding fee ranges from 1.25% to 3.3% of the loan amount and varies based on your down payment, whether you are buying a home or refinancing and how many times you have used your VA loan benefits. Whereas, on the other hand Conventional loan does not have any unique fees like the VA funding fee.
The funding fee is designed to cover potential costs in case the borrower defaults. While its one-time 1charge, the fee often gets rolled into the total loan amount. That adds to your monthly payment and the amount of interest you pay over the loan’s life.
Veterans receiving VA disability compensation do not have to pay this fee.
Down payment and loan limits
One of the major benefits of VA loan is that there is no required of down payment. Your lender may also require some money down if your credit score is low. They may also require a down payment if the property’s purchase price is high.
On the other hand, lenders that offer conventional loans typically prefer larger down payment. Conventional loan allows you to put as little as 3% down, which makes them a better option for buyers with minimal savings, but they recommend 20% or larger. By doing so, you avoid paying mortgage insurance (PMI).
VA loan limits are restrictions on how much a military service member can borrow when taking out a mortgage backed by the U.S. Department of Veteran Affairs (VA). Eligible Veterans, service members, and survivors with full entitlement haven’t been subject to a loan limit set by a government agency. On the other hand, Conventional loan must meet loan limits set by the federal Housing Finance Agency. These limits are usually the same regardless of where you are buying a home, except for some higher cost countries.
Credit Score Requirements
It is generally easier to receive a VA loan approval than a conventional mortgage loan because of the low credit score requirements for VA loans.
The Department of Veteran Affairs itself does not require a minimum credit score. Instead, the minimum comes from the mortgage lenders that offer VA loans. While conventional loan lenders will also have different credit score requirements, the minimum usually sits around 620.
Interest Rates
Conventional loan interest rates tend to be higher than those of government-backed mortgages. The interest rates carried by a conventional mortgage depends on several factors, including the terms of the loan – its length, its size, and whether the interest rates is fixed interest or adjustable – as well as current economic or financial market conditions.
VA mortgage generally offers lower rates than conventional loans at a percentage difference of 0.25% – 0.42%. VA loans rates are typically lower because they are backed by the government and carry lower risk for lenders and investors, VA loans typically have lower interest rates than conventional as well as FHA loan, particularly for borrowers with credit issues.
VA Vs Conventional Loans: Deciding Which Loan Is Right for You
VA loan is often better than a conventional loan because you can buy your home with no down payment, a higher debt-to-income-ratio, and no private mortgage insurance. But for this loan you will have to be eligible. You should be veteran or a military service member in order to be eligible for VA loan.
On the other hand conventional loans are more flexible and can be used to buy almost any property. In addition there are no specific eligibility requirements to qualify for conventional loan this is one of the great advantage, but conventional loan is better if you have a good and better credit score.
Both conventional and VA loans are good option but for a VA loan you should served in military, whereas for conventional loan you should have better credit score.
FAQs
1. What are the advantages of VA loan?
Ans: Advantages of VA loan are:
- No Down Payment
- No Private Mortgage Insurance
- Competitive Interest Rates
- VA loans can be much cheaper and quicker to refinance than conventional loans
- Closing Cost Limits
- Lifetime Benefit
- Foreclosure Avoidance etc.
2. What are the advantages of Conventional loan?
Ans: Advantages of conventional loan are:
- Low Cost
- Conventional loans are typically faster to close than VA loans
- Conventional loans have no property restrictions
- Flexible
- Opportunity to borrow more
- Higher loan limits etc.
3. Who is eligible for VA loan?
Ans: Those who are active-duty service members, Veterans, National Guards, Reserve members and surviving spouses are eligible for VA loan. VA loan is not available to general public.
4. Who is eligible for conventional loan?
Ans: There are no specific eligibility requirements to qualify for conventional loan. Conventional loan is available to general public but conventional loan is better if you have a good and better credit score.
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