VA Benefits That Help When Buying Your New Home
You’ll learn about the advantages and disadvantages of both VA and conventional mortgages so that you can decide what's right for you when choosing between a VA home loan and a traditional mortgage.
This way, you’ll be equipped with the info to determine if this powerful home loan option is genuinely better than a traditional loan for your circumstances or if sticking with a conventional loan is the way to go.
Table of Contents:
- VA Home Loans vs. Conventional Mortgages: What’s the Difference?
- FAQs About VA Home Loan Versus Traditional Mortgage
- Conclusion
VA Home Loans vs. Conventional Mortgages: What’s the Difference?
VA home loans and conventional loans are both pathways to homeownership. However, these two mortgage options cater to different types of borrowers. Choosing between the two depends heavily on individual needs, financial situations, and future homeownership plans.
What is a VA Home Loan?
A VA home loan is a government-backed mortgage. It is only available to veterans, active military, and some surviving spouses with a valid Certificate of Eligibility (COE). This mortgage type offers more affordable terms for eligible veterans and often comes with key perks.
Benefits of VA Loans
These loans offer significant advantages. Let’s take a look.
No Down Payment Needed
Probably the most significant perk, eligible veterans often don't need a down payment on VA loans. This is a huge plus because it removes a major financial hurdle many folks encounter with conventional loans.
A VA loan allows qualified buyers to purchase a home with less cash upfront without a required down payment. This makes homeownership more attainable, especially for first-time buyers or those with limited savings.
Lower Interest Rates
The government backing for these mortgages helps secure generally lower interest rates than traditional loans, which results in substantial savings over time. According to mortgage data company Optimal Blue, on average in 2023, VA loan rates were .323% lower than conventional loan rates.
Lower interest rates equate to lower monthly payments, freeing up cash flow for veterans and their families. These interest savings can be significant over the life of the loan.
No Private Mortgage Insurance
Another benefit, borrowers typically escape the burden of private mortgage insurance, saving big on monthly payments compared to traditional loans where it's often required. This can save borrowers hundreds of dollars per month.
Flexible Credit Requirements
With VA loans, qualification tends to be more accessible because lenders use more flexible criteria. The VA itself doesn't set a minimum credit score.
This sharply contrasts conventional mortgages, which usually come with strict credit requirements. Typically, VA lenders ask for a credit score 580, while traditional lenders require a 620 minimum. VA loans are a viable option for veterans who may not have perfect credit.
VA Loan Limits by County
Another difference between a VA home loan and a traditional mortgage is that the VA itself doesn’t impose loan limits, although some counties may have specific limits. However, conventional loans do adhere to these limitations. It’s something to consider when weighing both types.
Veteran Benefits May Be Most Valuable When Finding a Mortgage Lender
What Is a Conventional Loan?
Unlike VA loans, conventional mortgages are not backed by the government. Instead, they adhere to guidelines set by the Federal Housing Finance Agency (FHFA), which provides certain criteria for approval.
Benefits of Conventional Loans
Although VA loans boast appealing perks, conventional mortgages still have their merits. Take a look.
Lower Fees for Larger Down Payments
When a 20% down payment is an option, a traditional mortgage could result in lower overall fees than a VA loan. This is because larger down payments exempt you from private mortgage insurance, and you bypass the VA funding fee accompanying a VA loan.
Although there are advantages to a zero-down payment option with VA loans, it means a larger loan, thus paying more interest over time. A conventional loan can lead to long-term savings for buyers who can manage a larger down payment.
Broader Property Options
Traditional mortgages come with more versatility regarding eligible properties, as these loans can finance vacation homes, rental properties, and investment properties.
The rules governing VA loans restrict the use of these funds for primary residences. This makes conventional loans a more attractive for buyers looking to expand their real estate portfolios.
Faster Closing Process
Traditional mortgages may involve a smoother, quicker closing process compared to the VA’s strict property standards, which can sometimes slow things down a bit. Although the appraisal requirements with VA loans are meant to ensure that properties meet quality and safety standards, some see them as an advantage to conventional loans since a traditional lender may choose to waive an appraisal, which speeds up closing time.
In competitive real estate markets, a faster closing process can benefit buyers. Conventional loans sometimes have an edge in this area, especially if the appraisal process is expedited or waived.
FAQs About VA Home Loan Versus Traditional Mortgage
Is it better to do a conventional or VA loan?
There is no better or worse; it depends on your needs, finances, and situation. VA loans are great for veterans who qualify but have a lower down payment or credit score.
Conventional loans, although often requiring better credit and more money down, offer greater flexibility for investment or secondary home purchases. Weighing these factors is key in deciding between a va home loan versus traditional mortgage. Speaking with a mortgage professional can provide valuable insight tailored to your unique circumstances.
Why does Dave Ramsey not like VA loans?
Financial guru Dave Ramsey emphasizes the benefits of homeownership and the pride of paying your mortgage in full. Based on general financial prudence, his perspective often emphasizes minimizing debt and interest payments, leading to quicker equity growth. His philosophy leans toward favoring the option of a shorter 15-year loan and making a substantial down payment when financially possible, thus maximizing savings over time.
Though these are great goals for anyone considering a mortgage, Ramsey's advice is applicable across the board and not exclusive to any one mortgage type, even the VA Loan. In reality, it often boils down to whether you're better able to maximize the benefits of a zero-down payment but potentially slower equity gain offered with the VA loan or a potentially faster equity gain, but higher interest payments, which often comes with traditional mortgages. It is important to carefully evaluate your financial situation and long-term goals to determine which type of mortgage aligns best with your circumstances.
Why do sellers prefer conventional over VA loans?
Sellers may lean toward traditional mortgages over VA loans due to concerns about appraisal timelines and repair requirements. Although the appraisals tied to VA loans protect veterans and the government's interests, these assessments require properties to meet a specific set of guidelines.
As mentioned earlier, this often includes minimum property standards. While these safeguards are significant for borrowers, sometimes required repairs for a property to be VA-approved could add a little extra time and expense during the transaction, and some sellers are just averse to any bumps in the road during the sale process. Some home buyers choosing to secure funding with traditional mortgages may opt to forego this step entirely.
Are mortgage payments higher with a VA loan?
When comparing interest rates, VA loans may lead to lower monthly payments because of the historically lower interest rates these loans have had in recent years. The exemption from PMI is also a significant money saver compared to a conventional mortgage with a lower down payment that does not exceed 20% and requires PMI to offset lender risk.
However, those who choose to put a lower down payment or no down payment on a VA Loan will, by nature of having borrowed more money to cover the total cost of the home, pay more in total interest throughout the lifespan of their mortgage. Other costs associated with both mortgage types, such as the VA Funding Fee, can vary, so it's tough to make blanket generalizations.
