It’s an interesting match to ponder: VA loans vs. conventional loans. Which home loan should win the battle for your business? That answer depends on you, your personal preference, your financial situation, and your housing goals.
VA Loans vs. Conventional Loans
How do you decide which of these home loans is the better choice for you? First, you’ll want to have a basic idea of what these loans are. Then, you’ll want to consider certain key factors that can help you see how they stack up. Are you ready to explore VA loans vs. conventional loans?
Defining Terms: VA Loans vs. Conventional Loans
The U.S. Department of Veterans Affairs (VA) doesn’t actually hand out its popular VA purchase loans. Instead, its loan program sets a framework for private lenders, who actually make VA loans. Then, the VA stands behind these loans with a partial guarantee, reducing the lenders’ risk and allowing borrowers to enjoy favorable terms that might otherwise be out of their reach. Meanwhile, conventional loans are home loans that aren’t backed by the government.
VA loans are a benefit earned with service, so they’re only available to a select group. Generally, you’ll need to be a service member, veteran, member of the National Guard or Reserves, or a surviving spouse to qualify for a Certificate of Eligibility, a document from the VA that establishes your eligibility to participate in the VA loan program. What if you haven’t served in the military? Although you won’t be eligible for a VA loan, a conventional loan is still an option. As The Mortgage Reports notes, there is no military service requirement needed to establish your eligibility for a conventional loan.
One of the major differences between VA loans and conventional loans becomes obvious when you consider property type. The VA’s home loan program was designed to help service members become homeowners. As the VA makes clear, its loans can only be used to purchase a home that will serve as a primary residence. Conventional loans offer much more freedom, according to U.S. News & World Report. They can be used for a primary residence, but they can also be used to purchase an investment property or vacation home.
Coming up with a sizeable amount of cash for a down payment is a struggle for many Americans. Fortunately, it’s not truly necessary if you choose the right home loan. For example, the VA loan gives you an option to purchase a home with no down payment needed. As the VA explains, you can get 100-percent financing for your home purchase with a VA loan as long the home’s price tag isn’t higher than its appraised value. Plus, you’ll enjoy competitive interest rates, good loan terms, and limited closing costs, even if your credit isn’t perfect. How do conventional loans compare? As NerdWallet indicates, it’s possible to get a conventional loan with a down payment as low as 3 percent. However, you’ll generally need to have a credit score of at least 620 to get this type of loan, and making a small down payment means paying mortgage insurance.
If a borrower defaults on their loan, mortgage insurance steps in. However, it’s the lender who sees the benefit of the insurance. When it comes to mortgage insurance, borrowers who are required to have it pay the premiums, but they won’t get any of the payouts if the policy is triggered. Borrowers using VA loans don’t have to worry about mortgage insurance. As the VA notes, the guarantee offered by the VA eliminates the need for mortgage insurance. Borrowers using conventional loans aren’t as lucky. According to The Mortgage Reports, borrowers who use a conventional loan and make a down payment of 20 percent or more can avoid paying mortgage insurance. However, those who make a smaller down payment will be required to have private mortgage insurance, which can add hundreds of dollars to your monthly mortgage payment. Fortunately, this can be canceled once you have enough equity.
You may have questions about a specific type of loan. You may be trying to decide whether this type of loan would suit you better than that one. Or, you may be looking at the various types of loan products on the market and wondering where to start. Wherever you are in your quest to find the right home loan for your needs, the team at PrimeLending Denver is happy to offer our assistance. Contact us today to get started.