Understand the advantages of the VA loan compared to other popular loan options.
Buying a home is often one of the largest purchases most make in their lifetime, so knowing the options available can help save a significant amount of money in the long-run.
Here we look at the most common mortgage options vs. the VA loan to compare when each may make sense.
A conventional loan is a type of mortgage that isn't guaranteed by the federal government. Instead of government backing, conventional loans rely on private mortgage insurance to hedge potential losses.
According to data produced by the Home Mortgage Disclosure Act, Conventional loans make up over 54% of the home purchase market, making them the most common mortgage type.
While conventional loans make up the broader market, they still lack advantages for military buyers.
VA loans are one of the last mortgage options available to offer $0 money down. On the other hand, conventional loans generally require a minimum of 5% down.
For example, on a $250,000 mortgage, 5% means a conventional borrower would need to come up with a $12,500 down payment, in addition to closing costs.
Conversely, because the federal government backs VA loans, lenders do not require a down payment - making the VA loan one of the only loan programs that still offer 100% financing.
Another benefit of federal backing is the VA loan does not require PMI or any other type of mortgage insurance like conventional loans. With a conventional loan, borrowers typically pay monthly mortgage insurance until they have a 20% equity stake in the home.
According to Genworth Mortgage Insurance, Ginnie Mae, and the Urban Institute, PMI typically ranges from 0.55% to 2.25% of the original loan amount per year.
A VA borrower has an advantage when shopping for rates as well. The risk for VA lenders decreases with federal backing, allowing them to offer better rates than their conventional counterparts.
In fact, according to ICE Mortgage Technology (formerly Ellie Mae Encompass), the 30-year VA loan rate was more than a quarter of a percent lower than conventional.
The qualification standards for each loan type are very different. Once again, because the government backs the loan, lenders assume less risk and have less stringent qualification standards for VA loans making them easier to obtain.
When comparing VA and conventional loans, the downside for VA is the property type and funding fee.
You can only use a VA loan for a primary residence - meaning no vacation or second homes. And the VA funding fee (a one-time payment to the government that can be rolled into the entire loan amount) runs anywhere from 1.4% to 3.6% of the loan amount.
Disabled Veterans and those who've received a Purple Heart do not pay the VA Funding Fee.
The FHA loan is a government-backed mortgage option created for first-time and low-to-moderate income borrowers.
The federal government backs both FHA and VA loans, but the two programs' differences are immense.
We know the VA offers $0 down, but what about FHA?
FHA loans require a minimum of 3.5% down. That means on a $250,000 mortgage, you'd need to bring $8,750 to closing.
The most considerable difference between the programs may be the mortgage insurance requirements. While VA loans do not have PMI, FHA loans have both an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount and a monthly premium ranging from 0.45% to 1.05%.
FHA monthly mortgage insurance depends on the loan amount, size of the down payment, and the loan term. The most common monthly mortgage insurance premium is .85%, which, on a $250,000 mortgage, is an added $177 each month, typically for the life of the loan.
FHA loan credit requirements are more lenient than VA. The FHA allows credit scores as low as 580 for those wishing to put only 3.5% down. However, in the wake of the great recession and global pandemic, most lenders often require a higher score.
For rates, VA is the clear winner. VA loan rates are consistently lower than FHA loan rates.
The USDA loan is another government-backed mortgage option. The United States Department of Agriculture (USDA) created the USDA loan to help spur homeownership in rural communities.
The differences between VA loans are quite stark. USDA loans require you to purchase your home in a USDA eligible area and have an income maximum - meaning your total household income can't exceed more than 115% of the median income for that area.
USDA loans often have a longer time to close, as the USDA requires underwriting from both the lender and USDA. Conversely, according to ICE Mortgage Technology, the average VA loan typically closes just a few days more than a conventional loan.
Veterans interested in homeownership should review their options and talk with an experienced home loan specialist. Take the first step, and have VAMortgageCenter connect you with an experienced home loan specialist.