There are a few key differences between a VA loan and a conventional. In this post, we’ll go through what they are.
Deciding between a VA loan or a conventional loan may seem easy.
VA loan has a zero down payment, no mortgage insurance, a better interest rate, easier to qualify for, lower credit score requirements….. a VA home loan seems like the best option…right?
Not always. When you start to look into things like the VA funding fee and the restrictions on property requirements, a conventional loan may be better suited.
Lets go over the factors to consider when deciding between a VA mortgage and a conventional loan.
Funding fee requirements for VA loans vs. Conventional
VA loans don’t require a down payment or mortgage insurance, but it does have a funding fee which can make conventional loans a better option for certain borrowers.
The VA program has a fee called the “VA funding Fee“, it’s a cost that ranges anywhere from 2.3% to 3.6% depending on whether it’s your first time using the program or subsequent use.
This fee is usually rolled into the loan, but even though it’s not a cost you have to pay for out of pocket, it is still increasing the loan amount by a large percentage, which means that you’ll be paying more interest on the loan in the long run.
If you are doing a refinance, compare the monthly payment to a conventional loan.
Does the VA loan have a low enough payment to justify paying the funding fee or does a Conventional loan make more sense?
If you are purchasing, conventional loans always require a down payment. If you don’t have a down payment than a VA loan would best option for you.
But, if you have the means to make a down payment, compare the costs and payment to decide which makes the most sense.
VA has property restrictions that Conventional loans don’t have
The VA loan is only for primary residence, which means you can’t purchase a second home, investment property, or rental properties.
The VA program is strictly for a home that you and your family will be living in.
Condos and townhomes have to be VA approved, the home has to be move in ready with no large repairs.
VA has a lot of restrictions on what type of property can be bought with their program.
Conventional loans don’t have this same restriction. You can buy a condo that needs major repairs, you can buy a second home, or a rental property.
This is one of the reasons why realtors and sellers prefer a buyer that is using a conventional loan rather than a VA loan. The transaction usually goes smoother without having to worry about property issues that can delay the closing.
It’s easier to qualify for a VA loan versus a Conventional loan
If you have great credit with no blemishes, and a solid debt to income ratio than you most likely can qualify for either program easily.
But, if you have a high debt to income ratio, or maybe have a bankuptcy or foreclosure on your credit, or perhaps had a hardship at one point and you have a low credit score due to late payments or collections, the VA loan may be your only option.
VA loans are easier to qualify for than conventional loans.
Check out the requirements for each loan:
Conventional loans require a down payment and VA loans don’t
One of the obvious differences between both loan programs is the down payment.
VA loan is a zero down payment loan while Conventional has down payments as low as 3% for first time home buyers, and 5% for repeat buyers.
Related: Minimum down payments for Conventional loans
Conventional has PMI – VA Loans don’t
If you make less than a 20% down payment, private mortgage insurance is a requirement for Conventional loans.
The amount paid each month is based on credit score and the loan amount. The monthly payment can be as low as $50 to as high as $150.
Even though there is a PMI requirement for Conventional, it can be removed once you hit 20% equity in your home.
VA loans don’t have a PMI requirement.
Sellers prefer offers with Conventional Loans over a VA Loan
Putting a home on the market requires a lot of hard work. And once it’s listed and the offers start coming in, sellers have some decisions to make.
When they list the home, the seller’s goal is to sell and close the transaction as fast as possible with a limited amount of money out of pocket.
Offers with conventional financing can close faster than VA loans, mainly due to traditional loans having fewer property restrictions.
VA has rules about property standards and will not close on a loan unless an appraiser states that the property meets the VA’s property requirements.
These requirements can be little things like chipped paint on a railing or side of the house, a broken window, missing carbon monoxide detectors, etc.
To avoid these property headaches and a possible delay in closing, sellers will choose a purchase offer with conventional financing over a VA loan.
Related: How to Get your Offer Accepted in a Seller’s Market
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