If you're eligible for a VA loan, it's only natural to want to take advantage of every benefit you've earned through your military service.
One of those benefits is a mortgage guaranteed by the U.S. Department of Veterans Affairs, or VA. While VA loans have strong benefits, in some circumstances a conventional loan may be a better choice.
VA loan perks
VA-guaranteed loans feature several elements:
Down payment may not be required.
In most cases, mortgages guaranteed by the VA don't require a down payment.
No private mortgage insurance, or PMI
There's no need for PMI, since the VA guarantee protects lenders if you default on the loan. But most VA loans require a one-time funding fee that varies from 1.25% to 3.30% of the loan amount. Different factors can impact the fee, such as if the loan is a purchase or refinance, your down payment amount, whether you served in active-duty military, National Guard or Reserves, or if you've used your VA loan eligibility previously.
Easier credit qualifications
Although you still need to prove your mortgage payment won't be an excessive proportion of your income, the VA doesn't require a minimum credit score. But your lender may set a minimum credit score.
A potentially lower interest rate
Interest rates reflect the risk associated with loaning money. Thanks to the VA guarantee, lower risk to the lender may mean a lower interest rate for you.
Easier refinancing
When rates drop, a VA Interest Rate Reduction Refinance Loan, or VA IRRRL, could provide streamlined processing and easier documentation standards. Your lender or the VA may require an appraisal in some circumstances.
A conventional loan may be a better choice.
Making the decision to choose a VA loan over conventional loan hinges on how beneficial those perks are to you and your situation.
For example, while no money down has a certain sizzle, the more money you borrow, the larger your monthly mortgage payment and more money you'll spend on interest over the life of the loan. Buying with little or no money down also means you have little or no equity in the home. That can be a problem if you must sell the home in the first few years of ownership, especially if property values fall. It may require you to bring cash to closing in order to sell the home at a loss, compounding the normal costs of moving.
If you have enough money for a 20% down payment, you may want to consider a conventional loan. You won't pay for PMI and you'll avoid the VA funding fee.
Your credit can also be a factor. If you have a strong credit profile, you may find the rate on a conventional loan comparable to or better than what you'd get with a VA-guaranteed mortgage.
If you get a loan with someone other than your spouse or another veteran who'll live with you, the VA guarantee amount will be reduced, meaning the lender may require a down payment to make up the difference.
You should also consider the type of home you have in mind: If you're eyeing a vacation house or an investment property, a VA loan is out of the question because it can only be used to finance a primary home.
Similarly, if you plan to take on a fixer-upper, a VA loan may prove difficult since they have tighter rules regarding the condition of a home.
Finally, the timing of your move is also an important factor. VA loans give you a maximum of 60 days after closing to occupy the home in most cases. So they may not work if you're planning to buy a house long before you actually move.
We can help make the home loan process easier for you.
Learn more about our mortgage loans.