Why Should you Choose a VA Loan Over a Conventional Loan?

If you are a veteran, you have the option to choose a VA loan versus any other type loan, including the conventional loan. This great loan program offers several benefits that conventional mortgages don’t offer. Keep reading to learn the benefits and see if they pertain and/or benefit you.

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No Down Payment

Perhaps the largest benefit is the lack of need for a down payment. You can borrow 100% of the value of the home. As long as the purchase price is equal to or lower than the value of the home, you don’t need any money down. This is often helpful for veterans that haven’t had time to save a large chunk of money for the down payment. Please note that you still have to pay closing costs, which can be as much as 5% of the loan amount, but the VA does offer help in that area as well (see below.).

Seller Paid Closing Costs

The VA allows the seller to cover all of your closing costs. There isn’t a specified limit because the VA limits the amount of closing costs VA lenders may charge. In addition, sellers can provide up to 4% of the loan amount in seller concessions. This means the seller can also contribute to:

  • Taxes and insurance
  • Discount points
  • Funding fee
  • Taking care of collections or judgments on the buyer’s behalf
  • Gifts (furniture, appliances)

Conventional loans do seller paid closing costs, but the maximum allowed is 3% of the loan amount for loans with an LTV over 95%.

No PMI on VA Loans

Despite the fact that you don’t make a down payment, the VA doesn’t charge PMI. The only ‘extra’ charge you will pay is the funding fee, and every veteran pays that no matter the LTV. The funding fee helps keep the VA in the business of guaranteeing home loans for veterans.

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The lack of PMI, though, could save you thousands of dollars over the life of the loan. The exact amount of PMI you would pay on a conventional loan depends on the LTV and your credit score. The higher the LTV and the lower your credit score, the higher your insurance premiums. This insurance covers the lender in the face of default – it gives you no benefit with the exception of being granted the loan.

More Flexible Guidelines on a VA Loan

The VA loan is known for their flexible guidelines. In fact, they don’t have a minimum credit score or maximum debt ratio. Their main focus is on the disposable income you have each month. The VA believes if the veteran has a specific amount of disposable income based on their location (cost of living) and family size, they will be able to make their mortgage payments.

This doesn’t mean VA lenders don’t enforce a specific credit score or debt ratio, but they are often more flexible. In general, you can expect a minimum credit score requirement of 620 from most lenders. You can also expect a max debt ratio of 43% for most lenders. If you have compensating factors, though, lenders may be able to be even more flexible.

No Reserves Necessary

VA loans also don’t require you to have mortgage reserves on hand. Conventional loans don’t necessarily have it in their guidelines, but it can definitely help if you have a lower credit score or higher debt ratio. The VA only requires lenders to verify that a borrower has enough money to cover their closing costs, if they choose to pay them. If the seller covers the closing costs and funding fee, veterans don’t have to verify any assets for the loan.

The VA loan offers veterans many benefits they would not get with a conventional loan. If you have a lower credit score, higher debt ratio, or you don’t have money to put down on the home, you are better off with the VA program. If you have at least 20% to put down on the home and have good qualifying factors, the conventional loan could be a good option for you. Weigh the pros and cons of each to determine where you will benefit the most.

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