Comparing VA Loans to FHA and Conventional
Listed below are the major differences between each loan type and where you might expect one to have an advantage over the other. While this information is accurate to the best of our understanding, please contact your MilVetHomes.com Real Estate Specialist. We will be happy to look at the details of your specific situation and provide you with the resources and information so that you can make your best decision.
VA Loans vs FHA Loans vs Conventional Loans : The Basic Differences
VA Loans are government back loans design to be a benefit offered to Veterans of military service. They are mortgages that provide enticing benefits like No Money Down, No Private Mortgage Insurance, and ofter a better interest rate. Those are very attractive benefits. Then when you add in some of the flexibility that VA loans can sometimes provide with minimum credit score and maximum debt to income ratio, you would think that those benefits make the VA loan the instant winner, but it is not always the case.
VA loans come with a VA Funding Fee. This fee (for the first time you access this benefit) varies with the amount you put down, 2.3% with a Zero down payment, 1.65% with a 5% down payment and 1.4% with a down payment of 10% or more. For subsequent times that you finance (or refinance), the Funding Fee is 3.6% for Zero Down but the same amounts at 5% and 10% down payments.
You can roll the funding fee into your loan, which lowers your out of pocket expenses, but over the life of the loan, you will still end up paying it off.
Other limitations on VA Loans
VA Loans are limited to your primary residence, which means that you must occupy the home and it cannot be a rental or second home. Also, while VA loans say that there is not maximum debt to income ratio, it does require lenders to document compensating factors if the ratio is over 4!%, so while there is some flexibility, as a practical matter there may not be as much flexibility as marketing materials for VA Lenders might suggest.
Conventional Loans are (as they imply) loans that you obtain from a conventional private party lender and will vary more widely in the terms and conditions of the loan. Most lenders will require at least a 3% down payment and Private Mortgage Insurance will add a monthly fee to your mortgage until your loan to value ratio is below 80%. Most mortgage companies will allow borrowers to remove the Private Mortgage Insurance at that point. Based on your credit score and the size of your down payment, PMI fees often range from 0.55% of the loan amount to 2.24% of the loan amount (source: NerdWallet) .
Conventional Loan Credit Score Standards vary from institution to institution but on average, because (without government backing), the lender assumes the risk of the loan where a VA or FHA loan is government backed, a) the average credit score to qualify for a loan is slightly higher for conventional loans than for a similar credit score government backed loan.
FHA Loans are designed with first time and low-middle income homebuyers in mind and planned to make home ownership obtainable for many who would not be able to afford a conventional mortgage. Since their inception they have been really popular and have roughly twice the number of mortgages financed as VA loans during that time frame.
The attraction of FHA loans is that you can typically have a lower credit score (580 vs often 660 for VA) and still obtain financing that does not require a massive down payment. In fact only 3.5 percent is required. As a general rule, if your credit score is in the 580-660 range, FHA is an option for you and it tends to be the loan of choice for borrowers in that situation.
That said, there are a couple of distinct advantages that VA loans have over FHA loans. First, FHA requires both upfront mortgage insurance (similar to VA's Funding Fee) but then it also requires an annual mortgage insurance premium that lasts for the life of the loan.
Additionally, VA loans often are lower cost interest rate wise than either FHA or conventional. For these reasons (smaller down payment, Private Mortgage Insurance, and lower typical interest rates), VA loans (for those who are eligible) can be an attractive option.
So How Do I Know Which to Choose?
The best way to start is to go through the specifics of your situation with one of our MilVetHomes specialists. They can provide you with the information that you need as well as connecting you with Mortgage professionals who can help you get the process started quickly and easily.
You will not feel pressured or rushed. What you will get is transparent, practical sources of information to help you navigate the purchase of your home in the most efficient way that you can! Give us a call today!