It’s easy to think that choosing between a VA loan and a conventional loan is easy, until you consider the VA funding fee and the downpayment you need for a conventional mortgage. This is when things become tricky. Here are factors to consider when choosing between the two.
Type of Property
The main factor when choosing between these two types of loans is the type of property. VA loans are used for primary residence only, while you can use a conventional loan to buy a second home, an investment property, or a rental property.
A VA loan will have a lower interest rate, which makes it a more attractive option than conventional loans.
What makes VA loans so attractive is it doesn’t require a down payment. The lender will only need it if the price of the property is higher than the current value. On the other hand, you need to have a down payment for a conventional loan. Don’t worry; you can find mortgages that have low down payments today.
A funding fee is part of a VA loan to help with the loan should it default. It’s a one-time payment paid upfront between 1.4% and 3.6% of the loan amount. Usually, the fee is rolled into the loan amount. In turn, this makes monthly repayments higher because it adds to your interest.
If you’re a veteran who has VA disability compensation, you are not required to pay a funding fee at all.
Conventional loans require a down payment, and if it’s lower than 20%, you are required to get private mortgage insurance. The insurance serves as a protection of the lender should you default on the loan. It can be a one-time payment at the closing, or it can also be an ongoing fee that will be rolled into your monthly payment. You can also have both.
On the other hand, you don’t need mortgage insurance if you take out a VA loan.
Sure, the Department of Veterans Affairs doesn’t look into the credit score, but many VA lenders use it as a benchmark. Most of them are actually looking for borrowers with at least a 620 credit score. In case you have a lower credit score than 620, it’s best to consider an FHA loan instead. Of course, with conventional loans, credit scores are important, and it’s one of the factors the lender will look into.
Although VA promotes that they don’t need a maximum debt-to-income ratio, it requires borrowers to provide compensating factors if the total debt ratio is over 41%. The compensation factors include the take-home income at the end of the month after the new mortgage, and other necessary expenses are paid.
When you know these important factors to consider when deciding between a VA and conventional loan, you get to make a more informed decision suitable to your needs. Consider speaking with a professional as well to explore your options. Doing so will help you through the process to help find the right loan type for you.
Which loan should you choose? Let My Lending Pal, one of the best Florida mortgage brokers today, help you find the answer to that. We specialize in conventional, FHA, and VA home loans. Contact us today to get started!