Should You Choose A VA Loan Or Conventional Loan?
Are you thinking about buying a house using a VA loan, but you’re weighing the pros and cons versus a conventional loan? In this episode of Aloha O'ahu, I’m going to break down some of the differences between choosing a VA loan and a conventional loan. We’ll look at the qualifications and advantages of each so you can make the right decision for your situation.
Before we look at the differences between these two loans, please note that I am not a lender. However, I'm happy to refer you to one to discuss your specific circumstances. I speak to my clients about getting loans, in general, so they can make an educated decision about what will get their offer accepted and what will be best for them.
Choosing Your Loan
Buying a house can be confusing, especially when it comes to your financing and determining what kind of loan is the smart choice for you. The major difference between these two loans is that a VA loan is strictly meant for veterans, whereas a conventional loan is open to anyone who qualifies.
If you're a veteran, first of all, thank you for your service. Second, please don't let anyone tell you that a VA loan is a bad product. It's actually one of the best to use in most cases. However, we have to remember that not everyone qualifies for a VA loan. Additionally, VA loans don't apply to all properties.
A conventional loan typically offers the best terms and is best used for borrowers who have a minimum downpayment of 3.5%. However, many borrowers put as much as 10 to 20% down. Remember, the more you can put down, the lower your monthly payment will be. Additionally, closing costs are lower and the rate tends to be competitive.
Conventional loans tend to work best for borrowers with good credit who can put upwards of 5% down. Sellers like accepting offers that are based on conventional loans because they believe that they will close more smoothly.
Who Qualifies
Now let's talk about VA loans. If you're looking up information on VA loans, chances are you're affiliated with the military and may qualify for one. If you have questions about your specific situation, I'm happy to connect you with a lender.
Generally speaking, you will qualify for a VA loan if you serve 90 consecutive days of active duty during wartime or 180 days during peacetime. You’ll also qualify if you served six years in the National Guard or if you’re the spouse of a service member who passed away while serving or suffers from a service-related disability.
There are other cases than the ones I just listed, so always ask a lender if you think you may be eligible.
Rates And Loan Limits
When it comes to rates, VA loans are some of the most competitive rates around. They are also often less than a 30-year conventional loan. Additionally, the credit standards to receive a guaranteed VA loan can be more lax than conventional loans.
As of January 1, 2020, VA loans now have no cap or limit to the amount of money that a vet can borrow. If the VA lender is willing to underwrite such a loan, the VA will insure it. Please remember that every case is different; your lender can speak to you about your specific case.
This Versus That
Let's play a quick game of this-versus-that between VA loans and conventional loans. A VA loan requires no down payment by the lender, whereas a conventional loan needs a certain percentage of the purchase price down. Please keep in mind that with your VA loan, your realtor may advise you that a deposit—even a small one—may be required in the eyes of the seller.
When you're using a VA loan, you must use it for your primary residence. This means you have to live in it. With a conventional loan, you can live in the property, use it for a secondary residence, or even use it for an investment property.
With a VA loan, there is no formal credit score limit or debt-to-income ratio; it will be up to the lender who services a VA loan. With a conventional loan, however, there are firmer limits on your credit score and DTI. There is one twist with VA loans: you will pay for closing costs and the VA funding fee. Alternatively, with conventional loans, you'll only pay closing costs. Please note that the VA funding fee is normally rolled into your monthly mortgage payment.
Which Loan Is Best?
In most cases, VA loans are the way to go. Due to the overwhelming number of pros, we have used my husband's VA eligibility several times. I have enjoyed using the benefit myself. Of course, in some cases, a conventional loan may be the right choice for you, even if you qualify for a VA loan.
Some examples include if the veteran already has their VA eligibility tied up in another property or if they have a generous amount of funds for a downpayment, making the overall costs less by avoiding that VA funding fee. It also could apply if they want more equity in their home right away.
Additionally, in some cases, you cannot use VA loans on certain types of properties. This includes some condominium buildings that have not been approved by the VA, or if the property is not up to VA appraisal standards.
I’m Here To Help
I hope this video answered some of your questions regarding the differences between a VA loan and a conventional loan. Whether you decide to use either loan, it’s never too early to begin getting your financing in line. The truth is the more you prepare in advance, the less stressful it's going to be in the long run.
Regardless of what kind of property you will be purchasing, you will need to decide how to best finance it. Knowing which loan is the most beneficial is the most important part. If you have any additional questions, always feel free to reach out to me and I’ll be happy to help.
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