When it comes to mortgage financing, home buyers have a lot of different options to choose from. Military members and veterans have an additional option not available to other borrowers, and that’s the VA loan program.
In many ways, the VA loans are a better option than conventional mortgage financing. They offer a number of benefits you just won’t find with other programs.
Understanding the Terminology: Conventional vs. VA Loans
VA loans share a lot of things in common with conventional or “regular” mortgage loans. But the VA program also has some features that make it truly unique. Here’s a quick comparison:
A VA loan is simply a government-backed mortgage loan. They’re offered by banks and lenders operating in the private sector, just like other types of mortgage loans. But the difference here is that a VA loan receives a partial guarantee from the government, specifically the Department of Veterans Affairs.
This government backing helps to shield lenders from losses resulting from borrower default (or failure to repay). Because of this protection, lenders who participate in this program can offer more flexible qualification criteria to borrowers, along with a zero down payment option.
A conventional loan, on the other hand, does not receive any kind of insurance backing or guarantee from the government. They also tend to have stricter qualification criteria, when compared to government-backed mortgage options like FHA and VA.
What Makes VA Loans Better for Borrowers?
Mortgage lending is not a one-size-fits-all situation for borrowers. A specific mortgage product or program that works well for one borrower might not be the best option for another.
Even so, the VA home loan program offers many advantages for military members, veterans, and certain qualifying spouses. Here are some of the biggest reasons why VA loans are often a better option compared to conventional mortgage products:
1. You can skip the down payment.
Home buyers who use a VA loan to purchase a house can finance up to 100% of the purchase price. By doing so, they avoid the need for a down payment altogether. This is one of the biggest benefits offered by the VA home loan program, and also one of its most well-known features.
Conventional loans, on the other hand, almost always require a down payment of some kind. The minimum down payment for conventional loans that can be sold to Freddie Mac or Fannie Mae is 3%. Borrowers who need a larger loan might be required to put down 10% or even more.
The down payment represents the biggest obstacle for a home buyer, and it’s easy to see why. Even a 3% down payment would amount to more than $10,000 on a median-priced home in the U.S. In a more expensive real estate market, a 3% down payment could easily rise into the $20,000 range. It could take years for a typical home buyer to save that much.
So that’s one reason why VA loans can be a better option than conventional. By financing 100% of the purchase price, a person could buy a home much sooner and without having to save up as much money.
2. You might get a lower interest rate.
According to numerous sources, VA loans tend to have lower mortgage rates than their conventional counterparts. Even by shaving just twenty basis points off of your mortgage rate, you could potentially save a significant amount of money over time.
Also, the interest rate is one of the four components that make up your monthly mortgage payments. So by securing a lower rate with a VA loan, you could reduce the size of your monthly payments while also saving more money over the long term.
For home buyers who are on a tight budget, VA loans can be better than conventional mortgages due to their potential money-saving features.
3. You can avoid paying private mortgage insurance (PMI).
If you were to use a conventional loan with a relatively low down payment (like the 3% minimum mentioned earlier), you would probably have to pay for private mortgage insurance.
PMI is usually required whenever a conventional mortgage loan exceeds 80% of the property value. This is why borrowers who put less than 20% down on a home purchase often have to pay for PMI.
But VA loans do not require mortgage insurance, even for those borrowers who finance 100% of the purchase price. With this program, you get the best of both worlds. You could avoid making a down payment while also dodging the mortgage insurance that usually comes with a smaller investment.
As it states on the Department of Veterans Affairs website:
“With a VA loan, you can buy immediately, rather than years of saving for a down payment. With a VA loan, you also avoid steep mortgage insurance fees. At 5 percent down, private mortgage insurance (PMI) costs $150 per month on a $250,000 home, according to PMI provider MGIC.”
Mortgage insurance is another one of those four components that contribute to the monthly payment. So by avoiding PMI, you’re also reducing the size of your monthly payments. The benefits of the VA loan program just get better and better when you add them all up.
4. You don’t need flawless credit.
You don’t need perfect credit to qualify for a VA loan. In fact, it’s one of the easiest types of mortgage loans to qualify for, for some of the reasons stated above.
Mortgage lenders who offer these loans receive a guarantee from the federal government that minimizes their risk and potential losses. As a result, lenders often allow for lower credit scores with VA loans, when compared to conventional.
With a conventional loan, borrowers typically need a credit score of at least 600 just to qualify for financing. Some lenders set the bar even higher. But with a VA loan, borrowers with credit scores down into the 500 range can often get approved for a mortgage to buy a home.
The Department of Veterans Affairs does not have a minimum credit score and instead leaves it up to lenders. So there’s a lot of flexibility here as well.
5. You could simplify the refinancing process.
VA loans are often better than conventional mortgages when it comes to refinancing. The Department of Veterans Affairs offers a program known as the Interest Rate Reduction Refinancing Loan, or IRRRL. With this product, a homeowner with a VA loan could refinance into a lower interest rate with minimal paperwork and without a home appraisal.
With conventional mortgage loans, on the other hand, a home appraisal is almost always required in refinancing scenarios.
The IRRRL refinancing product also minimizes the amount of paperwork that’s involved. So you don’t have to worry about rounding up your bank statements and pay stubs. For this reason, the IRRRL is commonly referred to as the “streamlined refinance” option.
The VA home loan program offers a wide range of benefits and advantages for eligible borrowers. In many cases, it’s a better home loan option when compared to conventional financing. It reduces or even eliminates some of the biggest obstacles and hurdles associated with a home purchase.