When you are planning to buy a home, the type of mortgage you choose is an important decision. But with so many options available, it can be challenging to decide which loan is right for you.
Each loan product has its advantages and disadvantages, so it is imperative that you understand the differences between a VA home loan and a conventional home loan.
In this article, we will break down the key differences between these two types of mortgages so you can make an informed decision and choose the best loan for your needs.
What are Texas VA Home Loans?
VA home loans are government-backed mortgages that are partially guaranteed by the Federal Housing Administration (FHA). They are issued by private mortgage lenders but are backed by the VA, which means that the government will reimburse the lender if the borrower defaults on the loan.
VA home loans are designed to help active-duty military personnel, veterans, and families buy a home. They can be used to purchase single-family homes, condominiums, manufactured homes, or refinance an existing mortgage.
If you are an eligible veteran, you can take advantage of this program and purchase a home with zero down and no monthly mortgage insurance.
Pros and Cons of VA Loans
Pros:
- Offered to active duty military or veterans
- No down payment needed
- Variable interest rates,
- No prepayment penalty
Cons:
- Limited purchase price range ratio (maximum loan must be below market value)
What are Conventional Home Loans?
Conventional home loans are not government-backed mortgages and can be available to anyone who meets the credit and income requirements to purchase any type of property. Banks and mortgage companies in Texas issue conventional loans, but there is no secondary market for conventional loans like there is with FHA loans.
However, many conventional loans are also considered conforming loans. This means that they meet specific criteria that are set by the FHA, which makes it easier for lenders to sell their loans on secondary markets. If your down payment is 20% or more of the purchase price, you will most likely be able to get a conforming conventional loan.
The conventional loans that do not meet the FHA criteria are called non-conforming loans, such as Jumbo loans, as it exceeds the maximum loan limit of FHA.
Pros and Cons of Conventional Loans
Pros:
- No military or veteran requirements
- Down payment can go low up to 3.5%
- Fixed interest rates
Cons:
- Monthly mortgage insurance may be required
Read here to know more about Adjustable Mortgage Rates.
Key Differences
VA Home Loans vs. Conventional Home Loans:
Now that you know the basics of each type of loan let’s highlight some of the key differences between a VA home loan and a conventional mortgage to help you make an informed decision.
Availability:
The VA has very strict requirements for who is eligible for a home loan, but the conditions are designed to make sure that only those with solid financials and credit scores get approved. This means that you will have an easier time getting a loan if you qualify, especially if your credit score is below 680. On the other hand, conventional loans are available to everyone regardless of income or credit score.
Note: You can qualify for a guaranteed loan even if your credit is not perfect. However, you may pay a slightly higher interest rate, and there is an additional fee for getting this type of loan.
Funding Fee:
The VA charges a funding fee to borrowers to help offset the cost of guaranteeing these mortgages. This fee can be waived if you are receiving compensation for a service-connected disability, if the borrower is using the loan to buy their primary residence (as opposed to buying a second home), or if you previously used your VA eligibility and did not use it in the last two years.
Conventional loans do not have any sort of funding fee.
Loan Limit:
VA loans are capped at $417,000 in most places (higher if you live in a high-cost area), while conventional loans come with no limit on the home price. This means that you can purchase a more expensive home if your income is sufficient.
Interest Rate:
Because VA loans in Texas are government-backed, lenders can offer a lower interest rate than they can for a conventional loan. The interest rate for a VA loan is often 0.5% – 1.0% lower than the interest rate for a conventional loan. This can save you a big chunk over the life of your mortgage.
Down Payment:
With a VA loan, you need not pay a down payment. You can get a home loan with zero money out of pocket. However, this does not apply to refinance transactions. In that case, you will need at least 5% for a conventional home loan.
With a conventional mortgage, the amount you put down as a down payment carries a great deal of weight regarding how much money you will need to pay upfront. The more money you put down, the lower the monthly payment will be. However, this is not always a good thing because if you do not have enough saved up for a down payment, it could take years before your credit and finances are in good enough shape to take out a mortgage.
Mortgage Insurance:
VA home loans do not require monthly mortgage insurance premiums, which can save you a lot of money over the life of your loan. Conventional mortgages typically require mortgage insurance if the down payment is less than 20%. This can add a lot to your monthly payment.
Closing Costs:
VA home loans allow the seller to pay for all of your closing costs, which can be a huge savings. Conventional mortgages typically require the buyer to pay for at least some closing costs, which can add up to several thousand dollars.
What is best for you? Take the next step:
When choosing between a VA or conventional home loan, there are several factors to consider. Both types of mortgages have their own set of pros and cons, so it’s essential to understand what each option offers before making a decision.
In general, VA home loans are a better option than conventional mortgages for those who meet the eligibility requirements. The interest rates are lower, there is no down payment required, and you do not have to pay for mortgage insurance. However, if you do not meet all of the VA’s requirements, a conventional mortgage may be a better option for you.
Whichever you choose, be sure to get quotes from at least three local mortgage lenders. This way, you can shop around and find the best deal for your particular situation.
Read here to know about how to find the best mortgage lender.
Talk to the experts
When in doubt, it never hurts to ask. If you are interested in a VA or conventional mortgage, our Lone Star Financing experts are here to help. We are a full-service mortgage company that has been assisting Texans to purchase and refinance their homes for over 20 years. Our finance experts are happy to guide you through the process and answer any questions you may have.
Give us a call today!
