As a veteran, you have the opportunity to apply for a VA loan. If you have good credit and enough money to put down on the home, though, you may also be eligible or a conventional mortgage. How do you know which one is right for you?
You Don’t Need a Down Payment
Even if you have the money saved, you don’t have to put it down on a home. Instead, you can save it for a rainy day. Some veterans keep the money as their ‘reserves.’ This way they have a backup plan should their income stop suddenly and they can’t pay their mortgage. Having money set aside ‘just in case’ can help ease your mind when you take on a large obligation, such as a mortgage.
Of course, if you want to make a down payment, you are more than welcome to do so. In fact, if you put 5% or 10% down, you’ll save money on the funding fee. You’ll have to decide what makes the most sense for your financial situation. Just knowing that a down payment isn’t necessary, though, can be a nice feature.
The Qualifying Requirements for the VA Loan are Simple
Qualifying for a VA loan is much easier than qualifying for a conventional loan. Even if you have great credit, you may not qualify for the conventional loan. In general, they require:
- 680 minimum credit score (some lenders require a higher score)
- 28% housing ratio
- 36% total debt ratio
- Stable income/employment
The VA loan requires:
- 620 minimum credit score
- No specific housing ratio
- 43% total debt ratio
- Adequate disposable income each month
- Stable income/employment
- Proof you’ll occupy the property as your own
As you can see, the VA has more flexible guidelines to make it easier to qualify for a loan.
You Won’t Pay Mortgage Insurance
If you opt for a conventional loan, you’ll pay Private Mortgage Insurance as long as you owe more than 80% of the home’s value. VA loans don’t require mortgage insurance no matter how much you put down on the home. You can put nothing down and not pay insurance.
VA loans do charge a funding fee, as we discussed above, but it’s a one-time fee. Members of the regular military pay 2.15% of the loan amount at the closing and members of the Reserves or National Guard pay 2.4% of the loan amount. You only pay this fee when you take out a new VA loan, whether as a purchase or a refinance, though.
You Can Refinance With Little Verification
If interest rates drop or you find another way that refinancing may benefit you financially, you may be eligible for the VA streamline refinance. This easy to qualify for program allows you to refinance without verifying your income, assets, credit score, or home value.
If you were to refinance a conventional loan, you’d have to go through the entire verification process again. One of the benefits of the lack of verification is the ability to refinance even if your home value decreased or your income changed. You can even have a bad credit score and refinance. You won’t find this opportunity with any other loan.
The VA only has two requirements for the VA loan:
- You must have made your last 12 mortgage payments on time
- You must benefit from the refinance
If you find a lender that doesn’t add their own requirements, you can refinance even if your qualifying factors changed since you purchased the home. The VA allows lenders to give you 100% financing of your outstanding loan balance if it helps make your financial situation better.
Whether you should choose the VA loan or conventional loan is a personal decision. Many opt for the VA loan and then pay more towards the principal as they can. This way they pay less interest over the life of the loan, but don’t have to put down the large down payment that conventional loans require.
It’s best if you get quotes for both types of loans so that you can compare them to one another. Look at the interest rate, closing costs, and total interest paid over the life of the loan. This way you can determine which loan will provide you with the lowest costs over its term.