Is a VA loan Better Than a Conventional Loan?
If you’re a veteran or surviving spouse who qualifies for a VA loan, you might be wondering if it’s really the most cost-effective way to buy a home. Since VA loans do have a wide variety of benefits, most people would say yes. But, in reality, the truth can be more complex; while VA loans are often the best option for eligible borrowers, they aren’t always the smartest choice. Keep reading to learn when to use a VA loan and when to stick to a conventional mortgage, and why.
The Major Benefits of VA Loans
While VA loans aren’t right for everyone, they do have some incredible benefits, including:
0% down payment
Lower interest rates (most of the time)
No private mortgage insurance required
Much easier to qualify (no minimum credit score required)
Drawbacks of VA Loans
VA loans don’t have too many downsides, but one potential issue could be the VA funding fee that all borrowers are required to pay. This usually varies between 1.25% and 3.3%, depending on a variety of factors, including the specifics of a borrower’s military service, the size of a borrower’s down payment, and the borrower’s past use of their VA loan credit.
In addition, while there technically is no minimum credit score requirement for a VA loan, it’s essential to remember that VA loans are not directly offered by the VA, they’re only guaranteed by it. The loans themselves are actually offered by private lenders. This means that a lender will, in some way or another, look at your credit score before deciding to approve you. And, considering the fact that the average credit score for a VA loan is actually above 700, your credit might actually have to be pretty good to qualify.
VA Loans Are Only Available for Primary Residences
In addition to judging the general benefits and drawbacks of VA loans vs. conventional loans, it’s also important to realize that VA loans are only available for primary residences. This means that you can’t purchase an investment property or second home with this kind of financing -- instead, you’d need a conventional loan. Despite that, you can purchase a duplex or triplex with VA funding, as long as you occupy one of the units. That way, you can make rental income while still enjoying the benefits of a VA loan.
When to Choose a Conventional Mortgage Over a VA Loan
If you have enough cash to avoid a 20% down payment, you can avoid having to pay PMI altogether (regardless of the mortgage program you choose). In this sense, you won’t really benefit from the fact that VA loans don’t require PMI. And, since you can afford a substantial downpayment, it doesn’t matter that VA loans don’t require one.
With a conventional mortgage, you won’t have to pay the VA funding fee. The only other thing to consider is the interest rate -- so you’ll need to determine if the difference in interest rates is significant enough to outweigh the amount of your funding fee. If it is, then go with a conventional mortgage. If not, you might want to stick with a VA loan.