In 1944, U.S. Congress signed into law the Servicemen’s Readjustment Act, otherwise known as the G.I. Bill. More than 70 years later, the only provision from the original bill that’s still in force is the VA Home Loan Guarantee Program. Are VA loans still a good deal? Here’s a detailed comparison of VA loans vs. conventional mortgages
Through the program, veterans have been able to get the financing they need to buy a house. VA loans are often cheaper than conventional mortgage loans. You’ll often get a lower interest rate, and you don’t have to worry about putting any money down.
But if you look beyond the numbers, the decision might not be so clear-cut after all.
About the VA loan program
The Department of Veterans Affairs doesn’t originate or service mortgage loans. Rather, VA loans are typically issued by a private lender and insured by the VA.
Not everyone can qualify for a VA loan. To get a certificate of eligibility from the VA, you must meet one of the following requirements:
- You are a veteran, active-duty military, or were separated from the military in a situation other than a dishonorable discharge.
- You are a reservist or member of the National Guard.
- As a veteran or active-duty member, you meet the VA’s requirements for length of service.
- You are surviving spouse of a deceased veteran.
The process of getting a VA loan is the same as with a conventional mortgage loan, but there are some differences you’ll note along the way. Let’s dig into the details.
VA loans vs. conventional mortgage loans
Getting the right mortgage loan can make a big difference in your financial life. If you qualify for a VA loan, that doesn’t mean it’s the right choice for you.
VA loans usually have an interest rate one-eighth to one-fourth percent lower than conventional”
Here are some key differences between VA loans and conventional mortgage loans that you should know.
Compare the features of VA Loans and Conventional Loans before you make a decision.
- Only for primary residences.
- No down payment required.
- Lower rates (1/8 to 1/4 of a percent lower).
- No minimum credit score.
- Additional VA funding fee.
- Typically, a debt-to-income (DTI) OF 41% is required.
- No property use restrictions.
- If down payment is below 20%, a private mortgage insurance is required.
- Rates are based on the market.
- Minimum credit scores enforced.
- No VA administration fee.
- Debt-to-income ratio must not exceed 50%.
Rates and fees
The biggest cost with any loan is the interest. Over 15 to 30 years, you’ll likely pay tens, if not hundreds, of thousands of dollars in interest on your mortgage.
“VA loans usually have an interest rate one-eighth to one-fourth percent lower than conventional,” says James James Campbell, a real estate agent in Los Angeles. If you plan on staying in the home forever, this could make or break the deal.
One big drawback to VA loans is the VA funding fee that you have to pay upfront. “The funding fee ranges from 1.25% to 3.3%,” says Matt Hackett, operations manager at Equity Now, a direct mortgage lender. “Veterans who are entitled to disability pay for service related medical issues are exempt from the fee.”
The amount you end up paying depends on which branch you or your deceased spouse served in, your down payment, and how many VA loans you’ve had before.
With a conventional mortgage, you can do just about anything you want with your property. You can live in it, rent it out, or use it as a vacation home. With a VA loan, however, the house must be your primary residence. If this doesn’t describe your home purchase, conventional is your only option.
One of the biggest advantages of a VA loan is that they require no down payment. Instead of waiting several years to save a down payment, you can buy immediately, and save on rent and start building equity.”
“One of the biggest advantages of a VA loan is that they require no down payment,” says Campbell. “Instead of waiting several years to save a down payment, you can buy immediately, and save on rent and start building equity.”
With a conventional mortgage, you might be able to find a lender that will take you with no down payment, but those lenders are rare, and there’s generally a catch. For conventional mortgage lenders, the larger the down payment, the better. So, you might have a hard time getting good terms with a small one.
Because the Department of Veterans Affairs insures the loan, you don’t have to. Private mortgage insurance (PMI) on a conventional loan can be pricey, typically costing 0.5% to 1% of the price of the home, on average.
So, if you’re buying a $200,000 home, you’re shelling out between $1,000 and $2,000 a year for mortgage insurance. Plus, you can’t get off PMI until your loan is for less than 80% of the home’s value. With a VA loan, you get to keep that money.
Credit score requirements
When you apply for a VA loan or conventional mortgage, the credit score requirements are generally the same. The VA itself doesn’t have a minimum credit score requirement, but lenders can still maintain those standards. In both cases, you’ll want your credit score to be 620 or above.
Why should I use a VA loan?
If you qualify for a VA loan, the biggest reason to get one is if you don’t have enough cash for a down payment and you plan to stay in the home for a long time. Because of the VA funding fee that comes with the loan, the longer you stay in the house, the more likely you’ll make up for the fee with a lower interest rate and lower monthly payments.
If you’re not planning on sticking around, though, or buying the house as an investment, you might be better off skipping the VA funding fee and going with a conventional mortgage.
Keep in mind that you can also refinance a VA loan into a conventional mortgage and vice versa. So, if you change your mind down the road, you have that option.
Regardless of which option you choose, get started by comparing different mortgage lenders. During the process, you can speak with a loan officer, who can help you if you’re still not sure which one to choose.
There’s no best choice for everyone. It’s not a one-size-fits-all, but you’re more likely to make the right choice if you do your due diligence.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.