For military families, both conventional and VA loans offer something of value.
If you're like most buyers, you have mortgage questions. Conventional mortgage loans aren't for everyone, and neither are VA loans. For people with a good military service record and good credit, each option offers something of value for the buyer.
It isn't about whether one is better than the other, because both programs play an important role in helping buyers find and secure a home. The real questions are how do they differ, how are they the same, and which one puts a buyer in the best possible financial situation.
The Skinny on Conventional Loans
A conventional loan makes up as much as half of all mortgage loans in the United States, according to Investopedia. They're backed by Fannie Mae and Freddie Mac, which means they are purchased by these government-sponsored entities.
Fannie Mae and Freddie Mac exist to keep banks in the mortgage lending business. When a bank loans a certain amount on a mortgage, it doesn't necessarily have that much money on hand.
Buyers who meet the Fannie Mae or Freddie Mac criteria can qualify for a loan backed by them because the bank knows the loan will be sold. The bank keeps the buyer's payments, and Fannie Mae and Freddie Mac repackage the loan to be traded.
Most people need excellent credit and a considerable downpayment to qualify for a conventional loan. The upside is that these loans often fund with fewer hoops to jump through and in less time than other loans. Buyers can also use a conventional loan for a second home or investment property, as long as they meet the credit and down payment criteria.
VA loans were instituted to help active duty and military veterans obtain affordable housing.
What VA Loans are All About
The United States Department of Veterans Affairs established the VA Loan Home Guaranty Program for current and former service members. The VA doesn't participate in loan origination, says Investopedia. But they do set forth the qualifying criteria. Ginnie Mae secures VA loans, instead of Fannie Mae or Freddie Mac.
The VA program is part of the GI Bill. The U.S. Department of Veterans Affairs says that it was introduced to help service members find and secure affordable housing with competitive terms.
Buyers who meet the VA program criteria can often purchase a home without a downpayment, and without private mortgage insurance, unlike a conventional loan. That means for those who qualify, the VA offers as much as 100 percent financing. To secure a VA loan, buyers must provide a certificate of eligibility, showing proof of military service.
Many, but not all, service members, past and present, can qualify for a VA loan, even with zero down. There is a funding fee, which Veterans United explains can be 2.15 percent for regular military and 2.4 percent for military reserves and National Guard members. There may also be a minimum FICO score of 620, but that may vary.
Which One Suits You?
On its face, a service member might think 100 percent financing sounds like a great deal. And for many home buyers, it is. With a conventional loan, 100 percent financing is highly unlikely. And the lower the down payment on a conventional loan, the more likely the buyer will need private mortgage insurance (PMI). Conversely, a VA loan doesn't require PMI, even with no down payment.
With a conventional loan, buyers can purchase real estate for a primary home, second home or investment property. VA loans are usually reserved for the buyer's primary residence. And while the qualification criteria for a conventional loan might seem steep, it might not be much of a challenge for many service members.
Military security clearances are only one of many reasons why service members may keep their finances in good shape, according to Debt.org. Since conventional loans can fund quicker and give buyers more freedom, they might be the better choice in the long run.
Choosing between a conventional or VA loan isn't as simple as it might appear, which is why most buyers eventually run into a lot of mortgage questions. If you qualify for both, you might want to dig a little deeper to decide which one would put you in the best financial position afterward.
With a conventional loan and a down payment, you'd have at least some instant equity. With a VA loan and no down payment, you might find that buying a home is easier. There's no single right or wrong answer.
Interested in learning more about the financing options available today? Check out our mortgage articles and everything else that eppraisal has to offer.