Last Updated on March 15, 2023 by Luke Feldbrugge
In the battle of the conventional vs VA loan, the VA loan guarantee is a contender. It’s not always the best choice because it has requirements that might hem you in, but in terms of saving you money up front and over the long term, it’s hard to beat it. If you think the VA will be giving you the loan and private lenders won’t be involved, that’s not the case. The VA loan program isn’t an “either/or” decision. It’s more of a “both/and” process.
The good news in terms of qualifying for a VA loan is that the hard part is probably already behind you. By serving your country in the military or uniformed services, you have already done the hard work. Now you will need to fill out some forms and work with both the VA and a private lender to qualify for a mortgage.
With conventional mortgages, you usually just work with a private lender, mortgage broker or bank. With the VA home loan guarantee, it’s more of a two-pronged effort where you work in tandem with the U.S. Department of Veterans Affairs and a private lender to put together a mortgage package. Technically you get a mortgage guarantee, in the form of insurance from the VA, and you get the actual money from a lender in the form of a mortgage loan.
Figuring out whether the requirement you need to meet is coming from the federal government or the private mortgage service is where it gets a little confusing. For example, you might hear that the VA has a minimum credit score requirement of 580. In fact, the VA has no minimum credit score, but when you are working with the private lender to get the loan, they will probably enforce a minimum score between 580 and 620. Nevertheless, it’s always good to know where the requirements are coming from – the VA or the private lender.
Finding the right private lender is important, and that’s where Homes for Heroes can help. When you sign up with us, we connect you with our local mortgage specialist who is well versed in conventional vs VA loan requirements and can guide you along to best fit your financial needs. If you’re buying a home, we will also connect you with our local real estate specialist who understands your market, the current conditions, and what homes on the market offer at the price you want to pay. Together, our real estate and mortgage specialists can save you an average of $3,000 after closing with them on a new home, or an average of $6,000 when you buy and sell a home. They are committed to serving active, reserve, national guard and veteran military members like you; and would be honored to assist you in looking at the conventional vs VA loan options.
Conventional vs VA Loan: Overview
There are differences when considering a conventional loan vs VA loan.
The VA loan program is designed to help eligible veterans and active-duty service members get a mortgage when they find a home. It’s that simple. Here’s a list of who is eligible:
- Air Force
- Coast Guard
- Space Force
- National Guard
- Reserve members
- Public Health Service
- Surviving Spouses of military personnel
There is a detailed list of how much time you need to have served to qualify for VA benefits.
COE and Entitlement
Two unique processes to know about when comparing the conventional vs VA loan options, are the Certificate of Eligibility and Basic Entitlement.
Loans in general, and mortgages in particular, have a lot of moving parts. It’s the same for the VA home loan process. In this case, the VA has a couple of processes you should understand.
The Certificate of Eligibility is exactly what it sounds like: it verifies to the VA loan processors that you are eligible for the program. It also tells you how much the VA loan will cover, meaning how much the The Department of Veterans Affairs will guarantee your loan.
The basic entitlement will cover a $144,000 mortgage loan. If that seems low, it is. Consequently the VA changed the basic entitlement to keep up with the market. It came up with a secondary entitlement that covered home loans up to $726,200. Remember: There is no upper limit on a VA Loan, but they will only insure your loan up to that set entitlement. The rest is up to you and your private mortgage broker.
The VA home loan Certificate of Eligibility form is easy to find online. On page 3 of the form, there is a list of addresses if you want to send them a Request for a Certificate of Eligibility (VA Form 26-1880). You can also mail your completed VA eligibility form to the appropriate office on that list.
If you’ve already got a private lender ready to work with you on your VA loan, they can request a Certificate of Eligibility directly from the Department of Defense. There’s an online system called Web LGY that has this information online and it can be immediately downloaded. You can also do it yourself by using the VA’s eBenefits portal.
VA loans eligibility doesn’t mean you have been approved for the guarantee and insurance. For that, it’s best to work with your chosen private VA lender or mortgage broker. They can help you apply for a VA loan.
Conventional vs VA Loan Guarantee Benefits
One of the most encouraging things about the loan program sponsored by the VA is: the more you dig, the more you find. This is a partial list of what the VA loan guarantee can do for you.
- There is no down payment required, and that will save you thousands of dollars up front.
- The program typically gives you lower interest rates than the current market. The VA organization doesn’t directly control the interest you pay. That’s determined by a private lender. But, with the loan guarantee from the VA, mortgage brokers will often give you favorable terms and a lower monthly mortgage payment. Less risk for the lender often equals better interest rates for you.
- Private mortgage insurance is also not required. Without that monthly payment, you can save hundreds of dollars a month and thousands over a year.
- The VA loan benefit will limit your maximum closing costs, which can be paid by the seller.
- There is no minimum credit score required from the VA. That said, the aforementioned private lenders may require a good credit history.
- You do not have to be a first-time home buyer to use a VA home loan. You can reuse the benefit throughout your lifetime, as long as you are selling the home you currently own.
- Your VA home loan is assumable as long as the person assuming the loan also meets VA requirements.
- There is no maximum loan amount, however the VA does limit its guarantee.
- The VA does not have a maximum debt-to-income (DTI) ratio requirement, which is the comparison of your monthly income to the debts you have to pay each month. It does, however, have strong suggestions to private lenders about what to allow.
- If you have a bankruptcy or foreclosure in the past, you aren’t automatically disqualified from a VA loan. If your foreclosure or bankruptcy was more than a year ago, you could be eligible.
- The VA home loan benefit can be used for single-family homes, multifamily homes (up to four units), condos, manufactured homes, and new builds.
- VA loans may also be available to the surviving spouse of a service member or veteran who was killed in the line of duty, passed as a result of a service-related injury, is a POW or is MIA.
Costs and Drawbacks of the VA Loan
VA Funding Fee
On the cost side of the column, there is the VA funding fee. This is an upfront payment used to keep the VA home loan program running.
All VA mortgages include this one-time fee, and this fee can range between 2.6% and 3.5% of the loan amount (lower for first-time home buyers). This is due at closing, but you can fold it into the mortgage and pay it that way if you don’t have the cash.
While the VA Funding Fee is pretty universal among the loans provided by the organization, there are some notable exceptions to the fee, especially for disabled veterans. If you qualify for any of these, you may get your VA Funding Fee waived.
- Are you a veteran who receives compensation for a service-related disability?
- Are you eligible for service-connected disability pay but receiving retirement or active duty pay instead?
- Are you the surviving spouse of a veteran who died in service or from a service-related disability?
- Are you an active-duty service member who has been awarded the Purple Heart?
- Do you have a memorandum rating saying you are eligible for compensation based on pre-discharge claim?
If you think you may be exempt from the funding fee, but aren’t sure, you should probably contact the VA and talk to someone. If you pay the funding fee and later realize that you qualify for an exemption (if, for example, the paperwork didn’t come through in time), you can get a VA Funding Fee refund.
This Must be Your Primary Residence
One of the restrictions of working with the VA loan program is that you must guarantee that the house you are buying will be your primary residence. It’s not a big deal. Most people move into the house and live in the house they are buying. The only time it might be an issue is if you are thinking about using the VA loan and a private lender to buy a second home or vacation home. There are cases where you can have two VA loans at the same time but timing is important. For example, you can buy a new house but keep ownership of your previous house – using it as a rental investment property –but make sure the most recent house is the one you plan to live in full time.
If you are thinking about multiple VA loans, keep an eye on your entitlement. If you go over, it might make more sense to refinance one of them to a conventional loan.
In the case of using a VA loan to buy a multifamily unit (up to four units), make sure you will be living in one of the units.
Negotiating Closing Costs
This is a little counterintuitive because it will actually save you money, but the VA loan guarantee limits how many of the closing costs you can pay. Which is great, right? Less money out of your pocket is a good thing.
The trouble is, somebody has to pay the closing costs, and that means the seller is going to have to cover the bill. That puts you in a precarious position when you are negotiating to buy a house, especially if there are multiple offers on the table. This is a good place to emphasize that having a real estate professional that you trust is vital to making offers and negotiating. Homes for Heroes can help you find that professional, as well as a private mortgage broker to help you navigate the VA process.
“Overall great experience. I was able to use the Homes for Heroes program along with my VA loan and purchased the home of my dreams. The Homes for Heroes real estate agent was phenomenal and I couldn’t be happier. Thank you!” – Stephen, Navy, bought a new house in Texas.
Appraisals Can Take Longer
To get a VA-approved loan guarantee, you need the property to be evaluated by a VA-approved appraiser. There’s no wiggle room on this. The drawback is, in a competitive real estate market, VA appraisals take longer to schedule and complete. That can slow up the whole process and may be another warning sign to sellers. Everything is moving faster these days in the real estate world (even the closing process), so anything that slows you down can affect your ability to compete.
Conventional Loan Benefits
Conventional loans are what everybody else gets if they aren’t eligible for a VA loan guarantee. One advantage of this process is you only have to work with one party: your private mortgage lender. With a conventional loan, you don’t have to take into consideration any of the VA requirements.
When compared to VA loan guarantees, conventional loans have these benefits:
Faster Closings – Conventional loans typically close faster than VA loans, meaning you can get from start to finish more quickly. That puts you into your new home as soon as possible. That is an advantage for both buyers and sellers. Sellers like an expedited closing because it lets them move on to their new house or property.
More than One Property – With conventional loans, getting a mortgage for a second home, vacation home or rental property is easy. All you need to prove is that you can pay for it. You don’t need to worry about VA entitlement limitations.
Competition – As you may have gathered, having a VA guaranteed loan adds time and complexity to the mortgage process. It makes you less competitive in an aggressive buying environment where there are multiple offers on every house – many of them above the list price of the home. Conventional loans make you more competitive. In the eyes of some sellers, a buyer with a VA loan is more hassle than it’s worth, especially if they have offers on the table that can be closed quickly.
Conventional Loans: Costs and Drawbacks
When you look at conventional loans on their own, they look normal. They are the standard. But if you compare them to VA guaranteed loans, they look a little less desirable. For example, the standard conventional loan requires you to make a down payment, make monthly mortgage insurance premiums and pay the going interest rate for loans. Normally that’s not a big deal; those are, just the costs you usually pay.
Conforming Loan Limits
In terms of mortgage limits, many conventional loans abide by the rules of conforming loans. They put these voluntary limits on mortgages so they can resell them to Fannie Mae and Freddie Mac. Depending on the county, the upper limit is currently $647,000–which is the same number you will see if you have a full VA entitlement. Conforming loan limits are higher in high-priced real estate markets, such as California or Washington D.C.
More Risk for the Lender
Conventional loans are riskier for your mortgage lender. While that may seem like “not my problem,” it can affect your pocket book. When the VA takes on some of your risk with its guarantee, it typically reduces the interest rate on your mortgage, saving you thousands of dollars in both the short term and the long term. When the lender takes all the risk, they will reduce their own risk through down payments and higher interest rates (and mortgage insurance). Not to put too fine a point on it: their risk will cost you money.
Stricter Lending Requirements
Your private lender will have requirements associated with approving (or pre approving) your conventional loan. All private lenders are legally obligated to follow federal and local regulations. These are lending requirements that the VA does not make – but you will probably still need to meet these requirements when you involve the mortgage company that will give you the actual money as part of the VA loan process.
- Credit Score – Most lenders will require a score above 620 or make you pay extra if your score isn’t high enough.
- Proof of Income
- Debt-to-Income (DTI) ratio – Expressed as a percentage, this is the amount of money you spend on debt each month compared to your monthly income. Most conventional loans want you to have a DTI below 47%.
There will be other requirements and each lender is different. That’s all the more reason to do your research when choosing a mortgage lender. Or, work with Homes for Heroes and our local mortgage specialist in your area.
Homes for Heroes can Save You Money Through the Process
Homes for Heroes has been working for 20 years to help active and retired military heroes choose the right house and the right mortgage. Our model for helping consists of working with you at three phases of your house hunt.
- We help you find a real estate professional.
- We help you find a mortgage lender.
- We provide you with Hero Rewards® savings after working with our local specialists to close on a home or mortgage.
That middle step is probably the most helpful as you look at weighing a conventional loan versus a VA loan. We connect you with private mortgage brokers who have committed to help military personnel in all the branches of the United States armed forces. They understand your challenges and are prepared to assist.
You will receive excellent care from our real estate specialists and receive a Hero Rewards® check at the end. On average, our heroes save $3,000 when you purchase a home and $6,000 when you buy and sell a home. Our team can work with you to find a perfect home for you and your family. For more information and to talk to one of our specialists with no obligation, sign up today.