VA vs. Conventional Loans
May 26, 2021
VA vs. Conventional Loans
What are the main differences between VA and Conventional loans? Let’s get into it.
Down Payment and Loan-to-Value (LTV)
A down payment is the amount of money you put towards the purchase price at the start of a loan.
For a Conventional loan, first-time homebuyers can put down as little as 3% of the purchase price. For everyone else, the minimum is 5%. If you put down less than 20%, you will be required to pay private mortgage insurance. More on that later.
Alternatively, VA loans allow borrowers to have the option of putting 0% down if they meet the eligibility requirements laid out by the Department of Veterans Affairs. If you are a veteran and wondering if you qualify, talk to one of our team members today!
LTV is the inverse of your down payment. It lets you know what percentage of your home’s value is covered by your loan. Your down payment and LTV should always add up to 100%, giving the two a complementary relationship!
Following that math, if you’re a first-time home buyer and get a Conventional loan with a down payment of 3%, then your LTV will be 97%. If it’s not your first time purchasing a property, your maximum LTV will be 95%. If you’re a VA borrower putting 0%, your LTV will be 100%. Additionally, if you are putting 0% down and rolling in your funding fee, your maximum LTV could actually be over 100%.
When you think about the term insurance, you think of security and protection. That’s what mortgage insurance is. It protects the lender from the possibility of the borrower defaulting on their loan.
While MIP only applies to FHA loans, Conventional loan borrowers who put down less than 20% upfront are likely required to get PMI. There are plenty of reasons you might want to go this route. Maybe you want a little more cash in your pocket to furnish your new house, or you have immediate renovation plans. PMI payments differ depending on the borrower and are based on your down payment, credit score, and other financial factors. However, they are manageable and automatically included in your monthly payment. Once Conventional borrowers reach 20% equity, they can apply to remove their monthly PMI payment. In some cases, servicers will do this automatically.
VA loan borrowers are not required to pay mortgage insurance.
A funding fee is a one-time charge on government-backed loans that can be paid upfront or rolled into the total loan amount. Because it’s not government-backed, a Conventional loan has a funding fee of 0%. A VA funding fee is based on your loan and other financial factors. It can also potentially be waived if you meet certain criteria outlined by the Department of Veteran Affairs. To learn more, talk to a UMortgage team member today or visit the VA website.
Credit scores indicate your history as a borrower and play a role in determining which type of loan is best for you.
At UMortgage, a credit score of 640 or above is required to be approved for a Conventional loan. While there is no federal requirement for VA borrowers, UMortgage requires the generally recommended credit score of at least 620. If you are worried about meeting our credit score minimums, don’t worry! Our credit coaches can help you bolster your credit and get you ready in no time. If your time frame is a little tighter, let us know, and we will refer you to one of our trusted partners.
Debt-to-Income ratios give lenders an insight into how much of a borrower’s monthly income is allocated to paying off debt.
Conventional borrowers are permitted to have DTIs up to 45%. Depending on the borrower’s financial stability, they may have some room to move up to 50%.
There is no mandated maximum DTI for VA loans. However, any ratio above 41% will spark additional scrutiny.
Borrowers can get mortgages for all sorts of properties, from a primary residence to investment properties. While Conventional loans have no limitation for the property type, VA loans are a little more complicated. For a VA purchase loan, the property type is limited to a primary, also known as owner occupied, residence. This means that the borrower must reside in at least part of the property in question. However, if that same borrower decided to refinance their loan, they may have the option to convert the property type.
In addition to property type limits, there’s a ceiling for how much money can be borrowed for each type of loan.
The limit for Conventional borrowers varies by county and caps out at what is considered a higher loan amount for the area. For example, the Conventional loan limit in San Francisco, CA, for a one-unit residence is above $800,000. Alternatively, it’s less than $600,000 in Oklahoma City for the same criteria. If you’re looking for a loan above your regional limit, you will need to shop around for Jumbo loans instead.
The process for determining what would be considered a Jumbo VA loan is similar to the process for Conventional loans. Any other limits on your loan amount would be determined by your VA eligibility. To learn more, talk to a UMortgage team member or visit the US Department of Veteran Affairs website.
Refinance Seasoning Period
A refinance seasoning period refers to the amount of time that needs to pass between closing on a loan and refinancing that same loan. Conventional loans can be refinanced at any point after closing, with the exception of a cash-out refinance which requires a 6 month seasoning period. VA loans require a seasoning period of 210 days or six mortgage payments for any refi - whichever comes first.
Which is right for you?
In the end, there are many differences between Conventional and VA loans. Ultimately it comes down to what you want from your loan. There is no “better” or “right” option. It all depends on where you’re at in your homeownership journey. Luckily, UMortgage is always here to help you weigh the pros and cons and make an intelligent choice.