Unlike conventional loans, VA-backed mortgages don’t require a minimum down payment or monthly mortgage insurance. Instead, they charge a funding fee.
A company typically provides conventional loans with a credit score requirement of 620 or higher. They also may have higher interest rates and more conditions like property inspections and repairs.
Differences: VA Loans & Conventional Mortgages
No minimum down payment
Unlike conventional loans, which require a minimum down payment of 20% of the home’s price, VA home loan programs do not have this requirement. However, the lender will likely require a reserve amount equal to two months’ worth of mortgage payments before clearing you for closing.
The VA program also allows borrowers to finance 100% of their home’s value without paying PMI. This benefit can make it more affordable to buy a home, especially in high-priced areas like Denver.
Of course, a buyer’s ability to afford a new home will depend on other factors, including their debt-to-income ratio and income. In addition, a VA loan can only be used for a primary residence. A buyer may consider a conventional loan for a vacation or rental property.
No private mortgage insurance
VA loans have a variety of benefits, but they are only suitable for some homebuyers. For one, they can only be used for primary homes. Lenders will review your income, credit, and assets to ensure you can afford the mortgage payments. When assessing your eligibility for a mortgage, your debt-to-income ratio – the proportion of your income that goes towards monthly debt payments, including your new home – will also be considered. A mortgage calculator can help see these costs ahead of time. We like this Denver CO mortgage calculator if you needed an example.
Conventional loan requirements include a minimum down payment of three percent. You’ll also likely have to pay PMI, an insurance premium added to your monthly mortgage payment, until you reach an 80% equity-to-loan ratio. This significantly differs from VA loans, which have no PMI requirements and only require an upfront funding fee. It’s important to compare your options and choose the best for you.
No maximum debt-to-income ratio
Conventional loans often impose maximum debt-to-income ratio requirements that limit your monthly income after taking out a mortgage loan. VA loan borrowers don’t have that limitation.
However, a conventional lender may require you to qualify for the loan using back-end DTI calculations, which take into account your total debt obligations, including housing costs.
Conventional lenders typically set maximum loan limits for their conforming loans. VA home buyers can use their available entitlement to exceed these loan limits. However, they will generally pay more in upfront costs. This may include an initial funding fee and prepaid expenses. Conventional lenders may also require a minimum down payment of 3% or more. Borrowers that make down gains of less than 20% must purchase private mortgage insurance (PMI). This covers the lender’s investment if a borrower defaults on the loan.
No minimum credit score
The VA doesn’t set a minimum credit score, but lenders can have their requirements. A higher score will make it easier to qualify for a loan and may lead to better terms, including a lower interest rate.
Conventional loans typically require borrowers to pay 20 percent or more down. This protects the lender from financial loss if you default on mortgage payments. Conventional loans also require borrowers to pay for private mortgage insurance, which can cost up to 2% per year.
VA loans do not require a down payment or mortgage insurance, but you must pay a one-time VA funding fee based on your loan amount and other factors. The VA website has a funding fees table that can help you determine what you’ll need to pay.
No maximum loan amount
Conventional mortgage loans have maximum loan amounts for single-family homes in most country areas. These loan limits are based on home values, housing costs, and other factors.
VA loans have no maximum loan amount requirements but require a funding fee. This fee, which varies by buyer, goes to the Department of Veterans Affairs and is used for program costs and losses.
Lenders limit your debt-to-income ratio to 41% of pretax income, including your new mortgage payment. However, exceptions are possible for those with partial entitlement or who can demonstrate sufficient residual income.
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