Based on the loan requirements, VA seems to be the most advantageous option for eligible veteran home buyers as it does not require any down payment. However, conventional loans may also be a feasible alternative for eligible buyers who meet the minimum 5% down payment requirement, or for those who qualify for the HomeReady or Home Possible 3% down programs offered by Fannie Mae and Freddie Mac. It should be noted that these programs are exclusively tailored for low-income buyers. FHA loans, on the other hand, accept applicants of all income levels but demand a minimum of 3.5% down.
Private mortgage insurance, commonly known as PMI, is a protection policy that safeguards lenders against defaults on loans. The cost of PMI premiums can be a considerable burden for borrowers, with thousands of dollars being spent at closing and throughout the loan’s life. Conversely, VA loans eliminate the need for monthly mortgage insurance premiums, providing borrowers with substantial savings. However, Veterans using VA loans may be subject to a one-time funding fee of 3.3% -1.25%, which is not paid out of pocket during the closing procedure and is instead financed into the final loan amount. The VA funding fee percentage is determined based on multiple factors, such as the down payment and whether it is a first or subsequent use of the program. In contrast, Veterans with a disability of at least 10% are exempt from this fee.
In the event of a conventional loan falling short of a 20% down payment requirement, it is crucial to obtain PMI. PMI may be paid monthly, upfront as a closing expense, or by the lender. The most prevalent payment approach is the monthly premium route, which remains in effect until the mortgage balance has been reduced to 78% of the property’s original value. It is important to keep in mind that premium rates may vary among diverse mortgage insurance firms and may prove to be quite costly over time. In situations where the down payment is 5%, for example, it is normal to anticipate additional premium costs equivalent to an interest rate hike of 0.39%, with an upward limit of 1.86%.
FHA borrowers are subject to two types of mortgage premiums, making it important to understand the details. The first premium is an upfront mortgage insurance premium, which is 1.75% of the loan amount and is financing into the final mortgage balance. Additionally, FHA has monthly PMI. Standard premiums range from an extra interest rate charge of 15% to over .75% on a 30-year fixed-rate mortgage. It’s essential to note that unless an FHA borrower puts more than 10% down, the monthly mortgage insurance premiums will be charged for the life of the mortgage.
Veterans Affairs (VA) and Federal Housing Administration (FHA) borrowers may get interest rates as low as 0.25-0.375% less than conventional loans. This is usually the same until someone with a conventional loan puts 30% down, then their rate will be like those of the VA and FHA loans.
Both VA and FHA programs do not have any specific minimum credit score requirements, but most lenders have their own credit score limitations ranging from 580 to 620. As compared to conventional loans, which require a credit score of 620 or higher, VA loans offer more flexibility when it comes to evaluating a borrower’s credit. Apart from credit scores, other factors are also considered when assessing the borrower’s creditworthiness. VA’s underwriting guidelines for derogatory items are notably more flexible. These may include collections, judgments, consumer credit counseling, disputed accounts, bankruptcies, foreclosures, and short sales. As such, VA loans are the clear winner in this category.
Conventional and FHA publish an annual list of all the counties in the US and the maximum loan limits for those counties. If you want to borrow an amount greater than these established limits, then you’ll be forced to consider a Jumbo or non-conforming loan. VA borrowers have the upper hand here as they don’t have any maximum loan limits on a home purchase unless the Veteran has an existing or prior VA loan affecting their entitlement.
When it comes to getting a mortgage, one crucial aspect that lenders will look at is your debt-to-income ratio (DTI). This is a calculation that takes into account all of the monthly debt payments that you have, in addition to the proposed mortgage payment, and divides it by your gross monthly income. If you exceed a certain DTI ratio, you may be deemed too risky by the lender and not approved for the loan.
Usually, conventional loans have a strict limit of 50% DTI ratio. However, there are more flexible options available such as VA and FHA loans. These loans are specifically designed to be more accommodating for borrowers, including those with a higher DTI. Furthermore, in today’s market, underwriting programs from Fannie Mae and Freddie Mac are used for most mortgages. If you have a strong financial profile and meet certain qualifications, you may be able to qualify for a VA or FHA approval, even if your DTI is over 50%.
Overall, while traditional financing options may be more rigid, VA and FHA loans, offer more flexibility for borrowers who need it.
VA and FHA loans necessitate buyers to occupy the property as their primary principal residence. On the other hand, with a conventional loan, borrowers can buy a home as a secondary or investment property. Nevertheless, it’s worth noting that non-owner occupied conventional loans usually demand a higher down payment percentage and come with higher interest rates.
Assuming a mortgage means taking over the financial responsibility of an existing mortgage. This can be a beneficial option if the interest rate of the current loan is much lower than the current market rate. VA and FHA loans have an assumable feature, which makes them more advantageous than conventional loans.
However, we do not recommend most Veterans to assume a VA loan due to the negative consequences associated with the remaining VA guarantee. As long as the VA mortgage is still outstanding, the Veteran may suffer a partial or full loss of entitlement and may not be able to obtain another VA loan. Additionally, if the assumed VA mortgage goes into default, the loss of entitlement could become permanent, unless the loss is repaid.
One exception to this situation is an entitlement swap between two Veterans, where the financial liability and VA guarantee are relinquished, allowing them to use the VA loan program again without any ramifications.