Comparing VA Loans to Conventional, FHA and USDA Finance Options

Comparing VA loans to Other Options

VA loans are almost always a great fit for military borrowers. But comparison is healthy.

For the vast majority of military borrowers, VA loans are the most powerful and cost-effective mortgage program on the market. These government-backed loans come with significant financial benefits that help veterans purchase with no money down and no out-of-pocket spending up front — and plenty more benefits for America’s heroes.

But there are certainly times when a VA loan isn’t the best answer. For example, veterans who can handle a 20-percent down payment might sometimes find conventional financing a better fit because they avoid the mandatory VA Funding Fee. VA loans also can’t be used to purchase investment properties or vacation homes.

Comparing VA loans to their counterparts is important for prospective borrowers. Here’s a look at the four major lending options and what they may offer military borrowers:

Conventional

Conventional loans feature no government guarantees and adhere to the standards and requirements of government sponsored enterprises Fannie Mae and Freddie Mac. There’s typically a minimum down payment of 5 percent, but borrowers who can’t put down at least 20 percent have to pay private mortgage insurance (PMI). Consumers currently need a credit score of about 680 in order to qualify for a conventional loan.

Might Be a Good Fit For: Borrowers with sterling credit and enough cash on hand for a sizable down payment. Otherwise, PMI can make conventional financing needlessly expensive for veterans as seen with this client, who decided it was a better financial decision to use her VA Loan Benefit.

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FHA

Like the Department of Veterans Affairs, the Federal Housing Administration guarantees loans for qualified borrowers. FHA loans come with a minimum down payment of 3.5 percent. Borrowers pay an up front mortgage insurance premium along with annual premiums. Loan limits vary by housing type and county. There’s no credit score requirement, and some lenders can finance borrowers with a score of 580.

Might Be a Good Fit For: Low- and middle-income borrowers who don’t qualify for no-down payment programs.

USDA

The U.S. Department of Agriculture maintains a unique home loan program through its Rural Development office. USDA loans are the only other no-down payment loan program on the market. Lenders require a credit score of at least 620, and a borrower’s income cannot exceed 115 percent of the area’s median income. The home must also be located in what the USDA considers a qualified rural area. There is no private mortgage insurance or mortgage insurance premium. USDA purchase loans come with a mandatory guarantee fee (2 percent of the loan amount) that can be financed.

Might Be a Good Fit For: Veterans who live in rural areas.

VA

VA loans have no down payment requirement and allow qualified borrowers to purchase a home without spending money out of pocket. Agency-approved lenders require a credit score of at least 620. VA’s effective loan limits range from $417,000 to more than $1 million. There is no private mortgage insurance or mortgage insurance premium. The VA charges a mandatory Funding Fee of 2.15 percent for regular military and 2.4 percent for Reserves/Guard on purchase loans.

Might Be a Good Fit For: Most veterans and active duty service members with a VA entitlement.

To learn more about the VA Loan and how it stacks up to other options check out our comprehensive VA loan guide.

Photo courtesy of nikcname