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 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), which is not required with VA loans. Credit benchmarks can vary by lender and loan type. A 660 FICO score is a common benchmark for conventional loans, although you may need a much higher score to contend for the best rates and terms.
Might Be a Good Fit For: Borrowers with sterling credit and enough cash on hand for a sizable down payment.
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 upfront 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 scores of 580 and lower.
Might Be a Good Fit For: Low- and middle-income borrowers who don’t qualify for no-down payment programs.
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 often 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. USDA purchase loans come with both a upfront guarantee fee (1 percent of the loan amount) an annual mortgage insurance premium (0.35 percent of the loan balance).
Might Be a Good Fit For: Buyers who live in rural areas.
VA loans have no down payment requirement and allow qualified borrowers to purchase a home without the need for mortgage insurance.
VA loans also tend to have more flexible and forgiving requirements. Many lenders often look for a minimum 620 FICO score. 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: 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.
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