Those who served, or are actively serving, the United States military can qualify for the VA Home Loan Program, which is administered by the U.S. Department of Veteran Affairs. VA home loans offer benefits not provided by conventional mortgages, and, as such, should be a priority consideration for veterans and active duty members seeking homeownership.
The Conventional Home Loan
Conventional home loans generally mean the standard 30-year fixed-rate mortgage. Conventional lenders follow the strict underwriting standards of Fannie Mae and Freddie Mac and therefore, qualifying borrowers must have good credit history, sufficient income and stable employment. While there is no minimum credit score required to obtain a home loan, the National Association of Mortgage Brokers report that qualifying conventional mortgage borrowers must have a credit score of at least 620 out of 800. Furthermore, you typically need a down payment of at least 10 percent (though in most cases it’s 20 percent) of the mortgage principal.
The VA Home Loan
Unlike conventional mortgages, VA home loans are guaranteed by the U.S. Department of Veteran Affairs and therefore have less stringent underwriting standards for qualifying borrowers. Even so, qualifying borrowers must still meet credit and income standards (qualified borrowers have an average credit score of 680), and may need additional funds to cover closing costs (though sellers may agree to pay). Also, veterans have a “dishonorable discharge” will be disqualified from the program. Note that while private mortgage insurance is not required, borrowers are charged an upfront “VA funding fee,” which can be added on to the principal amount. The funding fee serves to spot some of the costs involved in issuing VA home loans and thus reduces the burden on taxpayers. The fee can range from a low 0.5 percent to a high of 3.3 percent of the loan balance (for subsequent users). A down payment can lower the VA funding fee.
Conventional Mortgage: Pros and Cons
The application process for a conventional home loan may be easier since there is less red tape than federally-backed mortgage programs such as the VA Home Loan. Home equity can also be built faster since these loans generally require higher down payments than VA mortgages. Still, higher down payment requirements may be a significant hurdle for would-be homeowners with little income or savings. Furthermore, the stricter underwriting standards followed by conventional loan lenders imply that candidates must have a strong financial history and condition. In addition, submitting a down payment less than the amount required will necessitate the purchase of Private Mortgage Insurance (PMI), adding to the costs involved with a mortgage. However, the PMI can be dropped once the borrower brings the loan-to-value ratio down to the desired level by paying down the principal balance.
VA Home Loan: Pros and Cons
Qualifying borrowers may be able to finance up to 100 percent of the home sales price and mortgage insurance is not required. This benefit applies to all veterans and is reusable. Loans are assumable by another veteran and sellers can opt to pay closing costs and the VA funding fee so long as these expenses do not exceed 4 percent of the loan balance. Also, while VA mortgage lenders do not put as much emphasis on credit ratings as conventional lenders, the candidate must still possess a clear credit record for the preceding 12 months. Interest-only mortgage options are not available under the VA mortgage program. Furthermore, surviving spouses will be held responsible for mortgage payments if the veteran dies before the loan is settled.
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