The Home Buyer's Korner

Information presented should be used for educational purposes only.

March 27th, 2015

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GREATER ESCONDIDO CALIFORNIA

The Home Buyer’s Korner

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VA or Conventional Loans

Google+LendersVA home loan are guaranteed by the federal government through the Department of Veterans Affairs and offers both active duty military and eligible veterans and spouses of a veteran that is deceased from a service-connected event to purchase a home with no money down or 100% financing. Conventional loans, on the other hand, are a bit harder to qualify and usually require up to 20% down payment for a mortgage.

With the new Qualified Mortgage (QM) rules in effect now, lenders are required to make sure that all loans are classified as “safe mortgages”. In other words, qualified mortgages are intended to protect lenders today from a borrower’s lawsuit tomorrow. The idea of a qualified mortgage would simply be following the program’s guidelines from DTI to Employment and everything in between. Given the new Qualified Mortgage regulations many believe that this would make it more difficult to purchase a home.

There are a few things that a Qualified Mortgage may not be able to have:

  1. Balloon Payments
  2. A term that exceeds 30 years
  3. Points and fees greater than 3% of a loan amount (over $100,000)
  4. Negative Amortization
  5. Loans with interest only payments

Above this, the loan must also fall into one of three category types:

  1. Loan qualifies for a purchase or guarantee by the government or a government-sponsored enterprise (GSE).
  2. Borrower’s Debt-to-Income Ratio (DTI) must not exceed 43%.
  3. Kept in-house by a small lender (not relying on Third-Party Company or business to complete the transaction).

The differences between a VA home loan and a Conventional loan are significant. VA home loans are only offered to active-duty military personnel, military veterans and some spouses of a veteran while Conventional loans are offered to all types of borrowers, as long as they meet the qualifications.

1. Conventional mortgages usually require a 5%-20% down payment, while VA mortgages require 0% down payment and 100% financing.

2. VA home loans do not require mortgage insurance, as a matter of fact it is prohibited by the VA that lenders don’t expect mortgage insurance from VA borrowers. Meanwhile, private mortgage insurance (PMI) is required for Conventional loans if the homebuyer is putting down less than 20% on the mortgage.

3. The credit qualifications for a conventional mortgage is usually strictly based on the program’s underwriting standards and specific credit score requirements. The VA loan program may allow a home buyer to have a reasonable amount of credit problems and still consider them eligible for the mortgage.

4. VA loans are assumable, meaning that if the home owner sales the house, then the new owner may be able to take over the current loan without having to obtain a new one for the purchase of that home. Conventional mortgages are not and may accrue prepayment penalties if the home owner decides to sell or refinance their home earlier than expected.

5. VA home loans usually require a minimum credit score of 620 but may vary from lender to lender, while a conventional loan will often set  a minimum credit score of 660 with no bad credit history.

6. VA does not issue loans, nor do they enforce credit score minimums, this is done by the VA lender and is guaranteed by the government in case of default. Conventional loans are not backed by the government or guaranteed and guidelines are often in accordance to strict guidelines by Federal National Mortgage Association.

7. VA loans do not have prepayment penalties while a conventional loan might.

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