Luckily, a few key strategies in taking on a home loan make it significantly easier to get in the door– literally– and begin paying for your own place. Whether it’s your first time buying a house or your fifth, odds are you’re looking into getting a loan of some sort to get the purchase underway and the keys in your hand. In today’s Build blog, we’ll look at two essential types of home loans– conventional mortgages and Veterans Affairs home loans– and discuss their differences, requirements, and benefits.

Figuring out the best way to get yourself and your family into your next (or first) house can feel like a big undertaking. Moving forward can be much easier with the proper knowledge of how to get there, the right loan to apply for, and the payments you should expect to make. Let’s crack into two popular loans for homeowners and break down how each works. We hope it helps potential homeowners get a little further along in the buying process. We’ll begin with conventional mortgages below.

What is a Conventional Mortgage?

A conventional mortgage loan does not come from a government program or agency. Consider these as “private” loans offered by companies, banks, or credit unions separate from entities like the Federal Housing Administration or the U.S. Department of Agriculture. Although privatized, these remain the most common home loan type available to Americans.^[1] Conventional mortgages can be classified into two categories: conforming and non-conforming, in relation to adhering to the guidelines set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac, respectively). Conventional mortgages have different requirements that have to be met in order to meet loan approval status, and their terms– once a borrower is approved– can range much differently from a government-supported mortgage. We’ll get more into the requirements for conventional mortgages below but know that the loan terms most commonly used by these types of loans include 15, 20, and 30-year repayment schedules, with 30 years being the most common term.^[1]

What is a VA Loan?

The U.S. Department of Veterans Affairs offers special mortgages for active-duty service members, veterans, or surviving spouses that allow eligible candidates access to loans that are typically easier to manage and cost less overall to the borrower. This is considered a military benefit and allows veterans to use credit more fairly to participate in the housing market. Active-duty members and veterans looking to own a home for the first time are encouraged to look into getting a VA loan for easier requirements, terms, and payments.

How Does a VA Loan Work? 

VA home loans are more lenient with credit score requirements, down payments, and debt-to-income ratios to help the potential borrower into a home more easily. Lower interest rates and closing costs are also typically employed for the same reason. The costs and fees associated with VA loans differ from conventional or FHA-backed loans, which helps military members get the loan they want. In terms of applying for a VA loan, the process is very similar to applying for a conventional or government-backed mortgage: find a lender, bank, or credit union that offers VA loans, and begin the steps necessary. Many lenders offer VA loans due to a Veterans Affairs guarantee that a certain amount of the loan will be paid back by the agency whether or not the borrower defaults.^[2]

Mortgage and VA Loan Requirements

Let’s look at conventional mortgages and VA loans and review the requirements needed by each to get approved for the loan you want. Remember that, while the most popular loan, conventional mortgages can be a bit more scrutinizing, and VA loans come with special requirements for active-duty service members and veterans:

Conventional Mortgage Requirements:^[3]

• A total loan amount of $510,400 or less in most areas (can be higher in high-cost zones)
• No outstanding or glaring credit report issues, such as bankruptcies or previous foreclosures
• A debt-to-income ratio of 43% or less (depending on credit score)
• A 3% down payment– or 20% without mortgage insurance
• A credit score of typically 620 or higher

VA Loan Requirements:^[4]

• Active duty service members must have served 90 or more continuous days
• Veterans must have served 90 days in wartime and 181 days in peacetime
• Six creditable years in the Reserves or National Guard
• Surviving spouses of veterans, prisoners of war, or service members who have gone Missing in Action. You must not have remarried or remarried after age 57.

Mortgage and VA Home Loan Benefits

Now that we know what requirements are needed to begin the loan process with conventional and VA loans, let’s look further into the benefits surrounding each:

Conventional Mortgage Benefits:^[5] 

• Security. Once your interest rate is locked in, you’ll continue to pay that amount for the entire term of the loan, no matter if interest rates or housing prices change or climb.
• Easier to Refinance. Because you’ve already met the requirements necessary to take on a conventional mortgage, refinancing is quicker and simpler.
• Escrow Options. With conventional mortgages, you can pay taxes and insurance directly without adding them to your escrow account. Conventional mortgages are the only loans with this option.
• Faster. Conventional loans have less paperwork, wait times, and complications than government-backed loans. This also includes avoiding strict and time-consuming inspections required by the FHA.
• Options. From different loan terms to varying requirements, it’s usually easier to find a loan that works with your finances and lifestyle rather than the rigid requirements of government-supported loans.

VA Loan Benefits: 

• No Loan Limit. While some lenders may set a maximum, there is currently no established limit to the amount your loan can be.
• Limited Closing Costs. Lender fees can only be 1% of the loan amount, meaning you’ll save money, and your closing costs will be much more affordable.
• No Insurance Required. VA loans don’t require mortgage insurance whatsoever, meaning you’ll save money.
• No Down Payment Required. With zero down payment required, you’re one step closer to the home you want. However, adding a down payment may be a wise financial decision to make.^[2] 

Between conventional mortgages and VA loans, if you meet the requirements above, you may have a good chance of obtaining a loan that works for your family and finances. Always research and discuss your options, and never rush into the process before determining what rates, terms, and benefits work best for your situation. Best of luck!

Disclaimer: Conventional Mortgage vs. VA Home Loans is intended for educational/informational purposes only and is not intended as financial advice.

Sources: 

1. What is a Conventional Loan?
   https://www.experian.com/blogs/ask-experian/what-is-a-conventional-loan/
   Accessed Apr 21, 2023
2. VA Loan Buyer’s Guide
   https://www.lendingtree.com/home/va/
   Accessed Apr 21, 2023
3. Conventional Mortgage – What You Need to Know to Qualify
   https://www.forbes.com/advisor/mortgages/conventional-mortgage/
   Accessed Apr 25, 2023
4. VA Loan Requirements & Eligibility Guidelines 2023
   https://www.nerdwallet.com/article/mortgages/va-loan-eligibility-requirements#:~:text=VA%20loan%20eligibility&text=You%20are%20on%20active%20duty,Selected%20Reserve%20or%20National%20Guard.
   Accessed Apr 25, 2023
5. Advantages of Conventional Mortgages
   https://mortgageone.com/advantages-of-conventional-mortgages/
   Accessed Apr 25, 2023