Conventional Loan vs. VA Loan
A conventional loan is a loan provided by a traditional lender (such as a bank) without any government backing or guarantees. A VA loan is a type of home loan which guaranteed by the US Department of Veteran Affairs (VA). The VA insures 25% of the loan, which means that if the borrower defaults on the loan, the VA will pay for 25% of the loan. The insurance of the VA significantly lowers the risk for the lender, which allows the lender to provide more favorable terms to the borrower. VA loans were created as an incentive to encourage people to join the military, and as such, they are only available to veterans, active service people and in some cases, the spouses of deceased veterans. VA loans are more advantageous than conventional home loans in most aspects.
Assuming you have veteran entitlement, VA loans are much easier to qualify for than conventional loans. Most conventional loans will ask for a minimum credit score of 720, while VA loans usually only ask for a credit score of 620. Also, the debt to income ratio (DTIR), or the percentage of the borrower's income which can be spent on debt payments is higher for VA loans. VA loans ask for a DTIR of 41% or less, whereas a typical conventional loan requires a DTIR of 34% or better.
The most significant advantage to VA loans may be in the down payments. For VA loans that are $417,000 or smaller, there is no down payment required. Many conventional loans ask for as much as 20% down. No down payment is especially advantageous for borrowers that are purchasing their first home since they do not have the sale of a previous home to help them make a down payment.
In addition to these other advantages VA loans also typically have lower interest rates and smaller fees than conventional loans.
One reason that a borrower with veteran entitlement might still seek a conventional home loan is for the added flexibility of conventional loans. VA home loans are only able to be used on the borrower’s primary residence. A conventional loan can be used on any type of property including vacation homes and investment homes that the owner plans to rent out. Also, the VA rarely backs a second loan until the first loan is paid off.