For many military service members and veterans, VA loans are the most powerful home-buying tool on the market.
Qualified buyers can purchase with $0 down and considerably lower credit scores than what conventional lenders typically require. To be sure, loans guaranteed by the Department of Veterans Affairs aren’t the right fit for every veteran.
But the program’s more flexible requirements have helped scores of military buyers who might otherwise struggle to secure conventional and even FHA financing.
Here’s a quick look at how VA loans stack up against the other two major lending options.
The VA doesn’t require a credit score to use this benefit. But the lenders who make these loans usually do. The upside: Credit score benchmarks for most VA lenders are far below what conventional lenders want.
Conventional loans often require a FICO score of 720 or higher. It’s not uncommon to see VA lenders looking for a score of 620.
FHA lenders are allowed to dip down to a 580 benchmark. But it’s tough to find them venturing far below 640 in the current economic environment.
The biggest benefit of VA loans is the ability to buy with no down payment. About 82% of buyers in 2014 did exactly that.
Conventional loans typically come with a minimum 5% down payment. FHA loans require 3.5% down. On a $250,000 home purchase, that’s nearly $13,000 for conventional lending and $9,000 for FHA.
Needless to say, it can take buyers years to save that kind of lump sum.
Conventional and FHA buyers can also get stuck paying mortgage insurance. Conventional buyers who can’t put down 20% will usually pay this each month until they build sufficient equity.
FHA buyers pay both an upfront and an annual mortgage insurance premium. The latter is a cost they now pay for the life of the loan, and it can add as much as $200 or more to the monthly payment.
There’s no mortgage insurance with VA loans. But VA buyers do pay an upfront funding fee, which most choose to finance. This fee goes directly to the VA to help keep the program running for future generations.
There’s a lingering sense that government-backed loans mean more red tape and delays. But the closing time frame for these loans is about the same on average.
In September, the average conventional purchase loan closed in 39 days, according to Ellie Mae. VA loans were one day behind at 40, with FHA coming in at 42 days.
A lot will depend on where you’re purchasing and the specifics of each transaction.