For the vast majority of Military homebuyers, the VA Loan program is the most powerful and cost-effective mortgage program available. This government-backed program comes with benefits directly catered to military veterans and a procurement process that is second to none.
However, there are certainly times where the VA Loan program isn’t the best option. For instance, borrowers who have no trouble handling a 20-percent down payment would most likely find conventional financing a better fit to avoid the VA’s mandatory Funding Fee.
Being able to compare the VA Loan against other lending programs is an important step for prospective borrowers. So for our military homebuyers out there, I have given a snapshot of the four major lending programs and the benefits they offer veterans or active duty military members.
The FHA Lending Program
This program, backed by the Federal Housing Administration, gives qualified homeowners the chance to purchase a home with a minimal down payment, usually starting around 3.5 percent. With FHA loans, borrowers pay an upfront mortgage insurance premium and continue to pay annual premiums over the life of the loan. This program has no credit score requirements and loan limits vary by housing type and county.
Best fit: This program is best fit for low and middle-income borrowers who don’t qualify for zero-down programs, such as the VA Home Loan or USDA Home Loan.
The USDA Loan Program
The United States Department of Agriculture maintains this home loan program and it is the only other zero-down loan program available. USDA Loans are meant for low to middle-income families who would like to buy a home in what the USDA considers a rural area.
With the USDA Loan Program, there are no required mortgage insurance premiums; however, there is a fee to cover the guarantee, which usually falls around 2 percent of the entire loan amount.
Best fit: This program is best fit for Veterans in rural areas.
Conventional Lending Options
Conventional loans carry no government guarantees and follow the standards and program requirements set by Fannie Mae and Freddie Mac, two government sponsored enterprises. With conventional loans, down payments are typically a minimum of 5 percent; however, borrowers that don’t make a down payment of at least 20 percent must pay a mortgage insurance premium over the life of the loan. Credit requirements for conventional lending programs are generally more strict and start around 680.
Best fit: Conventional programs are a great option for borrowers with strong credit and enough cash to make a sizable down payment. Otherwise, PMI can make conventional financing needlessly expensive for veterans, since the VA loan carries no mortgage insurance costs.
The VA Home Loan Program
VA Loans are catered directly to veterans and military members and carry benefits such as no required down payment, no mortgage insurance premiums and high loan limits ranging from $417,000 to $1 million. VA Loans can only be used for a borrower’s primary residence, meaning no rental property or land can be used.
Similar to the USDA loan program, VA Loans have a mandatory funding fee of 2.15 percent for regular military members and 2.4 percent for Reserves and National Guardsman. This fee keeps taxpayer costs down and ensures the continuation of the program.
For more information on benefits for first time home buyers, see this article on VA mortgages.
Best Fit: The VA Home Loan program is the best fit for most military members and veterans who have VA Loan entitlement.
Lauren Ratier is a mortgage commentator for Veteran’s United Realty. Veteran’s United Realty is a blog proudly sponsored by Veteran’s United Home Loans, the nation’s leading provider of VA loans.