Buying a home is exciting, but it can also be a little overwhelming. Choosing from all of the mortgage loan options, running into different requirements, and getting conflicting advice from people who may not even understand your financial needs can all make the process even more daunting. Fortunately for eligible veterans, a VA home loan in Colorado program gives you a little peace of mind with a mortgage option that can ease the stress of buying a house. Conventional mortgages are a popular choice for many homebuyers as well, but the two don't have exactly the same terms. They differ in eligibility criteria, upfront costs, and the long-term financial impact, so getting to know those details before you apply can help you avoid that pit in your stomach and some expenses down the line.
Who Can Qualify for a VA Loan or Conventional Mortgage?
The first major distinction is in the qualification standards. VA loans are issued through the VA and specifically targeted towards current military members, active members of the military, and veterans. You typically need to have a VA eligibility letter to show that you are eligible for a home loan through the VA. However, not everyone who has served will qualify for everything. Conventional loans do not have this prerequisite. VA loans are generally for military members or veterans. Conventional loans are for everyone and don't require any military service or other stability qualifications. There are other factors that are considered when applying for a loan, but the questions of eligibility are the big difference.
Down Payment Requirements: A Major Difference
What can be more difficult for many homebuyers is the down payment. Realistically, home prices aren't low, and it can take years to save that much money. VA loans give you a real advantage in that many eligible borrowers have the option of buying a home with no money down at all as long as they qualify with the lender and have sufficient entitlement. With no down payment, VA loans can be used by some people who may not have 20% of the home's value lying around. Conventional loans require a down payment and, with some exceptions, it's a percentage of the total price. Usually, it's a minimum of 3% but can be more depending on the loan program, credit score, and how much you make. Many VA loans don't require any down payment at all, but don't assume that means you won't need to have money for other expenses like closing costs, moving, or an unforeseen home repair.
Credit Scores and Financial Requirements
VA loans don't have a specific set of minimum credit scores issued by the Department of Veterans Affairs. Instead, each individual lender creates their standards, and many take the borrower's full financial profile into account. While lenders may not be as strict on credit history as traditional lenders, conventional financing typically has certain industry benchmarks for minimum scores depending on the type of loan program and lender. Having a higher score can afford you a better interest rate, which adds up over the duration of a 15- or 30-year mortgage. Regardless of the type of loan you pursue, you must demonstrate to your lender that you'll be able to make the payments without default. Borrowers will need to provide their income, employment, debt-to-income ratio, and other financial information. If your credit score needs improvement, don't become discouraged - take stock of the information on your credit reports, ensure your bills are all paid on time, and reduce balances wherever possible.
Interest Rates and How Much It Costs to Borrow
Even one percentage point difference in interest can make a big difference in the total amount you pay. VA loan interest rates are often very competitive due to the government guarantee that backs the loans, which reduces the risk for the lender. Conventional mortgage rates are based on a number of factors including your credit score, the size of your down payment, the length of the loan, and your local market. Someone with a great credit score and a large down payment will usually get a very competitive offer. Someone with a less-than-perfect credit profile might get a completely different result. The fact is, there is no one loan product that will always have the lowest rate. You need to compare concrete offers on the same loan amount, term, and closing date. Don't just go by the posted rate, either. Points, loan fees, and other costs can make one rate higher than another when they are factored in, even if the rate itself is slightly higher.
Mortgage Insurance and the VA Funding Fee
One of the biggest mortgage cost differences is mortgage insurance. Those with conventional loans that use less than 20% to buy a home (or have little equity in their current homes) will have to pay private mortgage insurance (PMI) unless their mortgage has an exception that allows them to skip it. PMI is paid to the lender, not you, but it costs you each month until you build up sufficient equity in your home, at which point you can typically have the insurance removed. VA loans do not charge monthly mortgage insurance for zero-down purchases, an advantage. But many borrowers pay a one-time fee to help run the program, with the fee based on the size of your down payment, whether you've used your VA loan benefit before, your loan type, and other factors. Those with qualifying VA disability compensation do not pay the fee. You can finance the fee (roll it into your loan) or pay it upfront; compare this to the PMI cost on a conventional loan to see what's best for you.
Property Requirements and the Home Appraisal
Neither loan skips the home-buying homework. Both VA and conventional home loans often require an appraisal, which can be helpful in determining the value of the property, but serves a slightly different purpose. (VA also requires an appraisal to confirm your home is up to VA's minimum property standards for safety and sanitation.) A VA appraisal can prevent you from buying a house with a lot of problems, but it isn't a substitute for a home inspection. Conventional appraisals can also determine value, and different loan programs may have different property standards. Older houses, properties in need of significant repairs, or any house with idiosyncratic features can lead to additional hurdles. If you're purchasing a home in Colorado, it pays to be aware of the condition of your potential new home. What looks great during a brief walk-through might hide costly problems. Make sure you get an independent inspection and understand what repairs might be necessary before closing.
Loan Flexibility, Closing Costs & Long-Term Planning
Traditional home loans offer different options, including fixed-interest loans, variable or adjustable-rate mortgages, and various down payment arrangements. VA loans also offer different options, but qualifying for the program involves additional requirements. Conventional home loans may be better for buyers who want to purchase certain property types or use financing arrangements that are not available through the VA program. However, if you're an eligible veteran looking to keep more money in your pocket, the VA program could be a valuable option. Consulting a Colorado mortgage lender can help you compare these options and determine which loan best suits your financial situation. Closing costs are also a concern with either option. VA borrowers receive protection from certain fees, but not all closing costs are eliminated. Conventional borrowers must also account for lender charges, title costs, appraisal expenses, and other transaction-related expenses. Finally, consider what the next five to ten years will look like. Do you plan to stay in the property for the long term, or might your circumstances change?
