WHY YOU SHOULD CHOOSE A VA LOAN OVER A CONVENTIONAL: VA Conventional A DIRECT COMPARISON A startling number of veterans and their spouses decide to forego their VA loan benefits and get conventional home loans instead. For the most part, this happens because of a lack of available, correct information about what makes the VA loan program so much better than the conventional. Make no mistake: the VA loan program is drastically superior to the conventional loan program. In an effort to turn this trend around, we want to do a direct comparison between the VA loan program and conventional home loans. The benefits to getting a VA loan instead of a conventional are as significant as they are numerous, and we are confident that after reading this ebook you ll agree that getting a VA loan whenever possible is the best route to choose. We re going to compare the two loan programs on a variety of fronts. We ll talk about interest rates, closing costs, down payments, qualifying for the respective loan programs, and the available loan options on each program, both for new purchases and refinances. There are other aspects we could compare the two on, but the ones above are the most important and have the most effect one way or the other. If you have questions after reading this ebook, don t hesitate to give us a call or contact us via our website and we ll be happy to answer them. 1
INTEREST RATES & CLOSING COSTS % Since available interest rates are one of the things that borrowers care most about (and rightly so) and closing costs are also a huge factor in getting a loan, it seems appropriate to start the comparison with these two things. Let s disseminate truth and dispel myths at the same time. INTEREST RATES Somehow, the rumor has gotten around that VA loans don t offer significantly lower interest rates than conventional loans. In reality, it s common for VA loan interest rates (on fixed loans) to be between 0.5% and 1% lower than comparable conventional loans. Interest rates on either will vary based on the borrower s credit and employment history and income, but you ll generally see rates in that range. Recently, even with conventional rates at historic lows, VA loan rates have averaged 0.32% lower over the last year. Generally speaking, when rates go up, conventional rates go up faster than VA rates do, and when rates go down, conventional go down faster than VA rates do. This is illustrated by the data, in that the higher rates are generally, the larger the gap between the VA rates and the conventional rates, and the lower that rates generally are, the more conventional begins to close the gap. This is because there s only so low that rates will ever go, and as conventional rates get closer to that point, they begin to close the gap with VA rates. CLOSING COSTS On average, closing costs on conventional loans and VA loans are about the same. On a conventional loan, you should expect to pay at least 2% of the loan amount and up to 5% of it in closing costs. On a VA loan, you can go as low as 1% and it also maxes out at around 5%. On a conventional loan, there is a lot of variation on what you might be charged for closing costs based on where you are and what lender you re working with. On a VA loan, the expectations are a bit more standard, because the VA limits what can and cannot be charged to the borrower as closing costs, though they do allow for differences by geographical area based on what is considered normal. An important thing to consider here, however, is that the VA Funding Fee is included in the above estimates, but the Funding Fee is able to be rolled into the loan amount if the borrower chooses that option, which means that money wouldn t be due upfront and closing costs would be significantly lower than on a conventional loan. Conventional Closing Costs Consider the following example: 0.32% might not sound like a large difference, but it actually is. If Dave gets a 30-year fixed for $200,000 on a VA loan at an interest rate of 4.00%, and Bill gets a 30-year fixed for $200,000 on a conventional loan at a rate of 4.32%, by the end of the loan term, Bill will have paid $13,414.49 more interest than Dave. Since VA rates are often even more than 0.32% lower than conventional rates, there are significant savings on interest by using VA loans. VA Closing Costs 2
DOWN PAYMENTS & QUALIFYING With down payments and qualifying for a home loan being the largest obstacles that most borrowers, especially first-time buyers, face, we definitely want you to know about the advantages that the VA loan program has over conventional home loans. The leg-up that the VA loan program has in this area is a major game-changer for VA-eligible borrowers, and is one of the best reasons to pursue a VA loan instead of a conventional one. DOWN PAYMENTS The VA recognizes that down payments constitute the single greatest obstacle to homeownership for first-time buyers. With that in mind, the VA loan program does not require a down payment of any kind. If you are getting a VA loan, you don t have to put in a dime on a down payment. Why? Because the VA Guarantee to the lender acts as your down payment and gets you the good loan terms (with no mortgage insurance) without forcing you to make a down payment. You can, of course, still make a down payment, and if you do you ll be rewarded by getting a discount on the VA Funding Fee as well as better terms from the lender, but it s not required and you don t have to pay mortgage insurance if you don t make a down payment. This is one of the greatest benefits of the VA loan program - the ability to buy a home without having 20% to make a down payment. Let s Talk Numbers: The VA Guarantee actually covers 25% of the loan, which is more than the 20% that conventional loans require for a down payment. This may seem like a small difference, but this is why VA interest rates are lower on average than conventional. Borrowers who have enough money to make a down payment may think that this is not that great of a benefit for them. That is incorrect. If you are making a 20% down payment in addition to having 25% of the loan amount guaranteed, then the lender is guaranteed to get at least 40% of the value of the home back (It s not 45% because the 20% down payment comes out first, then the 25% is calculated off the remaining loan amount. E.g. 20% taken out of $100,000 is $20,000, which leaves $80,000. 25% of $80,000 is also $20,000, which leaves $60,000 of the total loan amount). If a $ lender knows that 40% of their risk is completely covered, they ll be climbing over each other to offer you the lowest interest rates possible. QUALIFYING There are several aspects to qualifying for a loan, so we ll start with what s on most borrowers minds: credit scores. To get a conventional loan, you ll need a bare minimum score of 620, and will be penalized and/or have a hard time finding a loan if you have a score lower than 740. The VA loan program, on the other hand, has no minimum credit score requirements, and allows lenders to set their own. Many lenders set this at 620, many others set it at 580, and there are many lenders (like Low VA Rates, for example), that don t have hard floors for credit scores, and instead use a more subjective analysis of a borrower s credit history. As for debt-to-income ratios, conventional has a hard ceiling at 41%. While the VA loan program also has a ceiling at 41%, VA lenders are still able to approve borrowers with higher DTIs as long as the lender explains the reasoning in the final loan package when it s submitted to the VA. Overall you ll find that the VA loan program is easier to qualify for than a conventional loan, and for those borrowers who would have no trouble qualifying for either, the VA loan program will reward you more richly for your high credit score and low DTI. Quick TIp: Many VA borrowers try to get their Certificate of Eligibility before meeting with a lender. A lender can get your COE for you, and that means you don t have to deal with the VA s online request system. It s quicker, easier, and more streamlined to allow the lender to get your COE than to do it yourself. 3
AVAILABLE LOAN OPTIONS There are more ways to compare different loan programs, and they are very important. The most important of these are to consider your loan options within the different programs. If you ve got your mind set on a 30-year fixed mortgage, planning on paying it all the way through to the end, and nothing is going to change that, then other loan options may not be as important to you, but if you re ever planning on refinancing or are interested in looking at ways to save money over a 30-year fixed, then these are important options to know about. THE ADJUSTABLE-RATE MORTGAGE An adjustable-rate mortgage (ARM) is the opposite of a fixed-rate; the interest rate adjusts over the life of the loan instead of remaining the same. ARM loans can save you a ton of money over a fixed-rate depending on the circumstances, but they can also cost you more. A lot of the effectiveness of an ARM depends on the terms offered you. Conventional ARMs come with an initial fixed-rate period of usually 3, 5, or 7 years, but can go as low as 1 or as high as 10. After the fixed period, however, the interest rate can adjust as far as it needs to to catch up with the market, up to 5% higher than the starting rate. After that, the rate adjusts annually with an annual cap of 2% difference each year. The lifetime cap on the interest rate on an ARM is 5% higher than the starting rate (hence the limit on the first adjustment). VA ARMs are much, much better. Not only does the VA hybrid ARM offer much lower starting rates, the annual adjustments (including the first one) are limited to 1% each year, with the same lifetime cap of 5%. The VA hybrid ARM is also based off of a different index than the conventional ARM. The VA s index is the 1-year CMT, which is much less volatile than the LIBOR used by conventional ARMs. The CMT is averaged for the last twelve months, making your interest rate adjustments very predictable, and the 1% annual cap protects you from rapid upswings in the market. It s much more likely to save money (usually a lot of money) by using a VA hybrid ARM instead of a fixed-rate. It s not nearly as safe of a bet to use a conventional ARM instead of a fixed-rate. THE STREAMLINE REFINANCE A streamline refinance is a fast, cheap, and easy way to refinance your loan. The primary features of a streamline refinance are that an appraisal may not be required, the credit check and paperwork is minimal and usually the borrower cannot get cash out on the equity in their home when using a streamline. There s no such thing as a standard conventional streamline refinance. However, many banks offer their own streamline refinance options to borrowers. These offerings vary greatly in just how streamlined they really are and how expensive they are to the borrower. Generally speaking, though, streamline refinances offered by banks satisfactorily meet the goals and purposes of a streamline refinance. The VA loan program has a standard streamline refinance option called the IRRRL (Interest Rate Reduction Refinance Loan), which is actually really really cool. The credit check is minimal, an appraisal is usually not required, and the borrower can even get up to $6,000 to make energy-efficient improvements to their home. The Funding Fee is significantly cheaper on an IRRRL than on a normal refinance, and an IRRRL can close in as little as 10 days. The IRRRL can be much faster, cheaper, and easier than a streamline offered by a bank for a conventional loan, not to mention more consistent. Because the IRRRL does not require an appraisal, you can often refinance your home at the original value and take advantage of current interest rates even if you re underwater on the mortgage at the time. 4
DON T LEAVE THESE BENEFITS UNUSED On every important measurement, the VA loan program is a significantly better option than the conventional loan program. If you are a VA-eligible borrower, you owe it to yourself and your family to get a VA loan instead of a conventional loan. At the very least, you should apply for a loan with a VA-approved lender and see for yourself how much money you can save over the life of the loan. Feel free to give us a call at 866-569-8272 or contact us via our website. VISIT: LOWVARATES.COM TO LEARN MORE Call us toll-free at 866-LOWVARATES (866-569-8272) Chat Live on the Website Online at LowVARates.com 5