As a potential homebuyer, deciding which type of mortgage to choose is a big decision. If you are a veteran or active-duty service member, you may be considering a VA loan, while others might be looking into a more traditional conventional loan. Both loan types offer different advantages and drawbacks, and understanding the key differences can help you make the best choice for your home purchase.

At BrickWood Mortgage, Inc., we work with clients in Horry County, SC, to help guide them through the mortgage process. In this short guide, we’ll break down the pros and cons of VA loans and conventional loans to help you understand which might be the right fit for you.

What is a VA Loan?

A VA loan is a mortgage that is backed by the U.S. Department of Veterans Affairs. It’s designed to help veterans, active-duty military members, National Guard members, and eligible spouses purchase a home. VA loans offer several benefits, such as no down payment and no private mortgage insurance (PMI), making them a popular choice for those who qualify.

What is a Conventional Loan?

A conventional loan is a type of mortgage that is not backed by the government, unlike VA loans or FHA loans. It’s typically offered by private lenders such as banks, credit unions, or mortgage companies. Conventional loans usually require a higher credit score and a down payment, but they may offer more flexibility in some cases.

Now, let’s take a closer look at the pros and cons of both loan types to help you decide which is the best option for you.

Pros of a VA Loan

1. No Down Payment Required

One of the most significant advantages of a VA loan is that it allows you to buy a home with no down payment. Unlike conventional loans, which typically require a down payment of at least 3% to 20%, a VA loan allows qualified borrowers to finance 100% of the home’s purchase price. This is a huge benefit for many veterans and service members who may not have significant savings for a large down payment.

For example, if you’re purchasing a home in Horry County, SC, priced at $250,000, you could potentially buy it with no down payment required, making homeownership much more attainable.

2. No Private Mortgage Insurance (PMI)

Conventional loans often require private mortgage insurance (PMI) if your down payment is less than 20%. PMI is an additional monthly cost added to your mortgage payment that protects the lender in case you default on the loan. With a VA loan, however, you don’t have to worry about PMI, even if you’re financing 100% of the home’s value. This can significantly lower your monthly payments and save you money over time.

3. Lower Interest Rates

VA loans typically come with lower interest rates compared to conventional loans. Since the loan is backed by the VA, lenders face less risk, which allows them to offer more favorable terms. A lower interest rate means you will pay less in interest over the life of the loan, which can result in substantial savings.

4. Easier Qualification Requirements

VA loans are known for having more lenient qualification requirements compared to conventional loans. They tend to be more flexible when it comes to credit scores, debt-to-income ratios, and financial history. While conventional loans may require a higher credit score (typically around 620 or higher), VA loans often accept borrowers with lower credit scores (as low as 580) if they meet other requirements.

For veterans and active-duty service members who may have faced financial difficulties in the past, this can make it easier to secure a loan.

5. Capped Closing Costs

VA loans have limits on the amount of money you can be charged for closing costs. These limits help to protect you as the borrower from high fees, making your home purchase more affordable. Additionally, the seller can pay some of the closing costs for you, which further reduces your upfront expenses.

Cons of a VA Loan

1. VA Funding Fee

One downside of a VA loan is the VA funding fee. This one-time fee is paid to the Department of Veterans Affairs and helps keep the VA loan program running. The fee is typically a percentage of the loan amount, but it can vary depending on a few factors. The VA funding fee generally ranges from 0.5% to 3.3%, depending on factors such as whether this is your first use of a VA loan, the loan type, and whether you make a down payment greater than 5%. Most veterans pay a fee of 2.15%, but if you’ve used a VA loan before, the fee may be slightly higher, and if you make a down payment of more than 5%, the fee may be lower.

While the VA funding fee can be rolled into the loan, it’s still an added cost that you need to be aware of when considering a VA loan.

2. Limited to Eligible Borrowers

Not everyone can qualify for a VA loan. Only veterans, active-duty military, National Guard members, and eligible surviving spouses are eligible for a VA loan. If you don’t meet the eligibility requirements, you won’t be able to take advantage of the benefits of a VA loan. Conventional loans, on the other hand, are available to any qualified borrower, regardless of military service.

Pros of a Conventional Loan

1. More Flexibility in Loan Terms

Conventional loans offer more flexibility in terms of loan amount, repayment periods, and other conditions. While VA loans are a great option for eligible borrowers, they have certain restrictions in terms of the types of properties they can be used for and the amount you can borrow. With conventional loans, you have more room to negotiate the terms that best suit your financial situation.

2. No Funding Fee

Unlike VA loans, conventional loans do not require a funding fee. While they may require private mortgage insurance (PMI) for borrowers who put down less than 20%, you won’t face the additional costs associated with a VA funding fee.

3. Can Be Used for Any Type of Property

VA loans are intended primarily for the purchase of a primary residence, and there are restrictions on the types of properties that can be financed, such as rental properties or vacation homes. On the other hand, conventional loans can be used to finance a variety of property types, including second homes, investment properties, and vacation homes.

4. Potentially Lower Overall Costs for Larger Down Payments

If you have the ability to make a larger down payment (typically 20% or more), conventional loans may offer lower overall costs because you can avoid paying PMI. The more you put down, the less you’ll have to borrow, and this could result in lower monthly payments and less interest paid over the life of the loan.

Cons of a Conventional Loan

1. Higher Down Payment Requirements

Conventional loans typically require a higher down payment compared to VA loans. If you want to avoid paying private mortgage insurance (PMI), you’ll usually need to put down at least 20% of the home’s purchase price. Even if you can get by with a smaller down payment, conventional loans generally require a minimum of 3% to 5%.

2. Higher Interest Rates for Lower Credit Scores

Conventional loans are more dependent on your credit score than VA loans. If you have a lower credit score, you may face higher interest rates and less favorable loan terms. In contrast, VA loans are more forgiving with credit score requirements, making them a better option for veterans with less-than-perfect credit.

3. Private Mortgage Insurance (PMI)

If you put down less than 20% with a conventional loan, you will most likely be required to pay private mortgage insurance (PMI). PMI adds to your monthly payment and can increase the overall cost of your mortgage. While you can eventually cancel PMI once you’ve built enough equity in your home, it’s an added cost that doesn’t exist with VA loans.

Conclusion: Which Loan is Right for You?

Choosing between a VA loan and a conventional loan depends on your individual circumstances. If you are a veteran or active-duty military member, a VA loan offers significant benefits, including no down payment, no PMI, and lower interest rates. However, if you don’t qualify for a VA loan or prefer more flexibility in your loan terms, a conventional loan could be a good option, especially if you can afford a larger down payment.

At BrickWood Mortgage, Inc., we help clients in Horry County, SC, explore all their mortgage options and find the one that best suits their needs. Whether you’re interested in a VA loan or a conventional loan, we’re here to guide you through the process and help you secure the best deal possible. Reach out today to get started! Call us now at (843) 314-4101.