If you’re among the 19 million U.S. veterans1 you might be aware of the VA loan program which allows vets to purchase a home with as little as 0% down. These loans provide a way for veterans to become homeowners even if they haven’t saved for a down payment allowing them to build wealth through real estate more quickly than they otherwise would be able to. It’s a great loan program but it’s also not the only type of loan available to vets. Depending on your financial profile you might be eligible for many other loan programs as well. How can you go about deciding which loan product is right for you?
VA Loan Eligibility
These loans are available to veterans with an honorable discharge or who are still on active duty, subject to minimum time in service requirements listed on the VA website2. According to the VA you might also be eligible for a VA loan if you’ve served as a member in certain organizations such as:
- Public health services officer
- Cadet at West Point, Air Force Academy, US Naval Academy, or Coast Guard Academy
- Officer of the National Oceanic & Atmospheric Administration
The language on the VA website makes it sound like the above list isn’t exhaustive. If you think you might qualify, register and apply for benefits at https://www.ebenefits.va.gov
Why Consider a VA Loan in the First Place?
The headliner benefit is the ability to take out a mortgage with a 0% down payment. For someone with limited savings but a large, stable income, this is huge! Instead of continuing to rent and save, you can begin building equity as soon as you’ve created sufficient emergency savings. A second benefit is that the interest rate is competitive and may be lower than other types of loans. What’s more is that there also is no mortgage insurance requirement when the down payment is less than 20%.
The catch? There’s an upfront funding fee that can range from 1.4-3.6% of the total loan amount. Placing 0% down on a $350k home will result in a funding fee of $8400
The Federal Housing Administration began back in 1934 in the midst of the Great Depression. The FHA aims to make homeownership more attainable by insuring mortgages for lenders like banks and today insures over $1.3T worth of mortgages. This can help buyers because when the lender takes on less risk, they are more willing to issue a mortgage.
FHA backed loans require as little as 3.5% down, have lower credit score requirements than conventional loans, and don’t have an upfront funding fee like a VA loan. The major limitations are (1) these loans are only available for primary residences and (2) you pay mortgage insurance throughout the course of the loan. The mortgage insurance would not apply if you refinance the loan in the future and have 20% down.
Your Run of the Mill Conventional Loan
Conventional or conforming loans are what you likely first think of when a mortgage comes to mind. They have more strict credit requirements than VA or FHA loans and are limited in size to a loan amount of about $650k nationwide, though the amount is higher in some high cost of living metros. One big misconception with conventional loans is that they require a high down payment, usually 20%. In reality, they can be funded with as little as 3% down!
If conventional loans have low down payment options just like VA and FHA loans, then why don’t most people associate them?
Conventional loans require higher credit requirements which tend to be correlated with the ability of that same borrower to make a higher down payment. That is, borrowers who have higher credit scores are more likely to also be able to make a higher down payment. If you do have a high credit score (say 720+) but can’t make a large down payment then you might be able to get a great deal on a conventional loan with a low down payment.
Jumbo Loans. Not just for Donald Trump
Despite sounding cartoonish to some, jumbo loans are a real type of loan product. A jumbo loan is simply a mortgage which exceeds the conforming limits described above. If you’re in a high cost of living area (HCOL) like San Francisco, you may very well need a jumbo loan to afford the median priced home! It’s not surprising then that Google Trends data shows that the most common searches for jumbo loans come from areas of the country with the most expensive real estate.
While there are differences from conventional loans that matter to the bank that originates these mortgages, there is little practical difference to the borrower. For the borrower these are just larger mortgages that might require slightly more documentation for underwriting. Given the size of the loan you can also expect higher credit requirements to qualify.
There are multiple low down payment loan options for veterans looking to become homeowners beyond the VA loan. Depending on your credit history, down payment, and desired location you might be better off getting a conventional loan. Beyond these nationwide loan programs there are also many state run programs that can make sense. As a personal example I used a Wisconsin first time home buyer’s program to purchase my first home in Madison, WI. I did so because it was a starter home that I didn’t expect to stay in longer than 5-6 years, the program required only a 5% down payment, and the mortgage insurance was very inexpensive.
Each circumstance is unique but you can use this table as a starting point for thinking about whether or not a VA Loan makes the most sense.
|If you have:||Then consider a:|
|A good credit score and can make at least a 3% down payment||Conventional Loan|
|A good credit score, high income, and need to borrow more because you live in a HCOL area||Jumbo Loan|
|A poor credit score and can make at least a 3.5% down payment||VA Loan or FHA loan|
|No ability to make a down payment today||VA Loan|