Should I go Conventional instead of VA?

For active-duty service members and military veterans, using a VA loan to purchase your primary residence is almost always your best financing option. However, there are unique scenarios when a Conventional loan may be better for you, and that’s coming from a 20-year VA Loan Specialist! This newsletter explores those specific scenarios.

Scenario #1: ?You are making a down payment of 20% or more.

By putting down 20% or more on a Conventional loan, you will not incur the cost of mortgage insurance, which then makes a Conventional loan more competitive with a VA loan. VA’s biggest benefits are no down payment, no mortgage insurance, and competitive interest rates. With the first two equal in this scenario, it will come down to the interest rate difference between the two programs as well as the VA funding fee, if applicable.

If you are a disabled veteran, the VA funding fee is waived, so in that case, with 20% down on both programs, it is simply a matter of comparing interest rates between VA and Conventional -- the lower rate wins. However, if you do not have a VA disability rating, then you will incur a VA funding fee of 1.25% of the loan amount (assuming a down payment of 10% or more). It’s a one-time fee and is usually rolled into your loan. In that case, you need to determine if the interest rate on VA is better by enough to cover the cost of the VA funding fee, when compared to your Conventional loan options.

What you need to know is that it only takes a 0.125 improvement in the interest rate to offset the 1.25% VA funding fee. For instance, all else being equal, a VA rate of 5.00% with a 1.25% VA funding fee, would have a lower monthly payment than a Conventional rate of 5.125%. So, if the Conventional rate is higher by 0.125 or more, VA is a better option. If the Conventional rate is the same or better than VA and you have a VA funding fee, then going Conventional is better.

Scenario #2: ?You want to buy your new home without your spouse.

This is assuming the property is in Texas. Since Texas is a community property state, your spouse must be on the VA loan application (as either a co-borrower or a non-purchasing spouse) and their credit will be pulled, and their debts will be counted in your VA loan qualification. They do not have to be on the VA loan, but they are still part of the transaction in many ways.

If you were to go Conventional instead, your spouse would not need to be involved, and their debts would not be included, nor would their credit scores. This could potentially keep your debt-to-income (DTI) ratio lower and make it easier to qualify for a higher pre-approval amount. On the flip side, the DTI on VA loans is much more flexible than on Conventional loans, so sticking with VA and including your spouse’s debts may still work in many instances. Ask your lender to run both scenarios to determine which option is best for your particular situation.?

Scenario #3: ?You do not want an escrow account for your new mortgage.

Most lenders require an escrow account for homeowner’s insurance and property taxes on VA loans. That means that homeowner’s insurance and property taxes are included in your monthly payment. It is not required by the VA, per se, but lenders who fund VA loans usually require an escrow account. Even with 20% down on VA, you are still typically required to have an escrow account. Sometimes lenders will waive escrows by request, but that is becoming harder and harder to do these days, with investors refusing to purchase VA loans that don't have an escrow account.

So, if you don’t want an escrow account, then going Conventional may be an alternative. Typically, you can waive escrows on a Conventional loan, but you will likely have to put down 20% and pay a one-time fee of 0.0025 of your loan amount in order to do that. (That's $250 for every $100,000 borrowed.) Is that worth it to you? If so, Conventional may be the way to go.

Scenario #4: ?You are planning to recast your loan in the future.

First, what is recasting? A mortgage is recast when you make a large lump-sum payment toward the principal balance of your loan and then your lender re-amortizes your payment over the remaining loan term, thus lowering your monthly payment. Re-amortizing just means the new, lower loan balance is spread out over the remaining term, so that your loan is paid off at the same time as your original mortgage term.

Perhaps you finally sold your previous home, or you got an inheritance, and now you have a large lump-sum of cash to apply to your mortgage balance. When you make that large lump-sum payment, you knock years off your mortgage term, but the monthly payment does not change. With recasting, instead of reducing the term of your loan, you are greatly reducing your monthly payment. How much it reduces your monthly payment, of course, depends on the size of the lump-sum payment that you make.

The catch is that VA loans do not allow recasting! So, if you know you are likely going to make a large lump-sum payment in the future AND instead of reducing the term of your loan you will want to reduce your monthly payment with recasting, then going Conventional instead of VA gives you that option. (Incidentally, most lenders charge a fee for recasting, but it’s usually less than $500.)

Scenario #5: ?You want to purchase a condo that is not VA-approved.

The VA has a publicly-accessible list of VA-approved condos online. Here is the link: https://lgy.va.gov/lgyhub/condo-report. First, find your condo project on the list, then check the condo status. Is it “Accepted Without Conditions” or “Accepted With Conditions”? Either way, that’s good news. Is it “HUD Approved” or “Rejected”? Either way, that’s bad news. If it says "Pending" then a request for approval may be in process. Or maybe it is not on the list at all, which means it is not approved, because it was never submitted to the VA for approval.

If the subject property is not “Accepted With/Without Conditions”, then the best option is to see if the seller is willing to take a longer closing period so that you have time to get the condo approved by the VA. That process can take anywhere from a couple of weeks to a month. If the VA rejects the condo, you still may be able to proceed with a one-time waiver, which we recently did for one of our VA buyers which closed and funded on a VA loan.

If the seller is not willing to wait or the condo project is simply not able to get approved by the VA, then going Conventional for your financing could be the answer. That being said, when you go Conventional, your lender is going to consider if the condo is warrantable or not warrantable and that will have other implications for your financing. Ultimately, going VA on a condo is usually your best option though and we can make those submissions to the VA on your behalf.

Scenario #6: ?You have most or all of your VA entitlement tied up.

When you already have most or all of your VA entitlement tied up in a property or properties, and you don’t want to sell them before your new purchase, then going Conventional may be the only option for you. You could perhaps refinance one of your VA loans out of VA, but you only get one one-time restoration when you pay off or refinance a VA property without selling it. Whether or not that makes sense for you, will really depend on what current interest rates are compared to the rate on your current mortgage. Basically, if you don’t have the VA entitlement to go VA, then Conventional may have to be your back-up plan.?

But, after all that… Do you qualify for a Conventional loan?

Just because a Conventional loan may be better for you in a particular situation, like the scenarios listed above, that does not mean it is an option for everyone. Debt-to-income ratios are much more stringent on Conventional loans and Conventional loans are harder to qualify for than VA loans. If you are going Conventional instead of VA, you’ll need to be sure you actually qualify for the program and that the interest rate and other terms are beneficial for you. There are also other programs, such as FHA and USDA loans, to consider as well, but that’s a topic for another time.

In Summary…

VA truly is the best mortgage option for the vast majority of active-duty military members and veterans in the vast majority of situations; however, if you have great credit and you are putting down at least 20%, a Conventional loan may be better for you. Or, if you want to make a new home purchase without your spouse, or waive escrows, or recast your new loan, then a Conventional loan may be better too. Or, if you are wanting to purchase a condo that is not VA-approved, or you don’t have enough VA entitlement to use it again, then a Conventional loan may be the answer. In just about all other instances, VA will be the way to go!

Got questions about VA loans?

Great, just email?[email protected]?or call/text 512-357-7762. Are you interested in receiving my monthly VA newsletter by email, along with dates of upcoming VA classes and other learning opportunities? If so, subscribe here. Everyone is welcome!

Note: Veterans United Home Loans is a VA-approved lender, not affiliated or endorsed by any government agency, including the VA. Chad Bowman, Austin Branch Manager, NMLS 191475. Company NMLS 1907. Equal Opportunity Lender. More info. at ChadBowman.com.