Confused between VA loans and Conventional Loans? Here’s Some Help

Buying a home in Texas may top your list of New Year resolutions. The colorful culture, mouthwatering food, the plethora of employment opportunities and of course attractive homes, makes this state a dream destination to settle down in for many Americans. However, one of the major hurdles that prospective homeowners face is financing the entire investment, especially if you are an active military member or veteran.

This is where VA home mortgage loans play a crucial role. Despite the numerous advantages that VA loans offer, it has been shown that many veterans don’t apply for one. In 2004, VA loans accounted for only 2% of all mortgage loans in the U.S. The scenario improved in 2014, as the number increased to 8%.

One of the key features of VA loans is that it doesn’t require any down payment. Also, the VA loan rates in Texas are quite competitive as compared to conventional home loan programs. For instance, you may get a conventional loan with a low down payment, but the interest rate will be higher due to the higher risks involved.

Why VA Loans?
Here are just a few reasons you might want to choose a VA loan over a conventional loan:

No Downpayment - In recent times, lenders are asking for 10%-20% down payment for a conventional loan. VA loans are backed by the federal government, as a result, banks don’t require a down payment.

No PMI – A VA loan is backed by the government so that lenders don’t need private Mortgage Insurance (PMI) in the loan amount. This is an added expense that is required for conventional loans.

Lenient Qualification Standards - The qualification standards vary for different loans. The government-backed VA loans have less stringent qualification standards as the banks assume less risk.

Assigning an Interest Rate
There are several factors that are evaluated when assigning an interest rate for VA loans. Credit score, loan amount and lender’s fee charged to the veteran and the tenure for which you need the loan are some of the essential factors that are considered. VA loans don’t require a specific credit score but most lenders ensure that it is not lower than 620. A higher credit score ensures a better loan interest rate.

The lock-in period also plays an important role in determining the loan rate. The rates on the loan can vary from day-to-day, and at times even intra-day. This is the reason why it is essential to get the rate quotes on the same day and time.

A Bank Home Loan is Not Your Only Option

Most people, who want to buy a new home in a state like Texas usually consult a mortgage company that can help them find the most suitable property in the competitive housing market. If you too are looking to buy a home in this state, a bank loan is likely to be the first place you think of going. However, it is not your only option. Depending on your financial situation and preferences, you can also consider one of the following options for securing home loans in Texas.

Conventional Loan
These mortgages are offered by private lenders unlike others that are offered by government-sponsored ones. The two major types are –

Fixed rate mortgages -  Interest rates remain non-fluctuating for a determined time
Jumbo mortgages - even for borrowers with low credit scores; however, the down payment for Jumbo mortgages is larger than other mortgages.

Due to stringent lending regulations in the U.S, getting conventional mortgages has become increasingly difficult. Lending institutes are likely to reject loan applications if the borrower's’ monthly income and credit score are low.

FHA Home Mortgage Loan
The United States Federal Housing Administration (FHA) makes provisions for people who have less household income to be able to secure a home loan easily. Only approved mortgage companies can provide such loans. While the interest rate and other terms are favorable for people with lower cash reserves, they need to pay a minimum down payment of 3.5%. However, there is a 1.75% percent premium that is to be paid to the FHA upfront. This amount is usually adjusted in the loan. It means the burden falls on the shoulders of the lender. The overall amount paid by the borrower for an FHA loan is higher than other types of loans.

VA Mortgage Loan
This mortgage is for veterans, which can be sanctioned by approved lenders only. Veterans and their spouses (in the event of their death) can buy homes without a down payment if they can’t secure a private loan. There may be funding fees from zero (0) to 3.15%. The limit for this loan without a down payment can’t go beyond $625,500.

Loan for the First Time Homebuyers
In Texas, there’s the My First Texas Home Loan Program or TMP 79. Another program is known as the Texas Department of Housing & Community Affairs or TMP 77. These programs help people who have low to moderate incomes who have never owned a home (or at least not in the past three years). It helps borrowers get a competitive interest rate with a 30 year repayable mortgage. The amount may cover the down payment and the closing costs as well.

You may not be able to decide which program suits you the best. Keep in mind that the above-mentioned programs are not the only ones that exists. In order to make a smart and informed decision, contact an expert mortgage consultancy firm and learn about your options.