The interest rate is one of the most important factors to consider when deciding between a VA loan and a conventional loan.
Both loan types offer unique benefits, but understanding how their interest rates differ can significantly impact the overall cost of your monthly mortgage payments.
VA loans, which are available to veterans, active service members, and eligible family members, often have lower interest rates and more favorable terms than conventional loans.
This article will explore the key differences in interest rates between VA and conventional loans, helping you make an informed decision based on your financial situation.
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What is a VA loan?
A VA loan is a type of mortgage backed by the U.S. Department of Veterans Affairs, designed specifically to help veterans, active duty service members, and some surviving spouses purchase homes.
Unlike many other loan types, VA loans offer significant advantages, such as no requirement for a down payment, no credit score minimums, no private mortgage insurance, and competitive interest rates.
Eligibility requirements for a VA loan
You must be an active-duty member, a veteran, a member of the National Guard, or a reserve member. Spouses of service members who died in the line of duty or as a result of a service-related disability may also be eligible.
Here are other eligibility requirements for a VA loan:
- Certificate of Eligibility (COE): You’ll need this certificate to apply for a VA loan. It verifies to lenders that you meet the minimum service requirements. You can apply for the COE through the VA’s eBenefits portal.
- Credit and income requirements: While the VA does not require a specific credit score, private lenders might have their own requirements. Income must be stable and sufficient to cover the mortgage payments alongside other debts and obligations.
Benefits of VA loans over conventional loans
VA loans offer several advantages over conventional loans, including:
- No down payment: VA loans typically do not require a down payment, allowing veterans to finance 100% of the home’s price.
- No mortgage insurance (PMI): Unlike conventional loans, VA loans do not require monthly mortgage insurance, reducing monthly payments.
- Lower interest rates: VA loans often have lower interest rates due to government backing, making them more affordable over the loan’s lifetime.
- Credit flexibility: VA loans have more lenient credit requirements, making home ownership accessible to more veterans.
What is a conventional loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government, making it a popular choice for many homebuyers.
These loans are typically offered through private lenders like banks, credit unions, and mortgage companies. Common types of conventional loans include:
- 30-year fixed-rate mortgage: Offers consistent payments over a 30-year period, making it a stable choice for long-term homeowners.
- 15-year fixed-rate mortgage: Provides a shorter loan term with potentially lower interest rates, helping borrowers pay off their homes faster.
- 5-year adjustable-rate mortgage (ARM): Starts with a lower interest rate that adjusts periodically based on market conditions, offering initial savings for homebuyers who plan to move or refinance in a few years.
General eligibility criteria for a conventional loan
- Credit score of at least 620 to qualify for most conventional loans, though a higher score may be required to receive better interest rates.
- A downpayment of 5-20% is usually required, though minimum down payments can vary by lender, and options can be found with as little as 3% down.
- A debt-to-income (DTI) ratio no higher than 43% is typically preferred by lenders. This ratio helps lenders evaluate your ability to manage monthly payments and repay debts.
- You’ll need to provide documentation, such as W-2 statements, tax returns, and bank statements, to prove that you have a stable income and sufficient assets to cover the down payment and closing costs.
How do VA loan interest rates compare to conventional loan rates?
VA loans typically offer lower interest rates than conventional loans because they are backed by the Department of Veterans Affairs, reducing lender risk, and do not require private mortgage insurance.
Additionally, VA loans have more flexible credit requirements, which allows lenders to offer more competitive rates to eligible borrowers.
As of September 2024, the average 30-year fixed-rate for VA loans sits at approximately 6.68%, whereas conventional loans are slightly higher, averaging around 0.5% more for the same term.
Factors that influence interest rates
- Economic factors like inflation and federal reserve policies impact both VA and conventional loan rates.
- Higher credit scores typically secure lower interest rates by reducing lending risks.
- Shorter-term loans generally offer lower rates. The loan’s purpose (purchase, refinance, jumbo) also affects rates.
- Rates vary among lenders; comparing offers can lead to better rates.
Understanding fixed-rate vs. adjustable-rate mortgages
VA and conventional loans both offer fixed- or adjustable-rate options.
- Fixed-rate mortgages: Offer consistent monthly payments for the life of the loan, making budget planning easier. Generally, rates are higher than initial rates for ARMs but provide stability against rising interest rates.
- Adjustable-rate mortgages (ARMs): Start with lower initial rates that can change based on market conditions. This can lead to lower early payments but poses a risk of increasing rates over time, which could significantly raise future payments.
Which is better: a VA loan or a conventional loan?
Those who could qualify for both loans: Are you unsure if you should apply for a VA or conventional loan? Below is a quick checklist to help you decide the best option.
Who should consider a VA loan:
- Veterans, active military members, and some surviving spouses
- Those with lower credit scores or limited savings for a down payment
- Borrowers looking to avoid private mortgage insurance (PMI)
- Individuals seeking more flexible credit requirements
- Borrowers wanting potentially lower interest rates
Who should consider a conventional loan:
- Individuals with stronger credit histories who can secure lower interest rates
- Those looking to invest in real estate, such as second homes or rental properties
- Borrowers who can make a down payment and want to avoid PMI once 20% equity is reached
- Buyers interested in higher-priced homes that exceed VA loan limits
- People purchasing homes in need of significant repairs.
Explore your VA loan options today
If you’re a veteran or active service member looking to take advantage of the benefits of a VA loan, now is the perfect time to get started.
With no down payment required and flexible credit standards, VA loans offer an affordable path to homeownership.
Let MyPerfectMortgage.com match you with the perfect lender.
