Decide between a VA loan or one installment loan may seem easy. No down payment, no mortgage insurance, a better interest rate – a VA mortgage wins hands down, right?
But when you consider things like the VA financing fees and maybe put enough money on a installment mortgage to forgo mortgage insurance, the choice can be more complex. And, some of the benefits of the VA loan, such as no minimum credit score and no maximum debt ratio, are often overstated.
Here are the factors to consider when deciding between a mortgage from the Department of Veterans Affairs and a installment loan.
VA loans vs installment loans
Primary or secondary residences; investment properties.
Initial VA loan financing costs and other costs, such as loan origination costs.
Varies by lender, but usually includes a set-up fee.
Usually required if deposit is less than 20%.
Varies depending on the lender; no requirement set by VA.
The FICO 620 score is typical.
For starters, the type of property you buy can be a primary factor in deciding VA versus installment.
“The VA loan is for the primary residence only,” says Donna Bradford, assistant vice president of the Navy Federal Credit Union. “While a installment loan can be used to purchase a [home], you can use it to buy a second home – maybe a vacation home – or you can also use it to buy an investment property, a rental property. “
A major advantage of a VA loan is that no deposit is usually required. A lender may require a down payment if the purchase price of a property is greater than its current market value. This can happen in competitive housing markets with a multiple bid situation.
Lenders offering installment loans have traditionally preferred larger down payments, but these days it’s easy to find installment mortgages available with down payments as low as 3% – or even less.
Then there is the issue of fees.
A VA insured loan requires a finance charge to help cover the costs of the loans in default. This is a one-time initial amount that is between 1.4% and 3.6% of the loan amount, depending on your down payment and whether you have used your VA loan benefit before. Fees are often added to the loan amount, which increases your payment and adds to the interest you pay over the life of the loan.
Veterans who receive a VA disability award are exempt from having to pay fundraising fees, according to the Department of Veterans Affairs.
If your down payment is less than 20%, a installment loan will require private mortgage insurance, which protects the lender in the event of default on the loan. This could be a one-time fee paid at closing, an ongoing fee built into your monthly payment, or a combination of the two. This, and the amount you pay for PMI, varies with each lender. You can use a PMI calculator to estimate the cost. Depending on your credit score and the amount of your down payment, PMI fees can range from 0.55% to 2.25% of the loan amount, according to Genworth and the Urban Institute.
VA loans do not need mortgage insurance.
A down payment reduces but does not eliminate the cost of VA financing. However, with 20% off a installment loan (let alone with some lenders – it’s 5% with Navy Federal, Bradford says), you won’t have to pay PMI.
Credit score standards
You can hear lenders – and the Department of Veterans Affairs – claim that VA-insured loans have no minimum credit score and no maximum debt ratio. This may be true when it comes to VA, but not so much in the real world of lenders, according to Bradford.
“Most VA lenders use credit score benchmarks. This minimum will vary, but most VA approved lenders look for [for] at least 620, ”she says Bad credit installment loans not payday loans .
In fact, the average FICO credit score for home purchase loans in Virginia that closed in 2016 was 707, according to mortgage industry software provider Ellie Mae. installment mortgages closed with an average FICO score of 753.
If you have a lower credit score, you may want to consider an FHA loan.
VA Marketing Material Says There Is No Maximum debt to income ratio, but it also says that a “lender must provide compensating factors if the total debt ratio is greater than 41%”.
Greg Nelms, VA chief of loan policy, says these “offsetting factors” include residual income. This is the net income remaining at the end of the month following your new mortgage payment and all living expenses.
So yes, VA loans are easier to qualify with regards to debt and credit scores, but maybe not as easy as the VA promotional material might have you believe.
Another plus for the VA: it will likely have a lower interest rate than a installment loan. For 30-year fixed-rate loans that closed in November 2020, VA loans had an average rate of 2.72%, compared to 2.99% on a installment mortgage for the same term, according to mortgage data provider Ellie Mae. .
So what mortgage?
“It gets to the point where it’s really a personal decision,” Bradford says. You want to make a solid financial decision, the best you can, she adds.