Difference Between VA and Conventional Loans for California Borrowers

We’ve written about the different types of home loans available to California home buyers in the past. Today, we want to conduct a side-by-side comparison between VA-guaranteed home loans and conventional mortgage loans. Specifically, we will examine the differences between these two popular financing options.

Understanding your mortgage options is the first step to choosing the right one. So, let’s take a look at the key differences between VA and conventional loans when buying a house in California.

Choosing the Right Financing Option

Let’s start with an important clarification. VA loans are only available to military members, veterans, and certain qualifying spouses. So our comparison between VA and conventional loans is only applicable to this particular group.

Here are some definitions that will make this easier to understand:

• A conventional loan is a type of mortgage loan that is not guaranteed or insured by a government agency such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the US Department of Agriculture (USDA). Instead, conventional loans are backed by private lenders, such as banks or mortgage companies, and follow guidelines set by Fannie Mae and Freddie Mac, two government-sponsored entities that buy and sell conventional mortgage loans on the secondary market.
• A VA loan is a type of mortgage loan that is guaranteed by the Department of Veterans Affairs (VA) and is available to eligible veterans, active-duty service members, and certain surviving spouses. VA loans are designed to help these individuals purchase, build, or improve homes.

So the VA loan program is limited to certain military borrowers, while the conventional option is open to all types of borrowers. With that distinction out of the way, let’s explore the main differences between VA home loans and conventional mortgages, as they apply to home buyers in California.

Option 1: VA Home Loans

The VA loan program was created to reward military members for their service. It provides a number of unique benefits and advantages, when compared to conventional mortgage products.

The biggest benefit is something we’ve written about before. California home buyers who use a VA loan to purchase a house can finance up to 100% of the purchase price. This means they can avoid making a down payment entirely — a big deal in an expensive state like California. In fact, this is one of the only programs available that allows borrowers to finance 100% of the home price.

The VA loan program offers other advantages as well. In addition to avoiding the down payment expense, qualified borrowers can avoid paying for mortgage insurance.

Typically, a person who makes a low down payment on a house has to pay for mortgage insurance, to offset the  added risk. So, for example, if you use a conventional loan with a low down payment of around 5%, you would probably have to pay mortgage insurance. But that’s not the case with a California VA home loan.

VA loans are also one of the easiest mortgage programs to qualify for. That’s because the federal government guarantees these loans, giving mortgage lenders a layer of protection they wouldn’t otherwise have. This in turn allows lenders to ease the qualification criteria for borrowers, making it easier to qualify for these loans.

Option 2: Conventional Loans

We’ve already covered the main difference between VA and conventional loans in California. VA home loans receive government backing, in the form of a guarantee, while conventional loans do not.

This difference paves the way for other differences as well. For example, it’s typically harder to qualify for a conventional loan when compared to a VA-guaranteed mortgage.

There’s another big difference as well, and it has to do with down payments. Most home buyers in California who use a conventional loan have to make some kind of down payment. The minimum required down payment can vary based on the amount being borrowed and other factors. In California, the minimum upfront investment for a conventional loan typically ranges from 3% to 20%.

Private mortgage insurance is another important consideration here. If you use a conventional loan to buy a house in California, and it accounts for more than 80% of the home’s value, you will probably have to pay for private mortgage insurance (PMI). This recurring expense gets added onto your monthly mortgage payments.

According to research by Freddie Mac, borrowers can expect to pay “somewhere between $30 and $70 per month for every $100,000 borrowed,” for a standard private mortgage insurance policy.

The Key Differences in a Nutshell

We’ve covered a lot of different factors in this article. So let’s wrap up with a simple explanation of the differences between VA and conventional loans, as it relates to borrowers.

• VA loans are limited to military members, veterans and certain spouses.
• Conventional loans, on the other hand, are available to all types of home buyers.
• VA loans allow borrowers to avoid making a down payment, by financing up to 100%.
• Conventional loans typically require at least 3% down (or more for a larger loan size).
• VA loans are one of the easiest mortgage types to obtain, for the reasons stated earlier.
• Conventional home loans tend to have stricter criteria, by comparison.

Want to explore your options? This article provides a basic overview of the differences between VA loans and conventional mortgages in California. If you’re a military member and eligible for the VA loan program, please contact us with any questions you have. We offer both types of loans and serve the entire state of California!