Conventional Loan vs VA Loan: Comparing Mortgage Options
The Bottom Line
VA loans require $0 down and no monthly PMI, but there are still cases when you might choose a conventional loan, even if you’re VA-eligible.
While conventional loans are the most common type of mortgage, VA loans can offer great value for borrowers who qualify. We’ll compare aspects of both mortgage options to help you determine which may be the best fit for your individual homebuying needs.
VA Loans vs Conventional Loans
Looking for a quick overview of how VA loans and conventional loans stack up? Here is an easy-to-reference chart highlighting the primary differences between these two types of mortgages. We'll cover each of these topics – and other important information – in more detail a little further down in this article.
Conventional Loans | VA Loans | |
Credit Score | 620 | 580 - 620 |
Debt-to-Income Ratio | 43% | 41% |
Down Payment | 3% - 5% | 0% |
Mortgage Insurance | PMI with less than 20% down | VA funding fee |
Property Types | Multiple property types | Primary residences only |
Loan Limits | $806,500 (single-family) in most areas | No loan limits |
What’s Better? Conventional or VA?
The VA loan is the better option for eligible first-time homebuyers. Advantages include
Zero down payment
No monthly mortgage insurance
Typically lower rates than conventional
Usually easier credit score requirements
Should homebuyers ever use a conventional loan if they are VA-eligible?
Times when conventional is better.
You have 20% down: You’ll avoid the upfront VA funding fee and you won’t pay monthly mortgage insurance since you have 20% down
Seller will only accept a conventional offer: In tight markets, home sellers may not accept VA financing due to the misperception that VA appraisals are too tough.
The home is beat up: Some homes won’t qualify for VA financing but might squeak by conventional standards. However, you can try a VA renovation loan in this case.
You want to save your VA entitlement: If you’re planning on buying your forever home eventually, but want to keep this home as a rental, you might save your VA home loan entitlement for the future home.
Other reasons: There are other reasons you might choose conventional, discussed in our article When To Choose a Conventional Loan Over a VA Loan.
Government Backing vs Private Mortgage
Both conventional loans and VA loans are issued through mortgage providers such as banks, credit unions, and private lenders. VA loans, however, are insured by the US Department of Veterans Affairs. This federal backing reduces risk for lenders, translating into lower interest rates for borrowers, which can lead to lower monthly costs.
Because of their broader appeal, conventional loans are more widely available than VA loans. Most VA lenders also offer conventional loans, but not all conventional lenders offer VA-backed financing.
Eligibility
Most borrowers can apply for a conventional mortgage. VA loans, on the other hand, are only available to active-duty servicemembers, honorably discharged Veterans, and certain surviving spouses.
So, what criteria do lenders look for when approving conventional loans vs VA loans? Here are a couple of the most critical requirements.
Credit Score
Conventional lending guidelines require all borrowers to have a minimum credit score of 620. The VA, however, does not set fixed credit requirements. Instead, liberty is given to lenders to assess a borrower’s creditworthiness on an individual basis.
As such, most VA lenders look for a minimum credit score ranging from 580 to 620, although otherwise well-qualified applicants with lower scores may still be able to get approved through some mortgage providers.
Debt-to-Income Ratio
The debt-to-income (DTI) ratio is a metric that measures the portion of your qualifying income that goes to cover your ongoing financial obligations. This includes the loan you're applying for and installment payments for things such as auto financing and student debts.
For Example: If you earn $6,000 per month, currently have $750 in ongoing expenses, and are applying for a mortgage with $1,500 monthly payments, your DTI would be 37.5%.
Conventional lenders can approve borrowers with a DTI as high as 50%, but 43% is more common. Similar to credit score, the VA does not set a maximum debt-to-income level for the loans it backs. However, most lenders have upper limits ranging from 40% to 50%.
The lower your debt-to-income ratio, the more likely you will be approved and qualify for the most favorable interest rates with either type of mortgage.
Related: What Percent of Your Income Should Go Towards Your Mortgage?
Down Payments
One of the greatest advantages of a VA loan is that buyers can purchase without saving up for a down payment. VA loans are among the few true 0% down mortgage options. In contrast, conventional down payment requirements start at 3% for first-time and lower-income borrowers and 5% for everyone else.
For a $300,000 property, this would mean coming up with either $9,000 or $15,000 in cash in addition to any required closing expenses.
Related: What Is the Average Down Payment on a House?
Interest Rates
Because the federal government backs them, VA loans typically have lower interest rates than their conventional counterparts. However, various factors can impact your quoted interest rate, including your credit score, the size of your down payment, and the lender you choose to work with.
Occasionally, borrowers may find that they qualify for lower rates through a conventional lender, highlighting the importance of shopping around with multiple mortgage providers before committing to a single company or even a specific type of loan.
Mortgage Insurance and Other Fees
Since conventional loans are not government-backed, lenders limit their risk by requiring borrowers to obtain private mortgage insurance (PMI) on all loans with less than a 20% down payment (or 20% equity when refinancing).
Private mortgage insurance is risk-based, meaning borrowers with a higher credit score and larger down payment will pay a smaller premium than those with moderate credit who put a minimal amount down.
VA loans being insured by the Department of Veterans Affairs alleviates the need for ongoing mortgage insurance. However, they do have an upfront funding fee, which serves to ensure the stability of the VA home loans program.
In most cases, buyers taking out a 0% down VA loan will pay a funding fee of 2.15% of the total amount borrowed if it's their first time using their home loan benefit. Eligible applicants who have previously taken out a VA loan should expect a slightly higher VA funding fee of 3.3%.
However, VA borrowers who have a service-related disability rating of 10% or more can qualify for a funding fee waiver which eliminates this expense.
Occupancy and Property Types
Conventional and VA loans can both be used to purchase a home you plan to occupy as your primary residence for at least one year. However, borrowers aiming to buy a second home or investment property, as well as those who plan to live in the house for fewer than twelve months, will need to go conventional.
Are you looking to purchase a home with multiple residential units? Both conventional and VA loans allow you to buy these types of properties, although the VA will still require you to occupy one of the units as your primary residence.
Loan Limits
Conventional mortgages have maximum loan limits that are set by the Federal Housing Finance Agency (FHFA) and adjusted each year to keep pace with rising home values. These limits vary by the number of units the property has and the cost of living in the area where it’s located.
VA loans, on the other hand, do not have any fixed loan limits. The VA is willing to insure mortgages of any size with loans only restricted by the amount your income and debt level qualifies you to borrow.
This makes VA loans a good option for homebuyers who plan to exceed their area’s conventional loan limits and would otherwise need to apply for a more costly jumbo loan.
Appraisals
Both conventional and VA lenders require you to obtain an appraisal to ensure that the home you’re buying is worth at least the contracted purchase price. This helps to protect buyers from unintentionally paying above fair market value and keeps lenders from overextending loans that would be underwater from the start.
In addition to providing an expert opinion of value, VA loans go one step further and require appraisers to also verify that the home is safe, sound, and sanitary per the VA's minimum property requirements.
This process includes a slightly more in-depth assessment of the home, including:
Structural soundness
Roof condition
Electrical system
Water supply and sewage disposal
Signs of pest infestation or wood-destroying rot
Hazards such as chipped or peeling lead-based paint
While these requirements ultimately protect the buyer, they can make it more challenging to get a VA loan for properties that are not move-in ready. If the appraiser notes problems, sellers may need to remedy the issues for a VA loan to be approved.
Conversely, conventional loans have far more lenient appraisal requirements and generally allow you to buy fixer-uppers that need a small-to-moderate amount of work.
Home Inspections
Neither conventional nor VA loans require buyers to order a home inspection, which provides a more in-depth look at the condition of a property, its features, and the functionality of its mechanical systems than an appraisal. However, even though they’re not required, buyers are highly recommended to obtain a full inspection regardless of the type of loan they choose to go with.
Closing Costs
Closing costs are the expenses associated with purchasing a property and taking out a residential mortgage. These costs will be similar for both VA and conventional loans and can include lender-related and other charges such as:
Loan origination fees
Title insurance
Document recording fees
While these costs can vary based on your lender, other contributing vendors, and customary local practices, VA guidelines have buyer-protecting rules that limit the amount lenders can charge for originating a loan and restrict some other potential costs, such as prepayment penalties.
In most cases, closing costs will run between 2% and 4% of your total purchase price, regardless of the type of loan you choose. Keep in mind, however, that the VA does have an upfront funding fee, which can be considered a closing cost, although most borrowers choose to wrap this expense into their new loan balance.
Do Sellers Prefer Conventional Over VA Loans?
While a VA loan can provide qualifying homebuyers tremendous value, sellers tend to prefer offers with conventional financing. This is particularly true in hot housing markets where receiving multiple competing offers is commonplace.
Why do sellers prefer conventional loans over VA loans? A few of the most prominent reasons include:
The perception is that zero-money down VA loans are riskier than conventional mortgages, which require a down payment, and that VA borrowers are more likely to be denied funding or otherwise back out of their purchase agreement.
VA loans have stricter appraisal requirements, and many sellers are unwilling or unable to spend extra money on repairs or improvements for the buyer to get their mortgage approved.
Conventional loans can often close sooner than VA loans due to the latter having more detailed appraisal and underwriting requirements.
Refinance Options Down the Road
Both VA and conventional lenders offer multiple refinance options, and both programs are open to homeowners regardless of the type of loan that they originally acquired.
However, one type of VA refinance is only available to existing VA loan holders: the interest rate reduction refinance loan (IRRRL). An IRRRL is a streamlined low-doc mortgage that does not require a new appraisal, nor will you have to undergo a detailed credit check or reverify your income in most cases.
As a result, an IRRRL can allow you to refinance to reduce your interest rate cheaper and faster than most conventional options.
The downside is that you must have your mortgage for at least 210 days to qualify for an IRRRL. While not a streamline option, conventional rate and term refinances are available from day one for borrowers who meet Fannie Mae and Freddie Mac eligibility requirements.
Similarly, VA borrowers looking to refinance and receive cash back at closing must also have had their existing VA loan for a minimum of 210 days. Conventional cash-out refinances, on the other hand, require a loan seasoning period of at least twelve months, regardless of your current mortgage type.
Which Loan Type Is Right for You?
Frequently, borrowers who meet the eligibility requirements for VA loans find that they offer better value than conventional alternatives, particularly because of the lower interest rates and lack of required mortgage insurance – even with 0% down.
But that doesn't mean VA loans are the correct type of mortgage for every buyer, and there are certainly situations where a conventional loan would be a better fit. To determine whether a VA loan or conventional loan would be best for you, talk with a lending professional who can help you review your individual home financing needs.
