When To Choose a Conventional Loan Over a VA Loan

There’s a lot of hype about VA loans, and rightfully so. Few other mortgages allow you to purchase a home with 0% down. And that’s just the first of many reasons to consider getting a VA loan.

But despite the numerous benefits of VA loans, you might be wondering whether it's truly the best program for you. Even if you're eligible for a VA home loan, there are some circumstances where conventional financing is the more intelligent choice.

Here’s a breakdown of some different scenarios where you may want to choose a conventional loan over a VA loan.

You Have 20% Down

The most significant advantage of a VA loan is that it allows you to purchase a home with zero down payment. And unlike other low-down-payment loan options, VA loans don't require monthly mortgage insurance premiums.

But when you have 20% down, you'll probably pay less with a conventional loan. That's because VA loans have an upfront funding fee – 1.25% if you're putting 10% or more down – that you can avoid by going conventional. Plus, you won’t have to pay private mortgage insurance (PMI) on a conventional loan with 20% down.

For example: If you’re purchasing a $300,000 home with 20% ($60,000) down, you’d pay a $3,000 funding fee on a VA loan ($240,000 loan * 1.25% = $3,000).

If you’re wrapping the funding fee into your mortgage, you would end up with a $243,000 VA loan versus a $240,000 conventional loan.

All else equal, your principal and interest payments on a 30-year mortgage at an example rate of 7% would be:

• $1,596.73 on a conventional loan with no funding fee ($240,000)

• $1,616.69 on a VA loan with the funding fee ($243,000)

Something to keep in mind: It’s possible to get a VA home loan with a lower interest rate than a conventional loan, particularly if your credit score isn’t the best, thanks to VA mortgages being secured by the Department of Veteran Affairs. This variance could tip the scale back in the conventional vs VA loan debate, but you’ll need to talk with a lending professional to get a side-by-side rate and payment comparison.

You're In A Strong Seller's Market

It's a sad fact that many home sellers won't entertain an offer using VA financing.

They think the VA appraiser will require all sorts of nit-picky fixes. While VA appraisals are more stringent than conventional ones, they shouldn't be much of an issue for a quality home.

Still, some sellers will only accept a conventional loan offer. In these cases, you might consider using a conventional loan to purchase the property.

You could use a VA cash-out refinance 210 days after closing. This would eliminate your mortgage insurance and potentially refund some of your down payment back to you. Keep in mind that this strategy would result in extra costs, since a VA cash-out refi would require you to pay lender fees and other closing costs again.

You Have Great Credit

Even without 20% down, you may be better off choosing a conventional loan if you have great credit. While borrowers with low credit scores can get more attractive rates through government-secured mortgages, like a VA loan, the distinction between rates narrows as your credit score increases.

If your credit score exceeds 780, you may even receive lower rates with a conventional mortgage.

With a 10% down payment, you'll still have to pay PMI going conventional, but you won't incur the hefty VA funding fee (1.25% with a 10% down payment). Plus, you can drop private mortgage insurance on a conventional loan with 25% equity after two years.

For example: If you’re purchasing a $300,000 home with 10% ($30,000) down, you’d pay a $3,375 funding fee on a VA loan ($270,000 loan * 1.25% = $3,375).

If you’re wrapping your funding fee into your loan, you would get a $273,375 VA loan versus a $270,000 conventional loan.

All else equal, your principal and interest payments on a 30-year mortgage with 7% interest would be:

• $1,796.32 on a conventional loan with no funding fee ($270,000)

• $1,818.77 on a VA loan with the funding fee ($273,375)

Although paying (an estimated) $100 per month in PMI on a conventional loan would bring your monthly payment to $1,896.32, you'd only spend $2,400 in mortgage insurance if you canceled it when reaching 25% equity after two years.

All else equal, you'd save nearly $1,000 with a conventional vs VA loan when comparing two years of mortgage insurance to the 1.25% VA funding fee. And that's not counting the additional interest you'll pay over the life of a 30-year loan when you wrap the funding fee in.

In the example above ($273,375 VA loan vs $270,000 conventional loan, both at 7%), you’d end up paying more than $4,700 extra in interest across the life of the VA loan.

You Plan to Only Keep the Home a Few Years

Selling a home after just a few years is more challenging with VA mortgages, especially if home values don’t appreciate as rapidly as they have in recent history. That’s because wrapping the VA funding fee into your loan significantly reduces equity.

For example: Using a VA loan to purchase a $300,000 home with 0% down would incur a 2.15% (3.3% if you’ve used a VA Loan before) funding fee. Wrapping the $6,450 ($300,000 * 2.15% = $6,450) funding fee into your mortgage brings your total loan to $306,450.

Making standard monthly payments, it will take nearly two years before your loan balance drops below your original purchase price!

Plus, it costs, on average, 9-10% of a home’s price to sell (including agent commissions, taxes, and other selling fees). You may wind up needing to bring cash to the closing table with a VA loan if you plan to sell after just a few years.

You Plan To Turn the Property Into a Rental

VA mortgages require you to live in your home for at least 12 months. After that, you're able to turn the property into a rental. In fact, many service members who plan to be at a military installation for only a few years may purchase a home to rent once they're re-stationed.

In this scenario, obtaining a conventional loan might make more sense. That’s because, under most circumstances, VA guidelines only allow you to have one VA home loan at a time.

If you're planning to purchase another property at your next station or after your separation from the military, you may want to save your VA loan entitlement for that home. Otherwise, you'll need to refinance your rental property into a conventional loan to be eligible to use your VA loan entitlement again.

You Want To Save Your VA Entitlement for Another Home

If you plan to purchase another home before too long, especially if you anticipate buying a high-value property, you might want to save your VA entitlement.

Department of Veteran Affairs guidelines specify that you can only have one VA home loan at a time. You are able to pay off or refinance the loan into a conventional mortgage and keep the property, but you can only do this once.

If you're eyeing a bigger home purchase down the road, you may want to take out a conventional loan now and retain your VA entitlement. That's because unlike conventional loans, currently capped at $766,550 in most areas, VA mortgages have no maximum loan limit.

You’re Buying a Fixer-Upper

Although the VA does allow renovation financing, participating lenders can be challenging to find. Plus, VA minimum property requirements (MPRs) are more stringent than other mortgage types. And on top of that, renovations financed through VA loans must be completed by VA-approved contractors.

Conventional renovation financing is the simpler, more straightforward option for most people buying a fixer-upper. You'll even find renovation loans backed by the Federal Housing Administration, which may work in certain situations.

The best mortgage options for a fixer-upper include:

• Fannie Mae HomeStyle Renovation

• Freddie Mac CHOICERenovation

• FHA 203(k)

See Which Loan Is Better for You

There's a lot to consider when comparing conventional vs VA loans; in most cases, the VA home loan may be the better option. However, in many scenarios, a conventional mortgage is both cheaper and more practical.

With so many factors to consider, the best way to determine whether a conventional or VA loan is right for you is to apply with a lending professional with the expertise to guide you based on your unique financial situation.