VA loans vs. conventional loans: What’s the difference?
Key takeaways
- VA loans are government-backed loans that help veterans, active-duty service members and surviving spouses buy or build a home.
- Conventional loans are backed by private sector lenders, such as banks, credit unions and online lending companies.
- In addition to the military-related requirements, there are other differences between the two loan types, including credit score and down payment minimums.
VA loans offer 100-percent home financing to qualified veterans, active-duty servicemembers and surviving spouses. If you’re eligible for a VA loan, you might assume it’s a better option than a conventional loan. Here’s how they compare.
VA loans vs. conventional loans
Military service isn’t the only difference between VA and conventional loans. When deciding between a VA loan and a conventional loan, consider your down payment savings, credit score, debt load and the type of property you’re looking to finance.
VA loans
A VA loan is for members of the military and veterans and can be used to purchase, build or refinance a home. It’s backed by the U.S. Department of Veterans Affairs (VA), meaning the VA guarantees the loan on behalf of the mortgage lender in the event the borrower stops making payments. VA loans are only available from VA-approved mortgage lenders.
The benefits of a VA loan include no down payment and no mortgage insurance requirements. VA loans also tend to have lower interest rates and looser credit standards. However, VA loan borrowers will need to pay a funding fee, a one-time charge ranging up to 3.3 percent of the loan amount.
Conventional loans
A conventional loan is the most popular type of mortgage. In contrast to a VA loan, it isn’t backed by the government. It’s available through many kinds of mortgage providers, including banks and online lenders.
For the most part, conventional loans have stricter eligibility requirements and guidelines than VA loans. You’ll also need to purchase private mortgage insurance (PMI) if your down payment is less than 20 percent. However, conventional loans offer more flexibility with the types of properties that you can buy.
Is a VA loan better than a conventional loan?
While one loan type isn’t necessarily superior to the other, VA loans have some enticing benefits — if you’re eligible. Here’s why a VA loan could be a smarter option for you financially than a conventional mortgage:
- VA loans don’t require a down payment. If you have full entitlement to your VA benefits, you won’t have to spend months saving up to cover a down payment.
- VA loans don’t require mortgage insurance. Even with no down payment, you won’t have to pay mortgage insurance premiums.
- VA loans generally allow for greater flexibility. A lower credit score or higher debt load won’t necessarily disqualify you from a VA loan.
VA loan vs. conventional loan requirements
VA loan |
Conventional loan |
|
|---|---|---|
| Eligible properties | Primary residence only | Primary and secondary residences; investment properties |
| Credit score minimum | No formal minimum set by VA; many lenders look for 620 or higher | 620 |
| DTI ratio maximum | No formal maximum set by VA; many lenders look for 41% or lower | Typically 36%, but can range up to 50% in certain circumstances |
| Down payment minimum | None | 3% |
| Loan limits | No limit unless borrower has defaulted in the past or already has one active VA loan | $766,550; $1,149,825 in costlier housing markets |
| Mortgage insurance | No mortgage insurance | Mortgage insurance required if down payment lower than 20% |
| Fees | Closing costs plus funding fee ranging up to 3.3% of loan principal | Closing costs |
The key differences between VA loans and conventional loans include:
Credit score for VA loan vs. conventional
VA loans sometimes have a more relaxed credit threshold compared to conventional loans. That’s because the VA doesn’t impose a minimum credit score requirement. Some lenders, however, do set their own minimum (known as an “overlay”), often 620. With a conventional loan, you’ll almost certainly need a credit score of at least 620.
Down payment for VA loan vs. conventional
For most, the biggest appeal of a VA loan is the fact that there’s no requirement to put money down. For a conventional loan, you’ll need to put at least 3 percent down.
DTI ratio for VA loan vs. conventional
Your debt-to-income (DTI) ratio is the percentage of your gross monthly income spent on debt obligations, such as a car payment or student loans, compared against your total gross monthly income. Say you bring in $4,500 a month, but spend $1,200 of that on debt payments. In this case, your DTI ratio would be about 27 percent.
Again, the VA doesn’t impose a maximum DTI ratio, but many lenders like to see this figure at or below 41 percent. For a conventional loan, most lenders hold fast at 36 percent. Some go up to 43 percent or even 50 percent.
Mortgage insurance for VA loan vs. conventional
Mortgage insurance is a type of policy, paid by you, that protects the lender if you stop repaying your mortgage. With a conventional loan, you’ll need to pay these insurance premiums if you put down less than 20 percent. With a VA loan, there isn’t any mortgage insurance requirement at all.
Property eligibility for VA loan vs. conventional
You can only use VA loans to buy a primary residence that you plan to live in. On the other hand, you can use a conventional loan to purchase any type of home, including a primary or secondary residence. Investment properties and vacation homes are also eligible.
Fees for VA loan vs. conventional
Both types of loans come with closing costs, such as an appraisal fee or title insurance payment. VA loans, however, also charge a funding fee up to 3.3 percent of the amount you’re borrowing. (Note: Disabled veterans who receive disability payments are exempt from the VA funding fee).
How to choose the best loan option for you
If you qualify for both a VA and conventional loan, take the following steps to determine which is best:
- Compare mortgage offers: Look at offers from at least three mortgage lenders, ideally all on the same day. The rates on VA loans can sometimes be more attractive than conventional loan rates, but it depends on the lender you work with and other factors. (If you can get a lower rate with a VA loan, that might make it worth it, especially now as rates move up. If your credit score needs work, a VA loan might also offer more flexibility than a conventional loan.)
- Determine your down payment amount: If you can afford to put 20 percent down, it might be better to go with a conventional loan to avoid the VA funding fee. Unlike a VA loan with no money down, you’ll also have some equity in the home right away if you get a conventional loan with 20 percent (or any amount) down.
- Consider how you’ll use the property: Keep in mind that with a VA loan, you can’t buy a vacation home or investment property, either. If that’s your goal, you’ll need to shop for a conventional or investment property loan.
VA loan vs. conventional loan FAQ
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VA loans might come with looser credit score requirements than conventional loans, which can make them easier to get. But to get a VA loan, you must first obtain a Certificate of Eligibility (COE), a document that serves as evidence for lenders that you qualify for VA home loan benefits. There are specific requirements to meet for COE eligibility, and having a COE does not guarantee you will be approved for a mortgage. Working with a lender who has a lot of experience with underwriting VA loans can also help the process go more smoothly.
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VA loans can take longer to close than a conventional loan because the underwriting process is longer. Some sellers may not be willing to wait the extra time it takes for a VA loan to close. In addition, homes that will be financed with a VA loan must meet minimum property requirements during the appraisal for the deal to close. This might be a turn-off for some sellers. Still, the benefits of a VA loan can make them a better option for homebuyers, particularly first-timers.
