VA Loan vs. Conventional Loan

What will be the path to securing financing for your first or next home? For eligible active-duty personnel, veterans, or qualified surviving spouses, the option to secure a home loan from the Department of Veterans Affairs may seem like a no-brainer. After all, VA loans are renowned for low costs and accessible standards.

Before you decide, it might be worth examining a VA loan vs. a conventional loan comparison. Under some circumstances, a conventional loan may be more suitable depending on your financial profile and offer more favorable terms in the short- and long-term. Consequential factors may include what you can apply for a down payment, your credit score, other outstanding debt, and the type of property you hope to purchase.

Let’s compare the loan types side by side and determine which may be the best fit for your home purchase.

VA Loans

A VA loan offers up to 100% financing to qualified military personnel and veterans for use in the purchase of a home. The loan is guaranteed by the Department of Veterans Affairs, and some of the built-in benefits include no down payment and no requirements for mortgage insurance. VA loans typically tend to fetch lower interest rates and have more forgiving credit standards.

VA loans, like jumbo loans, Federal Housing Administration (FHA) loans and U.S. Department of Agriculture (USDA) loans, are classified as government or non-conforming loans. Non-conforming loans generally are more accessible to borrowers and are generally considered less restrictive than conventional loans.

Conventional Loans

Unlike a VA loan, conventional loans are not backed by the government and are considered conforming loans. They are available through a range of providers including banks and online mortgage providers.

Qualification is a little trickier: Borrowers typically need to provide somewhere between 3% to 20% as a down payment, or pay for private mortgage insurance.

Unlike VA loans, conventional loan lenders typically require a minimum credit score of 620. Higher scores (740 or higher) have the added perk of lower interest rates and better loan terms. While qualifying for a conventional loan may seem more challenging, these loans are by far the most popular mortgage type.

Pros and Cons of VA Loans vs. Conventional Loans

Deciding between a VA loan vs. a conventional loan means weighing several factors and requirements, and understanding the key differences between the two choices. You’ll need to understand how qualification standards for the chosen loan option, eligibility requirements, and cost factors such as required fees.

Property Types

The type of property you hope to buy should be a key consideration for which type of loan you opt to pursue, and there are differences between VA loans and conventional loans in this category.

VA Loans

In terms of the types of property eligible for a VA loan, the most important rule is that the loan must be used for the purchase of a primary residence, and it must meet certain minimum standards.

Conventional Loans

On the other hand, a conventional loan is far more flexible when it comes to selecting a property type, and a loan can be used for a primary or second home, or even an investment property. Any property requirements are at the discretion of the lender, so shop around for a bank that can meet the needs of the type of property you wish to purchase.

Down Payment Requirements

The question of how much money is needed for a down payment can ultimately float or sink any hope of homeownership, so the VA loan program offers great hope to those who hope to buy but maybe don’t have much in terms of money in the bank. Still, being able to offer a down payment through a conventional loan program can offer greater savings and terms over the life of the loan.

VA Loans

A major upside to a VA loan is that no down payment is required for most purchases in most cases. A lender might require a down payment for borrowers with low credit scores, or for purchases of properties with a price that exceeds the current market value. No matter the circumstance, you’ll probably find that VA loans have the lowest down payment requirement of the two options.

Conventional Loans

If you opt for a conventional loan, you will need a down payment and most lenders prefer around 20%. Ultimately, the amount will be determined by the lender and can go as low as 3%. With a down payment of 20% or higher, you’ll avoid having to pay mortgage insurance.

Credit Scores

Your credit score is another critical, make-or-break category when it comes to securing financing for a home loan, and the standards can vary wildly between lenders and loan programs. What’s more, whether you opt for a VA or conventional loan, your score will likely influence the interest rate on your mortgage so it would be wise to research ways for improving your credit score before you begin the application process.

VA Loans

Here’s some good news if you lack credit or your score is low: It’s generally easier to receive approval for a VA loan due to low score requirements and more flexible scoring requirements. In fact, the VA doesn’t have a required minimum score.

Mortgage lenders set the minimum credit score requirements, and those will vary from lender to lender. The minimum typically sits around 620, but some lenders offer minimums as low as 580.

The takeaway is that if your credit score is low, you would probably have an easier time qualifying for a VA loan.

Conventional Loans

For conventional loans, credit score thresholds will vary by lender, but the common minimum score is typically 620.

Mortgage Insurance vs. VA Loan Origination Fee

If you lack money for a down payment, a private mortgage insurance (PMI) policy might be part of your borrowing plan. These policies protect a lender in the event a borrower defaults on a mortgage.

VA Loans

Because a down payment isn’t typically necessary to secure a VA loan, and because the federal government backs the loan in the event of borrower default, VA loans don’t require a PMI policy.

However, borrowers who opt for a VA loan will pay a one-time, upfront fee that ranges from 1.25% to 3.3% of the purchase price. The fee percentage will depend on your down payment amount (if any) and whether you have ever had a VA loan, and it can be paid in cash at closing or financed as part of the mortgage.

Conventional Loans

A PMI policy will usually be required for conventional loans with a down payment of less than 20% of the purchase price.

Typically, a borrower pays an annual PMI fee, which ranges from 0.5% to 1.9% of the loan amount. The total amount will vary by lender and largely depend on the borrower’s credit score and the size of the down payment. The PMI cost is usually divided into 12 portions and added to the monthly mortgage payment.

As a bonus, a borrower can get rid of the policy after building enough equity.

Debt-to-Income (DTI) Ratio

As with any loan application process, a housing lender will take a very close look at your existing debt. The debt-to-income (DTI) ratio is a calculation that measures how much of your gross monthly income goes toward servicing monthly debt payments and gives an indication of whether you can afford the mortgage you’re applying for based on your current finances. A low DTI means you should qualify for more favorable interest rates.

VA Loans

The VA’s standards are somewhat more forgiving for DTI than what a borrower will find with a conventional loan. The VA has no maximum percentage for DTI, but it does require its partner lenders to more closely scrutinize an application when the DTI is greater than 41%.

Conventional Loans

When it comes to DTI and conventional loans, there is no hard ceiling among lenders. When reviewing an application for a conventional loan, lenders typically like to see a debt-to-income ratio of less than 36%, yet many will accept higher ratios.

If you are intent on securing a conventional loan but your debt might prevent approval, consider paying down debt to lower your DTI and increase the odds of qualifying for the loan.

Loan Limits

If the loan for the property you wish to purchase will exceed $700,000, you will need to familiarize yourself with conforming loan limits. These loan limits are the maximum amount of money that can be borrowed, and conventional loans and VA loans have different guidelines.

VA Loans

As a non-conforming loan, the VA loan program has less restrictive loan limits when compared to conventional loan programs. This means there are typically no loan limits unless the borrower has defaulted in the past or has two or more VA loans. This distinction is another reason that VA loans and other non-conforming loans are typically more accessible to buyers.

Conventional Loans

Conventional loans typically adhere to conforming loan limits, the maximum amount of money a homebuyer can borrow from a lender. The limits are set annually by the FHFA and currently top out at $726,200 (or $1,089,300 in more expensive housing markets).

Benefits of a VA Loan vs. Conventional Loan

Buying a home is always an exciting process, whether you’re a first-timer or not. While opting for a conventional loan for your mortgage has some advantages, the eligibility requirements for a VA loan make it one of the more valuable benefits associated with military service.

Again, consider some of the main benefits of VA loans when compared with conventional loan programs:

• Down payment: VA loans typically require no money down, while down payments for conventional loan programs will start at 3% and climb as high as 20%
• Loan limits: With few exceptions, there is no ceiling on the amount that can be borrowed on a VA loan. As conforming loans, conventional loans must not exceed the loan limits set by Fannie Mae and Freddie Mac: $726,200 (or $1,089,300 in costlier housing markets).
• Mortgage insurance: Because VA loans are backed by the federal government, there’s no requirement for a borrower to purchase mortgage insurance. Under conventional loan programs, a buyer must purchase PMI when their down payment is less than 20%.
• Credit score requirements: VA loans are considered to be very forgiving when it comes to an applicant’s credit score, with scores as low as 580 considered sometimes eligible. The floor for scores on a conventional loan is 620, which again makes the VA program a more accessible choice for most buyers.
• Debt-to-income ratio requirements: The VA loan program doesn’t have a set standard for DTI ratios, but the program preference is 41%. Conventional loan programs have a maximum DTI ratio of 50%.