Conventional Loans vs. VA Loans: Which Is Better for You?

Buying a home is likely one of the biggest financial decisions you’ll ever make. With so many mortgage options out there, it can be tricky to determine which type of loan is right for you. Two of the most common loan types for homebuyers are conventional loans and VA loans. While both offer competitive interest rates, they have some key differences that you need to understand before deciding which route to take.

In this comprehensive guide, we’ll walk through everything you need to know about conventional loans vs. VA loans, including:

• What are the main differences between conventional and VA loans?
• What are the pros and cons of each loan type?
• When is a conventional loan a better fit?
• When is a VA loan the better option?
• How do sellers view each loan type in offers?
• Frequently asked questions

Let’s dive in!

What’s the Difference Between Conventional and VA Loans?

To start let’s go over the basics of what distinguishes conventional loans from VA loans

• Eligibility – Conventional loans are available to all borrowers who meet the lender’s credit standards. VA loans are only for eligible military members and veterans.
• Down payment – Conventional loans typically require 3-20% down. VA loans require 0% down.
• Mortgage insurance – Conventional loans with less than 20% down require private mortgage insurance (PMI). VA loans don’t require any mortgage insurance.
• Funding fee – VA loans have a funding fee of 0.5-3.6% of the loan amount. Conventional loans don’t.
• Credit scores – Minimum scores are around 620 for conventional and 580-620 for VA loans.
• Debt-to-income ratio – VA loans allow higher DTI ratios than conventional loans.
• Loan limits – Conventional loans have conforming loan limits. VA loans don’t.
• Eligible properties – Conventional loans can be used for primary residences, second homes or investment properties. VA loans are just for primary residences.

As you can see VA loans offer more relaxed standards that make it easier for eligible borrowers to qualify and buy a home with little-to-no down payment. But conventional loans provide more flexibility.

Conventional Loan Pros and Cons

Conventional loans have their advantages, especially in terms of flexibility and ease of approval. But they also come with some drawbacks to consider.

Pros of Conventional Loans

• Available to all borrowers who meet minimum requirements
• Faster approval and closing timelines
• Can be used to purchase any type of property
• No funding fee
• Sellers may prefer conventional loan offers

Cons of Conventional Loans

• Typically requires private mortgage insurance (PMI) if less than 20% down
• Must meet stricter credit score and debt-to-income requirements
• Loan amounts limited by conforming loan limits
• Requires larger down payment for best terms

VA Loan Pros and Cons

VA loans offer exceptional benefits like no down payment and no monthly mortgage insurance. But they also come with some limitations to be aware of.

Pros of VA Loans

• Requires 0% down payment
• No monthly mortgage insurance premiums
• More flexible credit score and DTI requirements
• No maximum loan amounts
• Lower interest rates in many cases

Cons of VA Loans

• Must meet VA eligibility requirements
• Slower approval and closing timelines
• Funding fee of 0.5-3.6% of loan amount
• Can only be used for primary residence purchase
• Sellers may prefer conventional loan offers

As you weigh the pros and cons, keep your specific situation and financial goals in mind. This will help you determine if a conventional or VA loan is a better fit.

When Is a Conventional Loan Typically Better?

Here are a few scenarios where a conventional loan may be the superior option over a VA loan:

• You have excellent credit – If your credit score is 740+ and your debt-to-income ratio is low, you can likely get better conventional loan interest rates and terms.

• You’re putting 20% or more down – With at least 20% down on a conventional loan, you can avoid PMI and get the best pricing.

• You’re buying a second home or investment property – VA loans can only be used for primary residences. To buy a vacation home or rental property, you’ll need a conventional loan.

• You need flexibility on loan amount – Conventional loans go up to $999,999 in most areas, making them better for pricier homes.

• You’re not eligible for a VA loan – If you don’t meet VA guidelines, a conventional loan is your only option.

When Is a VA Loan Typically Better?

Here are some common situations where a VA loan really shines compared to a conventional loan:

• You have limited savings for a down payment – With $0 down required, VA loans allow more buyers to purchase sooner.

• You want to avoid PMI – Conventional loans charge PMI with less than 20% down. VA loans have no monthly mortgage insurance premiums.

• You have fair credit – VA loans can be obtained with credit scores as low as 580 in some cases. Many conventional loans require 620+ credit.

• You have higher debt – VA loans allow higher debt-to-income ratios, making it easier to qualify if you have existing debts.

• You’re purchasing a high-cost area home – VA loans don’t have maximum limits, so they can be ideal for pricier homes.

• You qualify for a VA loan – If you served, make the most of your VA benefits and get a mortgage with no down payment required.

How Do Sellers View VA Loans vs. Conventional Loans?

When making an offer on a home, your financing can impact how sellers perceive your offer. Many sellers prefer conventional loan offers over VA loan offers. Why is that?

A few key reasons sellers may favor conventional loans:

• Quicker closing timelines – VA loans often take longer to close, while conventional loans are often faster.

• Lower appraisal risks – VA appraisals are seen as more stringent, creating more risk of contract fallout.

• No repairs required – VA loans require all repairs in appraisal to be made. Conventional appraisals list property as-is.

However, it’s important to note that in a hot seller’s market, the loan type likely won’t make or break an offer. Factors like purchase price and contingencies play a larger role. Be sure to work closely with your real estate agent to put together a competitive offer, even when using a VA loan.

Frequently Asked Questions

Can I refinance from a VA to conventional loan (or vice versa)?

Yes, you can refinance from a VA to conventional loan, or vice versa, provided you meet eligibility criteria for the new loan program at the time of refinancing.

What credit score is needed for VA loans vs. conventional loans?

The minimum can be around 580-620 for VA loans and 620+ for conventional loans. But actual requirements vary by lender.

Do conventional loans have higher interest rates than VA loans?

Not necessarily. Rates are primarily based on your credit score and other individual factors. In some cases, VA loans may have lower rates.

Do you need a down payment for a conventional loan?

Most conventional loans require 3-20% down. But some conventional loan programs, like HomeReady or HomePossible, allow as low as 3% down.

Can I remove PMI from a conventional loan by refinancing to a VA loan?

Yes, this is one strategy for removing PMI from a conventional loan. By refinancing into a VA loan, you can eliminate the monthly mortgage insurance premiums.

The Bottom Line

When comparing conventional vs. VA loans, there’s no definitively “better” option for every homebuyer. You need to weigh the pros, cons and your personal financial situation. For eligible borrowers, VA loans offer amazing benefits. But conventional loans provide more flexibility. Shop multiple lenders, get pre-approved, and discuss your goals with a loan officer. This will help determine if a conventional or VA loan is the way to go for your home purchase.