VA Loan vs Conventional Loan: Which Is Better for You?

Purchasing a home is likely one of the biggest financial decisions you’ll make in your lifetime. And securing the right mortgage loan to finance your dream home is a crucial part of the process.

As a military servicemember veteran or surviving spouse, you have the choice between two main types of mortgages – VA loans and conventional loans. Both offer advantages and disadvantages, so it’s important to understand the key differences to determine which is better for your situation.

In this comprehensive guide, we’ll break down the pros and cons of VA loans versus conventional loans to help you make an informed decision.

What is a VA Loan?

First, let’s start with what exactly a VA loan is. VA loans are mortgage loans backed by the U.S. Department of Veterans Affairs. They allow eligible borrowers to purchase a home without a down payment or private mortgage insurance.

The main benefits of VA loans include:

• No down payment required – VA loans allow 100% financing
• No private mortgage insurance (PMI) – Saving you over $100/month
• Competitive interest rates – Often lower than conventional loans
• Limited closing costs – The VA caps certain fees
• Relaxed credit guidelines – Minimum credit scores around 580-620
• No prepayment penalties – So you can pay off your loan early
• Streamlined refinancing – Quick and easy through the IRRRL program

VA loans do come with eligibility requirements based on your military service. You must have served a minimum period of active duty to qualify.

VA loans also charge an upfront VA funding fee, which typically ranges from 1-3% of the loan amount.

Overall though, VA loans offer huge perks for eligible borrowers.

What is a Conventional Loan?

Conventional loans are the most common type of mortgage loan, used by over half of all homebuyers. They are backed by government-sponsored enterprises like Fannie Mae and Freddie Mac rather than a specific government agency.

Here are some key features of conventional loans:

• Low down payments – As low as 3-5% down
• Private mortgage insurance – Required if less than 20% down
• No military service required – Available to all borrowers who qualify
• Higher credit scores – Around 620 minimum
• Loan limits – Capped at $xxx,xxx in most areas
• Investment properties – Can be used to purchase rentals

Conventional loans offer more flexibility than VA loans but may come with higher costs like PMI if your down payment is less than 20%. They also don’t provide the same level of consumer protections as VA loans.

VA Loan vs Conventional Loan Comparison

Now let’s compare some of the key differences between VA loans and conventional loans:

As you can see, VA loans tend to offer more flexibility and cost savings for eligible borrowers. But conventional loans provide more options in terms of property types and maximum loan amounts.

Pros and Cons of VA Loans

Let’s explore some of the top advantages and potential drawbacks of VA loans in more detail:

Pros of VA Loans

• Requires no down payment – VA loans offer 100% financing, making them ideal for first-time homebuyers who haven’t built up savings for a down payment yet.

• No private mortgage insurance (PMI) – With a conventional loan, you’ll pay an additional PMI premium each month if your down payment is less than 20% of the purchase price. VA loans skip this added cost.

• Lower interest rates – Interest rates on VA loans are usually 0.5 to 1% lower than comparable conventional loans. This can lead to hundreds in savings each month.

• Relaxed DTI requirements – VA loans don’t have a maximum debt-to-income ratio. This helps borrowers who have higher monthly debts still qualify.

• Low credit scores accepted – You can qualify for a VA loan with credit scores as low as 580 in some cases. Conventional loans usually require 620+ scores.

• Capped VA funding fee – While VA loans do charge an upfront funding fee, the VA places limits on how high it can be. And it can be rolled into your loan amount.

• Easy streamlined refinancing – The IRRRL program lets you quickly refinance into a lower VA rate without an appraisal or credit check.

Cons of VA Loans

• VA funding fee – You’ll pay an upfront fee of 1-3% of the loan amount to offset the lack of down payment on VA loans. This fee does not go toward equity in the home.

• Slower processing – VA loans can take longer to close than conventional loans in some cases due to stricter appraisal standards. This can make your offer less attractive to sellers.

• Only for primary residences – You can’t use a VA loan to purchase a second home or investment property. It must be your primary residence.

• Loan limits – While VA loans themselves have no maximum loan limit, the VA does set limits by county. For expensive areas, you may need a jumbo loan.

• One at a time – You can only have one VA loan at a time. So you’d need a conventional loan for a second home.

• Ineligible if dishonorably discharged – Those who received a dishonorable discharge don’t qualify for VA loans.

Pros and Cons of Conventional Loans

What are the upsides and downsides of conventional mortgage loans?

Pros of Conventional Loans

• Low down payments accepted – Conventional loans allow down payments as low as 3-5%. FHA loans require at least 3.5% down.

• No military service required – Conventional loans are open to any borrower regardless of military background.

• Purchase any property type – Use a conventional loan to buy a primary residence, second home, vacation property, or investment property.

• No limits on multiple properties – You can use conventional financing to buy as many homes as you want and can qualify for.

• Potentially quicker processing – Conventional loans may have faster approval and closing timelines than VA loans.

• Jumbo loans available – Conventional loans can exceed the VA county limits for really expensive homes.

Cons of Conventional Loans

• Private mortgage insurance (PMI) – With less than 20% down, you’ll pay an added PMI premium each month until you reach 20% equity.

• Higher credit scores – To qualify, you’ll generally need a minimum credit score around 620. VA loans go down to 580.

• Higher interest rates – Conventional loan rates are usually 0.5 to 1% higher than comparable VA mortgage rates.

• No 100% financing – Even with the lowest down payment option, you’ll need at least 3-5% down plus closing costs.

• No streamlined refinancing – Conventional refinancing is a lengthier process than the VA IRRRL program.

As you can see, both loans have trade-offs to weigh when deciding what works best for your situation.

When is a VA Loan a Better Choice?

Given the benefits, there are certain situations where a VA mortgage clearly emerges as the superior financing option:

• For first-time homebuyers with very little savings, the zero down payment feature allows you to buy now rather than spend years saving up for a conventional down payment.

• If you have a lower credit score below 620, a VA loan may be your only path to homeownership until you can improve your score.

• If you need to stretch your budget with a higher debt-to-income ratio above 43%, the VA’s flexible DTI standards make approval more likely.

• For expensive high-cost areas, VA loans avoid conventional conforming loan limits so you can borrow more.

• If you want to avoid private mortgage insurance (PMI), the VA won’t make you pay this added monthly cost if your down payment is less than 20%.

When is a Conventional Loan the Better Choice?

Of course, conventional loans will be the better fit under certain circumstances as well:

• If you have an above 620 credit score and 20% down payment saved up, you can likely get a lower conventional rate.

• To buy a second home or