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Deciding between a VA loan or a conventional loan may seem easy. No money down and no mortgage insurance — a VA mortgage wins hands down, right?
But when you consider things like the VA funding fee and perhaps putting enough money down on a conventional mortgage to forgo mortgage insurance, the choice may be more complex.
Backed by the U.S. Department of Veterans Affairs, VA loans are only for veteran and current military members and some surviving spouses. Conventional loans, which are not backed by the federal government, are for anyone who can meet a lenders financial requirements.
Here are the factors to consider when deciding between a VA mortgage and a conventional loan.
Buying a home is an exciting milestone in life. But it also involves making big financial decisions, like choosing the right mortgage. Two popular options are conventional loans and VA loans.
In this article, we’ll compare these two mortgage types in-depth, so you can determine which is better for your situation
Overview of Conventional Loans and VA Loans
Conventional loans are mortgages not backed by the government They are issued by private lenders like banks and credit unions. Conventional loans have flexible criteria, so they are accessible to most borrowers.
VA loans are issued by private lenders but backed by the Department of Veterans Affairs. As the name suggests, they are for eligible military members and veterans. VA loans offer special benefits like no down payment and no mortgage insurance.
Here is a quick snapshot comparing the two loan types
| Conventional Loan | VA Loan | |
|---|---|---|
| Eligibility | Open to all | For veterans, active military, and surviving spouses |
| Down Payment | Typically 3-20% | 0% allowed |
| Mortgage Insurance | Required if <20% down | None required |
| Max Loan Amount | Varies by county | Set by VA; no max |
| Eligible Properties | Primary home, 2nd home, investment | Primary home only |
| Credit Score | 620+ recommended | 580+ typical |
As you can see, VA loans allow more flexible terms overall. But conventional loans give you more options on the type of home you can buy.
Below we’ll explore the pros, cons, eligibility, and scenarios where each loan performs best.
Pros and Cons of Conventional Loans
Pros
- Available to all buyers
- Low down payments possible
- Purchase any property type
- Faster closing time
- No funding fee
Cons
- Monthly mortgage insurance if <20% down
- Strict debt-to-income ratio cap
- Lower loan limits in some counties
- Competitive offers needed
Conventional loans are a sensible choice if you value speed and flexibility. Closing times are faster because there is less red tape.
You can also buy a vacation home or investment property, which isn’t allowed with VA loans. And there are no caps on loan amount, provided you qualify.
On the downside, you’ll pay mortgage insurance until reaching 20% equity in the home. And you need a credit score around 620 or higher.
Pros and Cons of VA Loans
Pros
- Requires no down payment
- No monthly mortgage insurance
- Can exceed debt-to-income ratio caps
- Offers low rates and costs
- Available with lower credit scores
Cons
- For veterans and military only
- Slower appraisal process
- Funding fee added
- Can only buy primary residence
The amazing perks of VA loans make them worth pursuing if you are eligible.
You can become a homeowner even with imperfect finances or little savings. Your offer may also be more competitive thanks to the appraisal contingency waiver.
Just keep in mind the VA funding fee, restrictions on property types, and potential delays due to the appraisal.
Eligibility for Conventional vs VA Loans
Conventional loans are available to all buyers, regardless of military service or background. However, you must meet credit score, income, and down payment requirements set by the lender.
Here are typical eligibility criteria:
- Credit score of 620 or higher
- Stable income and employment
- Monthly debt-to-income ratio under 45%
- Down payment of at least 3%
VA loans have specialized eligibility rules. You or your spouse must have served on active duty and meet one of these conditions:
- 90+ days of service during wartime
- 181+ days of service during peacetime
- 6 years in the National Guard/Reserves
- Surviving spouse of a veteran who died in combat or from a service-related cause
Bad conduct or dishonorable discharges usually disqualify VA loan eligibility. Upgrading your discharge may help overcome this.
Scenarios Where Each Loan Performs Best
Conventional loans tend to work better when:
- Your credit score is below 620
- You want maximum financing flexibility
- Your debt-to-income ratio exceeds 45%
- You are buying a second home or investment property
- You need to close quickly with less red tape
VA loans are the superior option when:
- You don’t have funds saved for a down payment
- You want to avoid monthly mortgage insurance
- Your credit score is between 580-620
- You are purchasing a primary residence
- You anticipate needing to refinance in the future
However, it varies case-by-case. For example, if you have 20% or more for a down payment, a conventional loan with no mortgage insurance may beat out a VA loan.
What Sellers Prefer
One obstacle with VA loans is that sellers often prefer conventional loan offers. Why?
Conventional loans are perceived to have less risk of appraisal issues or delays. Sellers may also wrongly assume VA buyers are riskier and more likely to default.
But in reality, VA loans are extremely reliable. Educating sellers on the facts can help overcome reservations.
Highlight that VA loans require no down payment yet have lower delinquency rates than conventional loans. Stressing your solid finances helps too.
Getting pre-approved shows you are serious. And try negotiating with the seller to keep the VA contingency, or offer a higher price to offset their concerns.
How to Decide What’s Best
Choosing between a conventional or VA loan depends on your specific situation. Consider factors like:
- Your VA eligibility and entitlement
- Down payment funds available
- The type of property you want to purchase
- Your income, assets, credit score and debt profile
- How urgent your home purchase timeline is
Reaching out to experienced lenders can provide guidance. They can run the numbers for both loan types to see how much you qualify for and at what rates and costs.
While VA loans trump conventional loans in many cases, having both options on the table is ideal. Get pre-approved for each, then go with whichever lands you the best deal.
The Bottom Line
VA loans and conventional loans each have pros and cons. Conventional loans are more widely available, while VA loans offer superior terms.
Carefully weigh your personal scenario, finances, and goals. Shop around with multiple lenders as well. This ensures you find the optimal mortgage solution with the lowest rates and costs.
Owning a home is an amazing accomplishment. Make sure you set yourself up for success by choosing the right loan to fit your needs!
Mortgage insurance
VA loans dont require mortgage insurance, but they do have a funding fee, a one-time, upfront charge ranging from 1.25% to 3.3% of the loan amount for purchase mortgages. The fee percentage depends on your down payment amount and whether youve ever had a VA loan.
The funding fee is 0.5% for an Interest Rate Reduction Refinance Loan, or IRRRL, and 2.15% for a first VA cash-out refinance and 3.3% for a subsequent VA cash-out refinance loan.
You can pay the fee in cash at closing or finance it as part of the mortgage.
Service members who have been awarded a Purple Heart, veterans receiving compensation for a service-connected disability and surviving spouses receiving Dependency and Indemnity Compensation are exempt from the funding fee.
Maximum debt-to-income ratio
The debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward monthly debt payments, including housing costs. Regardless of loan type, youll qualify for better mortgage rates with a lower DTI.
FHA vs Conventional vs VA Mortgage Loans – Which is Better?
FAQ
What is better, a conventional loan or a VA loan?
Why do sellers prefer conventional over VA?
What are the disadvantages of a VA loan?
How much lower are VA rates than conventional?
What is the difference between a VA loan and a conventional loan?
The most significant difference is who can use each loan type. VA loans are for Veterans, active duty military and surviving spouses with a valid Certificate of Eligibility (COE). Those who don’t meet the basic service requirements won’t be able to get a VA loan. Conventional loans don’t have any special borrower requirements.
Can you get a VA loan with a conventional mortgage?
While most mortgage companies offer conventional home loans, only VA-approved lenders can provide VA-backed financing. Most mortgage lenders offer conventional loans such as fixed-rate and adjustable-rate mortgages (ARMs). Banks, credit unions, and mortgage companies, for example, typically cater to conventional buyers.
Is a VA mortgage better than a conventional mortgage?
VA mortgages offer more favorable loan terms than conventional loans, especially for those with limited down payment capabilities or less-than-perfect credit. This mortgage comparison between conventional and VA mortgages is based on official mortgage guidelines from the FHFA and VA and is subject to change should mortgage guidelines change.
What is mortgage insurance versus a VA loan?
Mortgage insurance can be a one-time cost you pay at closing, a regular fee rolled into your monthly mortgage payment, or both. Let’s look at the mortgage insurance requirements for conventional loans versus VA loans: