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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.
Purchasing a home is one of the most important financial decisions you can make. With two popular mortgage options like conventional loans and VA loans, it can be tough deciding which is better for your situation
In this comprehensive guide, we’ll compare conventional loans vs VA loans so you can determine the right choice for you
An Overview of Conventional Loans
Conventional loans are the most common type of mortgage loan making up about 70% of the current U.S. mortgage market. They are offered by private lenders and not backed by any government agency.
Here are some key things to know about conventional loans:
- Available to all borrowers who meet the lender’s criteria
- Typically require a minimum 3% down payment
- Have maximum conforming loan limits set by Fannie Mae and Freddie Mac
- Require private mortgage insurance (PMI) if less than 20% is put down
- Offer fixed- and adjustable-rate terms
- Can be used to purchase primary residences, second homes, or investment properties
Conventional loans provide more flexibility in some regards than government-backed loans. However, they also tend to have stricter requirements for down payments, credit scores, and debt-to-income ratios.
What Are VA Loans?
VA loans are mortgage loans backed by the U.S. Department of Veterans Affairs. They offer special benefits to eligible military members, veterans, and in some cases their surviving spouses.
Here are some of the key perks of VA loans:
- Require no down payment or minimum credit score
- Have no monthly mortgage insurance premiums
- Allow higher debt-to-income ratios than conventional loans
- Offer lower interest rates than conventional loans
- Place no limits on the loan amount based on the county median home price
- Allow borrowers to roll closing costs into the loan amount
The main drawback of VA loans is that they can only be used to purchase a primary residence. They cannot finance second homes or investment properties.
VA loans also come with upfront funding fees ranging from 1.4% to 3.6% of the total loan amount. And they have stricter appraisal requirements than conventional loans.
Conventional vs VA Loans Comparison Chart
Here is a helpful comparison chart highlighting some of the key differences between conventional and VA loans:
| Loan Feature | Conventional Loan | VA Loan |
|---|---|---|
| Eligibility | All borrowers | Military members/veterans |
| Down Payment | 3-20% | 0% |
| Mortgage Insurance | Required if <20% down | None |
| Interest Rates | Set by lender | Lower than conventional |
| Loan Limits | Conforming limits set by FHFA | No limit based on county median price |
| Eligible Properties | Primary residences, second homes, investment properties | Primary residences only |
| Funding Fee | None | 1.4-3.6% of loan amount |
Pros of Conventional Loans
Although VA loans offer nice perks for eligible borrowers, conventional loans have their own set of advantages. Here are some of the biggest pros of conventional mortgages:
More flexible eligibility – Conventional loans are available to all borrowers regardless of military status or work history. The lender will mainly consider your credit score, income, assets, and debts when approving your loan.
Faster closing times – VA loans typically take longer to close than conventional loans. Conventional mortgages offer quicker closing speeds, which can be useful in competitive markets.
Lower upfront fees – Conventional loans don’t charge funding fees. And they may qualify for appraisal waivers, further reducing closing costs. VA loans charge upfront fees of 1.4-3.6% of the total loan amount.
No restrictions on property type – Conventional loans can finance primary homes, second homes, investment properties, condos, manufactured homes, and more. VA loans are limited to primary residences only.
May have easier appraisal terms – VA loans require properties to meet Minimum Property Requirements. Conventional appraisals are usually more flexible.
Higher loan limits for jumbos – Jumbo mortgages over the conforming limit are more widely available for conventional loans, even with a lower down payment.
Cons of Conventional Loans
Despite their advantages, conventional mortgages also come with a few drawbacks:
Typically require PMI – If you put down less than 20% on a conventional loan, you’ll have to pay private mortgage insurance. This adds to your monthly costs until you build 20% home equity.
Strict DTI requirements – Conventional loans usually look for your total monthly debts divided by gross monthly income (DTI) to be below 43%. VA loans are more flexible on DTI.
20% down often needed for best rates – You’ll typically need at least 20% down to get the very best interest rates on conventional loans. VA loans offer ultra low rates with no down payment.
Lower loan amounts – Conforming loan limits restrict how much you can borrow with a conventional mortgage in high-cost areas. Jumbo loans may carry higher rates.
Potentially higher rates – Due to less competition, some lenders charge slightly higher interest rates for conventional loans vs VA loans.
Must meet minimum credit scores – Conventional lenders usually require a minimum credit score around 620. VA loans are more lenient on credit scores.
Pros of VA Loans
VA loans offer exceptional benefits for eligible military personnel and veterans. Here are some of the biggest pros:
Requires no down payment – This allows buyers to get into a home sooner without saving up a large down payment. VA loans offer 100% financing.
No monthly mortgage insurance – Unlike conventional loans, VA borrowers don’t have to pay private mortgage insurance premiums. This provides monthly savings.
More flexible credit guidelines – VA lenders can approve borrowers with credit scores as low as 580 in some cases. They also look at extenuating circumstances.
Higher DTI allowed – VA doesn’t set a maximum DTI ratio. Many lenders allow ratios above 50% with compensating factors.
Lower interest rates – Due to the VA loan guarantee, lenders can offer lower rates than they would on comparable conventional loans.
No limit on loan size – VA doesn’t cap loan amounts based on home prices in your county like conforming conventional loans do.
Easier streamlined refinancing – The VA IRRRL program offers cheaper, easier refinancing for eligible VA borrowers.
Seller can pay closing costs – VA allows the seller or lender to cover all closing costs so you don’t pay any upfront.
Cons of VA Loans
Despite the many benefits, VA loans aren’t perfect. Here are some potential drawbacks:
For primary residences only – VA loans can only be used to purchase a primary home to live in. They cannot finance second homes or investment properties.
Slower processing and closing – Extra VA requirements often result in slower underwriting and closing compared to conventional loans.
Upfront funding fee – You must pay an upfront VA funding fee typically ranging from 1.4-3.6% of the total loan amount.
Ineligible use penalties – Getting caught renting out a VA-financed home or not living there as your primary residence can lead to penalties.
Seller resistance – Some sellers prefer conventional loan offers over VA loans due to appraisal requirements and longer closing timelines.
Maintaining VA entitlement – Your VA entitlement gets used up when you purchase a home. This impacts future use for another VA loan.
Regional loan limits – VA loan limits vary by county and are lower than conventional conforming limits in certain higher-priced areas.
Stricter appraisal terms – The VA appraisal process is more stringent than conventional loans. But it also protects buyers from overpayment.
When Is a Conventional Loan Typically Better?
Given their pros and cons, conventional loans tend to work better under these circumstances:
- You have excellent credit and a down payment of at least 20%
- You are not eligible for a VA loan based on military status
- You want to buy a second home or investment property
- You need a jumbo loan above the conforming loan limit
- You need to close quickly with less seller resistance to your offer
- The property requires major renovations before move-in
Conventional loans offer solid options for all buyers. Their main appeal is providing more flexibility than government-backed loans on property types, loan amounts, credit, required repairs, etc.
When Is a VA Loan Typically Better?
If you qualify for VA financing, it is often the superior option thanks to these situations:
- You have limited savings for a down payment and closing costs
- You want to buy sooner without saving up 20% down
- Your credit score or debt-to-income ratio is borderline
- You want the lowest monthly mortgage payment possible
- You value the ability to refinance easily down the road
- You want to buy a moderately priced home
Minimum down payment
VA loans usually require no down payment. However, a lender may require money down if the purchase price of a property is higher than its current market value. That can happen in competitive housing markets with bidding wars.
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
Is it better to have a conventional loan or 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’s the difference between a VA mortgage and a conventional loan?
Conventional loans, which are not backed by the federal government, are for anyone who can meet a lender’s financial requirements. Here are the factors to consider when deciding between a VA mortgage and a conventional loan. Primary home. Primary or second home, investment properties. Zero in most instances. Usually at least 3%.
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:
Should I get a conventional loan or a VA loan?
Choose a conventional loan if the home will solely serve as a vacation, rental or investment property. VA loans come with what’s known as the VA funding fee. The fee ranges from 1.25 to 3.3 percent and is applied to every VA purchase and refinance loan.
Is a VA loan a good idea?
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. A conventional loan is the most popular type of mortgage. In contrast to a VA loan, it isn’t backed by the government.