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

Purchasing a home is likely one of the biggest financial decisions you’ll make in your lifetime. When it comes time to get a mortgage, you have two main options – VA loans and conventional loans. While both offer advantages, there are some key differences between the two that you need to understand before deciding which is better for your situation.

In this comprehensive guide, we’ll compare VA and conventional loans side-by-side so you can make an informed decision when buying your dream home.

VA Loan Overview

VA loans are mortgage loans guaranteed by the U.S. Department of Veterans Affairs. They are only available to qualifying military members and veterans. Some of the key features of VA loans include:

• No Down Payment Required VA loans allow buyers to purchase a home with 0% down This makes them more accessible for buyers who don’t have a lot of cash saved upfront

• No Mortgage Insurance: VA loans do not require private mortgage insurance (PMI). Instead, buyers pay a one-time VA funding fee which can be financed into the loan amount.

• Flexible Guidelines: VA loans have more flexible credit and debt-to-income requirements compared to conventional loans. This allows more buyers to qualify.

• Competitive Interest Rates Interest rates on VA loans are capped at a certain amount above conventional loan rates This generally makes them lower than interest rates for other loan types

VA loans can only be used to purchase or refinance a primary residence. Second homes or investment properties do not qualify. There are also VA requirements for the condition of the property being purchased.

Conventional Loan Overview

Conventional loans are mortgage loans that are not backed by a government agency like the VA or FHA. Some key features include:

• Wider Availability: Conventional loans are available to all buyers, not just military members.

• Lower Funding Fees: Conventional loans don’t charge VA funding fees or FHA mortgage insurance premiums. However, they may require private mortgage insurance.

• Multiple Property Types: Conventional loans can be used to buy primary residences, second homes, or investment properties.

• Potentially Stricter Guidelines: Conventional loans usually require higher credit scores and lower debt-to-income ratios compared to government-backed loans.

If you put down less than 20% on a conventional loan, you will likely have to pay private mortgage insurance until you reach 20% equity in the home.

Comparing Down Payments

One of the biggest differences between VA and conventional loans is the down payment requirements:

• VA Loans: 0% down payment required in most cases. Can contribute down payment to lower interest rate.

• Conventional Loans: Typically require at least 3% down, but many lenders offer 5% or 10% down options. 20% down avoids PMI.

This makes VA loans more accessible if you want to buy but don’t have a lot of money saved for a down payment. With a conventional loan, you typically need anywhere from 3% to 20% down.

However, with a larger down payment on a conventional loan, you can often get a lower interest rate and avoid mortgage insurance costs. Carefully compare options if you do have funds available.

Mortgage Insurance Differences

VA loans charge a one-time VA funding fee that can be financed into the loan amount, rather than monthly private mortgage insurance:

• VA Funding Fee: 2.3% for first-time use. 3.6% for subsequent use. No monthly mortgage insurance payments.

• Conventional PMI: 0.3% to 1.5% of loan amount per year. Divided into monthly payments.

Run the numbers to see if the upfront VA funding fee or ongoing PMI payments are more cost effective based on your down payment amount and time you plan to stay in the home.

Flexible Qualification Guidelines

VA loans are known for having more flexible qualification guidelines compared to conventional loans:

• Minimum Credit Scores: VA has no minimum. Conventional loans typically require 620+ credit score.

• Debt-to-Income Ratio: VA allows up to 41% DTI. Conventional loans prefer 36% DTI or lower.

This allows buyers who don’t have perfect credit or high incomes to qualify for a VA loan when they may not meet stricter conventional loan standards.

Interest Rate Differences

Government-backed VA loans often have lower interest rates than conventional loans:

• VA Loans: Capped at no more than 1 percentage point higher than similar conventional loans. Actual rates often lower.

• Conventional Loans: Set by private lenders based on market rates, buyer qualifications, down payment amount and other factors.

It’s a good idea to compare both VA and conventional loan interest rates from multiple lenders when shopping for a mortgage. Focus on the overall down payment requirements, fees, and monthly payments rather than just interest rate.

Eligible Borrowers

VA loans have strict borrower eligibility requirements while conventional loans are available to all borrowers who meet underwriting requirements:

• Eligible Borrowers for VA Loans: Military members, veterans, qualifying spouses. Honorably discharged.

• Eligible Borrowers for Conventional Loans: All borrowers including civilian borrowers.

If you are not active military or a veteran, your only option is a conventional loan. But if you do qualify for VA, both VA and conventional loans should be considered.

Types of Properties Allowed

When it comes to eligible property types, conventional loans are less restrictive:

• VA Loan Property Types: Primary residences only. Must meet VA minimum property requirements.

• Conventional Loan Property Types: Primary residence, second home or investment property. Condo and fixer upper loans available.

With a conventional loan, you have more flexibility if you want to purchase a second home or investment property. VA loans can only be used to buy a primary residence.

Choosing the Best Loan Type for You

So how do you decide whether a VA or conventional loan is a better fit? Here are a few key considerations:

If you want to purchase a primary residence, consider a VA loan if you:

• Don’t have funds saved for a down payment
• Have a lower credit score below 620
• Have a high debt-to-income ratio over 36%

If you want to purchase any property type, consider a conventional loan if you:

• Have a 20% or higher down payment to avoid PMI
• Have a higher credit score of 720+
• Want a second home or investment property

For buyers who qualify for VA loans, it often makes sense to get quotes for both loan types. You can then compare down payments, rates, fees, and monthly payments to determine the most affordable option. Conventional loans may have higher payments but more home options.

There’s no one size fits all answer. Each buyer’s personal financial situation and goals will determine whether a VA or conventional loan is the way to go. Get quotes from multiple lenders and crunch the numbers thoroughly before committing to maximize savings.

The Bottom Line

VA and conventional loans both offer advantages in different situations. Key differences include:

VA Loans

• No down payment required
• No monthly mortgage insurance
• Lower credit score requirements
• Higher DTI ratio allowed
• Primary residence only

Conventional Loans

• Minimum 3% down payment
• Private mortgage insurance if under 20% down
• Require better credit history
• Lower DTI ratios preferred
• More property types eligible

Evaluate your specific homebuying position, finances, and goals to decide if a VA or conventional mortgage suits you better. Be sure to get multiple quotes and compare total costs before choosing your home loan.