Is a Conventional Loan Better Than a VA Loan? A Detailed Comparison

As a homebuyer, one of the biggest decisions you’ll make is whether to get a VA or conventional loan. Both have pros and cons, so let’s take an in-depth look to see if a conventional loan is truly better than a VA loan.

I’ve been in the mortgage industry for over 10 years, and I’ve helped countless clients navigate this decision There’s no one-size-fits-all answer, but I’ll outline the key factors to weigh so you can determine what’s best for your situation.

VA Loan Overview

First, a quick refresher on VA loans. These mortgages are backed by the Department of Veterans Affairs and are only available to military members and veterans.

Some key VA loan benefits include:

• No down payment required – This makes VA loans more affordable for buyers without a lot of savings. Conventional loans typically require 3-20% down.

• No monthly mortgage insurance – With a conventional loan under 20% down you have to pay mortgage insurance. VA loans skip this added cost.

• Lower interest rates – VA loans often have lower rates than conventional loans, saving you money each month.

• More flexible credit guidelines – VA loans can be easier to qualify for if your credit isn’t perfect.

• Ability to reuse benefit – You can use a VA loan more than once to purchase or refinance a home.

So in many cases, VA loans provide excellent advantages for eligible borrowers. But are they always the best choice? Let’s look at when a conventional loan may be a better fit.

Scenario 1: You Have a 20% Down Payment

The biggest factor in choosing a conventional loan is if you can make a down payment of at least 20%. This allows you to avoid paying private mortgage insurance (PMI), which is required on conventional loans with less than 20% down.

PMI can add hundreds of dollars to your monthly mortgage payment, so avoiding it is ideal. With a VA loan, you pay a funding fee instead of PMI, but it’s a one-time fee rolled into the loan. If you put down 20% on a conventional loan, your monthly costs are likely lower without PMI.

The bottom line: If you have enough for 20% down, a conventional loan probably saves you more long-term by avoiding PMI.

Scenario 2: You Have Fair Credit

VA loans are great if you have fair credit (usually around a 620 FICO score). They offer more leniency than conventional loans typically do. If your score is on the lower end, a VA loan may be your easiest path to approval.

But if you have fair credit closer to the 660-680 range, a conventional 97% LTV loan with 3% down is also a possibility. This means for borrowers with higher fair credit, a conventional loan and VA loan may be equally feasible options.

So with credit in the higher fair range, focus more on other factors like down payment savings, home type, and loan costs.

The bottom line: VA loans are better for lower fair credit borrowers. For higher fair credit, it’s a toss up.

Scenario 3: You’re Buying a Second Home or Investment Property

VA loans can only be used to buy or refinance a primary residence – not second homes or investment properties. So if you’re looking to buy a vacation home or rental property, a conventional loan is your only choice.

Some buyers like the flexibility of having a VA loan on their primary home while using a conventional loan for a second property. This way, you can still tap into VA loan benefits while also purchasing other property types.

The bottom line: Conventional loans are required for second homes or investment properties.

Scenario 4: You Value Simplicity in the Homebuying Process

Some buyers choose conventional loans because they find the process less cumbersome compared to VA loans. There is more paperwork, documentation, and appraisal requirements with VA loans.

Conventional loans also give you more freedom to negotiate with sellers. VA appraisals can be strict, with required repairs eating into your negotiation power.

So if you want a smoother, simpler homebuying experience, conventional loans may have the edge. But for buyers who value the financial perks of a VA loan, the extra steps are worth it.

The bottom line: Conventional loans involve less red tape which some buyers prefer.

Scenario 5: Your Loan Amount is Over VA Limits

VA loans have loan limits that cap the maximum you can borrow based on the property county. In 2022, the range is $420,000 to $1,054,000 depending on the area. If your loan amount exceeds VA limits, a conventional loan is required.

Jumbo loans above conventional conforming limits are also an option. Jumbos typically require higher credit scores and down payments.

Very few areas have VA limits low enough to be a constraint, but it is something to be aware of.

The bottom line: Conventional or jumbo loans are needed above VA loan limits.

How to Choose the Right Loan Type

As you can see, there are valid scenarios where conventional loans may be the better option over VA loans. Here are some final tips on choosing the right loan type:

• Crunch the numbers on costs including fees, rates, and PMI. Compare total savings.

• Know your credit score and down payment savings – this impacts qualifying.

• Think about current home needs and future plans. Will you want to buy rental properties?

• Look at total monthly payments and cash needed at closing. Lower is better.

• Check if your loan amount exceeds VA loan limits in your county.

• Ask your loan officer to help you compare options. Together you can determine the best loan type.

While VA loans are a great choice, they aren’t right for everyone. Conventional loans have some clear advantages in certain situations. The key is to look at the big picture of your finances, goals, and the home you’re looking to buy. This ensures you pick the mortgage that fits your needs.

To recap, conventional loans can make sense when:

• You have 20% or more to put down
• Your credit score is 660+
• You want to buy a second home or investment property
• You value a simpler mortgage process
• Your loan amount exceeds VA loan limits