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

Getting a mortgage is one of the biggest financial decisions you can make As a homebuyer, you have options between different types of loans. Two popular choices are VA loans and conventional loans

But is a VA loan better than a conventional loan when buying or refinancing a home? The answer depends on your situation. While VA loans offer unique benefits conventional loans also have advantages to weigh.

In this detailed comparison we’ll break down how VA loans and conventional loans stack up across key factors. Read on to learn if a VA loan is the better option for your mortgage needs.

First, let’s quickly review what defines a VA loan and a conventional loan.

What is a VA Loan?

A VA loan is a mortgage backed by the Department of Veterans Affairs. These government-issued loans provide affordable financing to eligible military members and veterans.

Some notable traits of VA loans include:

• No down payment requirement – VA loans don’t mandate borrowers put money down. You can receive 100% financing.

• No mortgage insurance – Mortgage insurance protects the lender, but costs you. VA loans skip this added expense.

• Flexible credit requirements – VA loans look at your entire financial profile, not just your credit score. Requirements are more lenient.

• Capped fees – The VA limits certain fees to protect borrowers, like origination fees.

• Interest rate discounts – VA loan rates average 0.25% – 0.5% lower than conventional loan rates.

What is a Conventional Loan?

A conventional loan is a mortgage that conforms to standards allowing it to be purchased by Freddie Mac or Fannie Mae. These “conforming loans” have conventional guidelines.

Conventional loans tend to have:

• A minimum down payment – Often at least 3-5% of the purchase price. 20% down avoids mortgage insurance.

• Mortgage insurance requirements – If your down payment is under 20%, you’ll pay this added cost.

• Stricter credit standards – Minimum credit scores around 620. Other strict benchmarks for income, assets, and debts.

• No special discounts – Rates and fees vary by lender. No built-in rate discounts like with VA loans.

Now that we’ve covered the basics, let’s compare VA loans and conventional loans across key deciding factors.

Comparing Credit Score Requirements

One major difference between VA loans and conventional loans is their credit score requirements.

VA loans are more flexible when it comes to credit scores. The Department of Veterans Affairs itself doesn’t enforce a minimum score. Individual VA lenders may require scores around 580 to 620. But they’ll look at additional aspects of your finances too.

Conventional loans adhere to stricter standards. Most conventional lenders want minimum credit scores of 620 or 640. You’ll likely need a higher score for the best rates and terms.

This more lenient credit policy allows more borrowers to qualify for VA loans. Even if your score is on the lower side, a VA loan may still be possible.

Evaluating Down Payments

Down payments present another significant contrast between these two mortgage types.

VA loans don’t require any down payment at all. Conventional loans, on the other hand, expect down payments starting at 3-5% of the purchase price.

Putting 20% down on a conventional loan helps you avoid paying mortgage insurance. But few borrowers make 20% down payments. The median down payment for first-time homebuyers is only 6%, according to census data.

Being able to skip the down payment is a major perk of VA loans. You can buy a home with 100% financing and no mortgage insurance.

Comparing Debt-to-Income Ratios

Lenders analyze your debt-to-income ratio (DTI) to measure your current debt burden. DTI compares your total monthly debts with your gross monthly income.

Most conventional lenders cap DTIs around 50%. In contrast, VA loans don’t enforce a DTI limit.

VA lenders prefer to see DTIs under 41%. But they may approve loans with higher ratios by looking at your entire financial picture.

These more flexible DTI standards can benefit borrowers with higher debt. VA guidelines offer more room if you have existing student loans, credit card balances, auto loans, or other monthly debts.

Reviewing Mortgage Insurance Policies

Mortgage insurance protects the lender from losses if you default on your loan. It’s an added cost passed on to the borrower through monthly premiums or upfront fees.

Borrowers with conventional loans must pay mortgage insurance if they make down payments under 20% of the purchase price. Monthly premiums often range between 0.3-1.5% of the total loan amount.

VA loans waive this requirement entirely. You pay no monthly mortgage insurance premiums or upfront mortgage insurance fees. Avoiding this cost over the life of the loan results in significant interest savings.

Comparing Interest Rates and Closing Costs

Beyond the major differences above, VA loans and conventional loans diverge across other key financial factors.

Interest Rates

Across lenders, VA mortgage rates tend to run 0.25-0.5% lower than comparable conventional rates. These rate discounts amount to significant savings over the course of your loan term.

On a $300,000 loan amount, 0.25% in rate savings would equal over $15,000 in interest savings over 30 years.

Closing Costs

Closing costs include lender fees, prepaid costs like home insurance, and government recording fees. The VA caps certain fees for VA loans to limit closing costs.

Average closing costs run around 2-5% of the mortgage amount for both loan types. But VA loans may have lower total fees in some cases due to VA fee limits.

The VA Funding Fee

VA loans do have one unique fee – the VA funding fee. This upfront cost helps the VA cover potential losses from borrower defaults.

For first-time VA loan borrowers, the fee typically equals 2.3% of the loan amount. It can either be paid at closing or rolled into your loan balance. Veterans with a service-connected disability don’t pay the fee at all.

Even with the VA funding fee factored in, total closing costs may be lower with a VA loan compared to a similarly-sized conventional loan with mortgage insurance.

Reviewing Eligibility and Property Requirements

VA loans and conventional loans also differ in their eligibility guidelines and property standards.

Borrower Eligibility

Conventional loans don’t have special borrower requirements outside of standard credit and income criteria. VA loans impose additional eligibility conditions.

To qualify for a VA loan, you must be an eligible veteran, service member, or surviving spouse. You’ll need a Certificate of Eligibility (COE) from the VA to confirm your eligibility status.

Property Types Allowed

Conventional loans can finance primary homes, second homes, and investment properties. VA loans can only back primary residence purchases – no second homes or investment properties.

However, VA loans allow 2-4 unit properties as long as you occupy one unit. So you can still use rental income to help qualify for a VA loan.

The Bottom Line: Is a VA Loan Better for You?

VA loans clearly offer some distinct advantages, like no down payment or mortgage insurance requirements. Their lower rates and flexible standards also help more borrowers qualify.

But conventional loans have benefits too. Their eligibility is open to all borrowers, not just veterans and service members. And they allow financing for second homes or investment properties.

Choosing between a VA loan and conventional loan depends on your personal situation and financial goals. Key factors to consider include:

• Your credit score and history
• Your existing assets and debts
• Your down payment savings
• Your homeownership plans
• Your veteran or military status

If you’re eligible, a VA loan often makes sense thanks to the better terms. But conventional loans are a strong alternative if you don’t qualify for a VA loan.

The best approach is to explore both VA and conventional mortgage options. Compare loan estimates and preapprovals from multiple lenders. See which type of mortgage and lender offer you the best rates, fees, and overall value.

Making an informed decision will help you identify the optimal loan program and lender to finance your home. With the right mortgage choice, you can buy or refinance into your ideal house with confidence.