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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.
If you’re eligible for a VA home loan, you may be wondering how VA loan rates stack up against conventional mortgage rates. With a VA loan, you can buy a home with no down payment and no mortgage insurance. But conventional loans have pros too, like more flexible guidelines.
Understanding the rate differences and key features can help you decide if a VA or conventional loan better suits your needs and budget. This comprehensive guide compares VA and conventional mortgage rates, terms, fees, and more.
How Do VA Loan Rates Compare?
In general, VA mortgage rates closely track conventional mortgage rates. On a given day, the average interest rate for a 30-year VA fixed-rate mortgage may be the same as a 30-year conventional loan or differ by only a slight margin.
For example, on a recent day average rates were:
- 30-year VA loan: 5.25%
- 30-year conventional: 5.312%
Over the past 5 years, the average rate spread has been:
- VA rates 0.05% lower than conventional rates 65% of the time
- VA rates 0.01% to 0.25% higher 35% of the time
So VA rates are often marginally lower but frequently match conventional loan rates The difference is usually minimal either way.
Your individual rate depends on factors like your credit score, debt, and down payment – not loan type. Shop and compare personalized quotes to find the lowest rate for your situation.
VA Loan Rate Advantages
Beyond a slight rate edge. VA loans offer other advantages that can make them cost-effective
No down payment required – 100% financing means you don’t tie up cash. This gives VA loans a clear cost benefit.
No monthly mortgage insurance – Conventional loans require private mortgage insurance if you put down less than 20%. This added cost can be several hundred dollars a month.
No prepayment penalty – You can pay a VA loan off early without penalty to refinance or move.
Interest rate reduction refinancing – VA IRRRL refinances let you lower your rate and payment without an appraisal or credit check.
Closing cost help – VA loans offer a funding fee option to roll closing costs into the loan amount.
So even if VA rates are fractionally higher on a given day, the program provides savings over the long haul versus conventional loans.
Conventional Loan Rate Advantages
Conventional loans do have some advantages that might justify a slightly lower rate:
Lower rates with a big down payment – You may qualify for a lower rate by putting 20% or more down to avoid mortgage insurance.
No funding fee – Conventional loans have no upfront fee like the VA funding fee.
Lower costs long-term – Your all-in costs over the full loan term may be lower with a conventional loan.
Home equity borrowing – Conventional loans make it easier to access equity later via a home equity loan or line of credit.
So if you have a large down payment, don’t need to lower costs upfront, and want flexibility to borrow against equity later, a conventional loan could offer a better overall value despite the marginally higher rate.
Comparing Loan Terms and Qualification
Beyond rates, VA and conventional loans have different terms and qualifications worth comparing:
Loan limits – For 2023, VA loan limits are higher in most counties. VA has no cap in some high-cost areas.
Debt-to-income ratio – VA DTI can exceed 41% with extra review. Conventional loans ideally stay under 36% DTI.
Credit score requirements – VA has no set minimum score but 600s are often required. Conventional loans may require a 620+ score.
Down payments – VA requires none. Conventional loans usually need at least 3% down.
Home types – VA only allows primary residence loans. Conventional loans can be used for second homes or investment properties.
Cash-out refinancing – VA cash-out refis allow 100% of the home value. Conventional has an 80% limit.
For eligibility, VA offers more flexibility. But conventional loans fit a wider range of purposes like second homes, rentals, and cash-out refinancing.
Closing Costs and Fees
VA and conventional loans have different fees and closing costs:
VA funding fee – This upfront fee ranges from 1.4% to 3.6% of the loan amount. It can be financed into the loan. Some borrowers are exempt.
Private mortgage insurance – With less than 20% down on a conventional loan, you’ll pay an annual PMI premium averaging 0.5% to 1.5% of the amount borrowed.
Appraisal fee – VA appraisals cost about $600 on average. Conventional appraisal fees typically range from $500 to $800.
Origination fee – Lenders usually charge a 1% to 2% origination fee for both loan types.
Other costs – Title insurance fees, recording fees, credit report fees, and more are charged for both VA and conventional loans. VA has limits on some fees.
Lender credits – Lenders often offer credits covering some closing costs for both loan types.
VA loans avoid monthly mortgage insurance but have the upfront funding fee. Carefully crunch the numbers to see how costs compare.
Should I Choose a VA or Conventional Loan?
With their slight interest rate edge and built-in cost savings, VA loans offer good value, especially if you want to minimize cash needed to close and don’t mind the funding fee.
But conventional loans have perks like predictable long-term costs. They may be a better match if you have at least a 10% to 20% down payment or want a vacation home or investment property.
To decide, get rate quotes for both loans and compare:
- Upfront cash needed
- Monthly payments
- Projected long-term costs
- Loan terms and fees
- Your goals and needs
Look at the full picture. Crunching the numbers may reveal the better loan option for you.
VA Rate vs Conventional Rate FAQs
If you’re trying to decide between VA and conventional loans, here are answers to some common questions:
Are VA mortgage rates higher than conventional rates?
On average VA and conventional rates are very close. Daily rate snapshots often show them as equal or within 0.1 to 0.2% of each other. Over months and years, VA rates are slightly lower than conventional rates more often than not.
Why are VA loan rates lower?
VA mortgages rates tend to track close to conventional rates because they are bundled into mortgage-backed securities just like conventional loans. VA loans must still compete for investors on the secondary market. Their built-in cost advantages allow lenders to offer VA loans competitively while still making profit.
How much lower are VA rates?
In recent years, VA rates have averaged about 0.05% lower than conventional rates. But on any given day, VA rates may be equal to, slightly lower, or occasionally marginally higher than conventional mortgage rates.
What credit score do you need for a VA loan?
The VA doesn’t set a minimum credit score requirement, but lenders generally want scores of at least 620 or 640 for a VA loan. The average VA borrower credit score is around 720. Better credit means better mortgage rates.
Do conventional loans have lower interest rates?
On average, interest rates for conventional loans are extremely close to VA rates. But conventional rates can be marginally lower if you make a larger down payment of 20% or more. This avoids paying for mortgage insurance. Better credit also means lower rates for both loan types.
Can I refinance my VA loan with a conventional loan?
Yes, you can refinance a VA loan with a conventional mortgage or vice versa. An IRRRL VA streamline refinance is often the simplest option to lower a VA rate without an appraisal or credit check. But you can use any mortgage loan to refi a VA or conventional loan to get a lower rate or tap home equity.
The Bottom Line
VA and conventional loans offer their own advantages. VA loans give veterans and military members affordable financing options plus cost savings that often make them a great value. Conventional loans provide more flexibility on things like down payments, home types, and home equity borrowing.
Look closely at rates, terms, fees, and your personal goals to decide which type of mortgage works best for your unique home buying or refinancing situation.
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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.
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.