VA Loans vs Conventional Loans: How to Choose the Best Mortgage for You

Buying a home is an exciting milestone in life. But navigating the mortgage process can feel overwhelming for first-time homebuyers. An important decision you’ll make early on is whether to get a VA or conventional loan.

I’ve helped many clients weigh the pros and cons of these two common mortgage options. Here’s what you need to know to choose the best type of mortgage for your situation.

An Overview of VA and Conventional Loans

VA loans are backed by the Department of Veterans Affairs They are only available to active military members, veterans, and eligible surviving spouses

Conventional loans are not government-backed. They are available to anyone who meets the lender’s criteria

Here’s a quick snapshot of how VA and conventional loans compare

• Eligibility: VA loans are for veterans and servicemembers. Conventional loans are open to anyone.

• Down payment: VA loans require no down payment in most cases. Conventional loans typically need at least 3% down.

• Mortgage insurance: VA loans have a funding fee but no monthly mortgage insurance payments. With conventional loans, you need mortgage insurance if your down payment is under 20%.

• Credit scores: VA loans work with lower credit scores. You may need a higher score for a conventional loan.

• Debt-to-income ratio: VA loans allow higher DTI ratios above 41%, while conventional mortgages ideally want to see DTIs of 36% or less.

Now let’s explore those key differences in more detail.

VA Loan Benefits and Drawbacks

VA loans have unique advantages thanks to their government backing. However, they aren’t right for every homebuyer.

Pros of VA Loans

• No down payment required. This makes VA loans more affordable for buyers without much cash saved. You can get a VA loan with 0% down.

• No monthly mortgage insurance. With a conventional loan, you pay mortgage insurance if your down payment is under 20%. VA loans skip this added cost.

• Lenient credit guidelines. VA doesn’t set an official minimum credit score. Many lenders accept scores around 580. This helps buyers with poorer credit qualify.

• No income limits. Your income doesn’t impact VA loan eligibility. This is different from other government-backed loans like USDA and FHA.

• Low interest rates. VA loan rates are competitive with conventional mortgage rates. Sometimes they may be slightly lower.

• Ability to finance the funding fee. You can roll the VA funding fee into the loan amount instead of paying it upfront.

• No prepayment penalties. You can pay off a VA loan early without penalty. This isn’t always true with conventional mortgages.

Cons of VA Loans

• VA funding fee. All VA loans have an upfront fee. It ranges from 1.4% to 3.6% of the loan amount. This increases your out-of-pocket costs.

• Loan limits. VA mortgages have local loan limits. The max loan size varies by county but typically falls between $420,000 to $970,800.

• Home eligibility requirements. The VA has minimum property requirements your home must meet. This reduces the pool of eligible homes.

• Can’t be used for non-primary residences. VA loans only work for primary homes. You need a conventional loan for investment properties or vacation homes.

• Refinance fees. Refinancing costs more with a VA loan thanks to the VA funding fee. Expect to pay around 0.5% to 3.3% of your balance.

Who Should Consider a VA Loan?

VA loans are a good fit if you:

• Have limited funds for a down payment and closing costs
• Want to skip private mortgage insurance
• Have a lower credit score or high debt-to-income ratio
• Qualify for VA home loan benefits through military service

Conventional Loan Benefits and Drawbacks

Conventional loans have pros and cons too. Here’s what you need to know:

Pros of Conventional Loans

• Open to anyone. You don’t need military service to qualify. If you meet the lender’s criteria, you can get approved.

• Lower monthly payments with 20% down. A 20% down payment avoids costly mortgage insurance. This can make your monthly payments lower.

• No limit on the loan amount. Conventional loans work for jumbo mortgages above conforming loan limits. VA loans have capped loan limits.

• Can be used for any property type. You aren’t limited to primary residences. Conventional loans also work for rental properties and second homes.

• Potentially lower interest rates with excellent credit. Borrowers with FICO scores over 740 may see lower rates than with VA loans.

• No VA funding fee. You avoid this upfront cost which can be 1% to 3% of the total loan amount.

Cons of Conventional Loans

• Usually requires a down payment. Expect to need at least 3% to 5% down for a conventional loan. With a VA loan you can buy a home with 0% down.

• Mortgage insurance required if down payment is under 20%. This adds to your monthly payment and overall costs.

• Higher credit score requirements. Many lenders want at least a 620 FICO score. VA has more flexible guidelines.

• Lower debt-to-income ratio allowed. Conventional loans look for DTIs under 36%. VA allows ratios above 41% in many cases.

Who Should Consider a Conventional Loan?

Conventional loans may be the better option if you:

• Have at least a 10% to 20% down payment
• Want to buy an investment property or second home
• Have a FICO score over 740 and low debt-to-income ratio
• Don’t qualify for VA loan benefits

7 Key Factors Impacting Your VA Versus Conventional Decision

Your personal situation should drive whether a VA or conventional loan works better. As you weigh options, consider these 7 factors:

1. Your Down Payment Amount

VA loans only require 0% to 3% down in most cases. This makes them more affordable if your savings are limited.

With conventional loans, you’ll typically need between 3% to 20% down. Aim for at least 10% down if possible, or mortgage insurance costs will be painful.

2. Your Credit Scores and Debt Level

VA loans allow lower credit scores, often around 580 FICO. They are also more flexible on debt-to-income ratio.

For a conventional loan, aim for a credit score of at least 660 to 720. Lenders also prefer to see your DTI under 36%. Excellent credit (740+) may qualify you for the lowest rates.

3. Your Qualification for VA Benefits

Only active duty military, veterans, and surviving spouses can use VA loans. Run your eligibility by visiting www.va.gov.

Conventional loans don’t have military service requirements. They work for civilian buyers too.

4. The Type of Home You Want to Buy

VA loans only work for primary residences. If you want a rental property or vacation home, choose a conventional loan.

5. Your Desired Loan Amount

VA loans have local loan limits set by the VA. Typically they fall between $420,000 and $970,000.

Conventional loans work if you need a jumbo mortgage above VA’s maximum loan amount for your county.

6. Whether You Plan to Prepay

VA loans don’t charge prepayment penalties if you pay off your mortgage early. This perk may not apply with a conventional loan.

7. If You’ll Refinance Later

When refinancing, VA loans charge a funding fee of 0.5% to 3.3%. With a conventional loan, you avoid this added cost.

How to Decide: VA Loan vs Conventional Loan

As you can see, both VA and conventional loans have pros and cons. Here are a few rules of thumb on deciding which works better:

• If your credit score is below 660 or your DTI above 36%, lean towards a VA loan
• If you want a jumbo loan over $600,000, need to buy a vacation home, or don’t have military service, go conventional
• If you can make a down payment of 10% to 20%, a conventional loan with no PMI may cost less
• Crunch the numbers to see whether the VA funding fee outweighs PMI costs on a conventional loan

But there’s no one-size-fits-all answer. Getting mortgage quotes for both VA and conventional loans is the best way to make an informed decision.

I always advise clients to compare total origination fees, projected monthly payments, and long-term costs between VA and conventional loans. This takes the guesswork out of choosing the optimal loan program.

Next Steps: Apply for VA and Conventional Loan Pre