VA Loan vs Conventional Loan: Which is Better for You?

Buying a home is likely one of the biggest financial decisions you’ll make in your life. With so many options for mortgage loans out there, it can be challenging to determine which type of loan is best for your situation. Two popular options are VA loans and conventional loans. While they share some similarities, there are some key differences you’ll want to understand before deciding if a VA or conventional loan is a better fit

In this comprehensive guide, we’ll walk through the pros and cons, requirements, and costs of VA and conventional loans. By the end, you’ll have the information you need to determine which mortgage option makes more sense for your home buying goals.

VA Loan Overview

VA loans are mortgage loans guaranteed by the US Department of Veterans Affairs. They are available to eligible military members and veterans. Some spouses may also qualify.

The main benefits of a VA loan include:

• No Down Payment Required This makes VA loans more accessible for buyers without a lot of cash saved up

• No Mortgage Insurance: With a conventional loan under 20% down, you have to pay private mortgage insurance. VA loans don’t require this.

• Lower Interest Rates: VA loan rates are competitive with conventional loans. Sometimes they are lower.

• More Flexible Credit Guidelines: VA loans can be easier to qualify for than conventional loans. Minimum credit scores are lower.

• Can Be Used Multiple Times: You can use a VA loan more than once to purchase or refinance a home.

VA loans do come with a funding fee that ranges from 1.4% – 3.6% of the loan amount. This fee can be financed into the loan.

Overall, a VA loan can be a great option for eligible borrowers, especially those lacking funds for a down payment.

Conventional Loan Overview

Conventional loans are mortgage loans that conform to standards set by Fannie Mae and Freddie Mac. These loans are not backed by the government.

Some pros of conventional loans include:

• Lower Fees: No VA funding fee is required. With 20% down, no mortgage insurance either.

• Use on Non-Owner Occupied Properties: VA loans are for primary residences only. Conventional loans can be used for investment properties or vacation homes.

• Higher Loan Limits: In expensive areas, conventional loan limits are higher than VA caps.

• May Have More Options: Some lenders have specialized conventional loan programs not offered for VA.

The main downsides are that you usually need a down payment of at least 3-5% and will have to pay mortgage insurance if less than 20% down. Credit and debt-to-income requirements are also stricter compared to VA loans.

Now that we’ve covered the basics of each loan type, let’s compare them across a few key factors.

Comparing Down Payment and Mortgage Insurance

The down payment and mortgage insurance requirements are where VA and conventional loans differ the most:

VA Loans

• No down payment required
• No monthly mortgage insurance
• Funding fee of 1.4% – 3.6% of loan amount

Conventional Loans

• Minimum 3-5% down payment typically
• Mortgage insurance required if less than 20% down
• No funding fee

As you can see, the main tradeoff is paying a funding fee upfront with a VA loan versus paying mortgage insurance monthly with a conventional loan and less than 20% down.

Let’s break this down further:

On a $300,000 loan amount:

• With a VA loan and no money down, you would pay a funding fee of around $4,500 ($300k x 1.5%).

• With a conventional loan and 5% down ($15,000), your mortgage insurance may cost around $150 per month. Over 5 years that adds up to around $9,000.

In this example, the upfront VA funding fee is less expensive than paying monthly mortgage insurance with a 5% down conventional loan.

However, if you put down 20% on a conventional loan, you can avoid mortgage insurance and likely come out ahead over the long run compared to the VA funding fee.

Comparing Interest Rates

In terms of interest rates, VA and conventional loans are usually pretty close these days. Here are some general guidelines:

• On average, VA rates are 0.25% lower than conventional rates for borrowers with strong credit (700+ scores).

• The rate advantage shrinks for borrowers with lower credit scores.

• VA rates are capped based on loan amount. On jumbo loans above $647,200, conventional rates can be lower.

• Daily rate fluctuations may make one or the other cheaper on any given day.

The takeaway is VA rates are extremely competitive with conventional loans. Locking in rates from multiple lenders can help you find the best deal.

Comparing Loan Qualification

VA and conventional loans have different requirements when it comes to your credit score, debt-to-income ratio, and down payment funds.

VA Loans

• No minimum credit score, but many lenders want 620+
• Can qualify with debt-to-income ratios above 50% in some cases
• No need for down payment funds

Conventional Loans

• Minimum credit scores around 620+
• Debt-to-income ratio ideally below 45%
• Need cash for down payment and closing costs

As you can see, VA guidelines are a little more flexible when it comes to credit scores and debt-to-income ratios. VA loans are also more realistic for buyers without much cash saved up.

That said, conventional loans still offer qualification routes for less-than-perfect borrowers. Make sure to shop around with different lenders.

Comparing Loan Limits

For 2023, here are the standard VA and conventional conforming loan limits:

• VA loan limits: $647,200 for most counties, higher in expensive areas
• Conventional limits: $726,200 for most areas, even higher for high-cost counties

The takeaway is conventional loans allow for higher purchase prices, especially in costly real estate markets like California and New York.

In cheaper areas, loan limits are usually not a major deciding factor between VA and conventional loans. But in high-cost cities, conventional loan limits open up more options. VA still has routes for buying above their standard limit.

Which Loan is Right for You?

There’s no universally “best” option between VA and conventional loans. The right loan type depends on your specific situation.

Here are some guidelines on when to choose a VA loan vs when a conventional loan may be a better fit:

VA Loan Makes More Sense If:

• You lack funds for a down payment
• Your credit score is on the lower side
• You have a high debt-to-income ratio
• You qualify for VA based on military status

Conventional Loan May Be Better If:

• You can put down 20% or more to skip mortgage insurance
• You have excellent credit (760+ score)
• You are buying a high-cost home above VA limits
• You need a non-owner occupied loan

As you can see, there is overlap in situations where either loan could work. That’s why getting quotes for both is recommended. Comparing total costs and payments will tell you which option truly saves you money.

Next Steps for Picking the Right Loan

If you’re still on the fence between VA and conventional loans, here are some suggested next steps:

• Get pre-approved for both loans and compare offers directly. Look at rates, fees, and monthly payments.

• Ask lenders if you qualify for specialty conventional programs like low down payment options.

• Consider consulting a loan officer who can go over pros and cons based on your specific financial situation.

• Use online mortgage calculators to model different down payment and mortgage insurance scenarios.

• Check if you meet eligibility requirements for a VA loan based on military service.

Taking the time to research both loans upfront will pay off hugely in the long run. You’ll feel confident knowing you chose the truly optimal mortgage solution for purchasing your dream home.