VA Loans vs Conventional Loans: A Detailed Comparison for Homebuyers

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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.

Buying a home is an exciting milestone in life But it also involves making one of the biggest financial decisions you’ll ever make Choosing the right mortgage to finance your home can have a huge impact on your buying power and monthly costs.

Two popular options for homebuyers are VA loans and conventional loans VA loans are backed by the Department of Veterans Affairs and aim to help eligible military members, veterans, and surviving spouses buy a home Conventional loans are the most common loans available from private lenders.

In this detailed guide, we’ll compare VA loans vs conventional loans to help you determine which is the better fit for your home buying needs.

VA Loan Overview

VA loans are government-backed mortgages designed to help servicemembers, veterans, and eligible surviving spouses purchase a home. Some key features include:

No down payment required: VA loans allow 100% financing. This makes them especially appealing to first-time homebuyers.
No private mortgage insurance (PMI) required: With a conventional loan under 20% down, you have to pay PMI. VA loans don’t require any PMI.
Competitive interest rates: VA loans often have lower rates than conventional loans. Rates average 0.5% lower.
Funding fee instead of PMI: VA loans charge an upfront funding fee of 1-3.6% of the loan amount. This can be financed into the loan.
No debt-to-income ratio (DTI) limits: VA doesn’t set a DTI maximum, giving more flexibility.
Relaxed credit requirements: Minimum credit scores are around 580 to 620 for VA loans.
No prepayment penalties: VA loans let you pay off your mortgage early with no penalty.
Streamlined refinance option (IRRRL): The IRRRL makes refinancing a VA loan quick and easy.

VA loans do come with some downsides:

Slower process: VA loans usually take longer to close and appraise. Conventional loans are often faster.
VA funding fee: This upfront cost is 1-3.6% of the loan amount.
Strict eligibility rules: You must have served on active duty to qualify for a VA loan.
For primary home only: VA loans can only be used for a primary residence.

Conventional Loan Overview

Conventional loans make up about 70% of the mortgage market. They’re provided by private lenders like banks and credit unions. Here are some key features:

No military service required: Anyone can qualify for a conventional loan.
Lower credit scores accepted: Minimum scores are around 620. But higher scores get better rates.
Low down payment options: Many conventional loans only need 3% down.
PMI required if under 20% down: PMI is typically 0.3-1% of the loan amount.
No funding fee: Conventional loans don’t charge any upfront fees.
No property restrictions: Conventional loans can finance primary homes, second homes, or investment properties.
Faster closing times: Conventional loans usually close faster than VA loans.
Prepayment penalties possible: Some conventional loans charge a penalty for early payoff.
Conforming loan limits: Loan amounts are capped based on local housing costs.

Drawbacks of conventional loans include:

PMI requirements: PMI makes your monthly payments higher until you build 20% equity.
Higher interest rates: Conventional loan rates average 0.5% higher than VA loan rates.
Minimum 3% down payment: Many buyers can’t afford this, especially first-timers.
Lower DTI ratios: Conventional loans usually want your DTI under 43%.

Head-to-Head Comparison

Now let’s directly compare some key factors to consider when weighing a VA loan vs a conventional loan:

Eligibility

VA loans require military service history. Conventional loans just examine your credit and finances.

Down Payment

VA loans need 0% down. Conventional loans typically require at least 3%.

Private Mortgage Insurance

VA loans have no PMI. Conventional loans under 20% down require PMI.

Funding Fee

VA loans charge a 1-3.6% funding fee. Conventional loans have no upfront fees.

Closing Costs

Both VA and conventional loans have closing costs around 2-5% of the loan amount.

Debt-to-Income Ratio

VA has no set DTI limit. Conventional lenders prefer DTIs below 43%.

Credit Scores

VA minimum scores are 580-620. Conventional loans want at least 620.

Loan Limits

VA loans have no maximum. Conventional conforming loans have local limits.

Eligible Properties

VA loans are for primary residences only. Conventional loans can finance any property type.

Interest Rates

Average VA loan rates are 0.5% lower than conventional loan rates.

Refinance Options

VA streamlined IRRRL refis are quicker and easier. Conventional refis are a standard process.

When Is a VA Loan a Better Choice?

VA loans really shine for eligible borrowers in these situations:

You have no down payment funds saved up
You want to avoid PMI
You don’t meet minimum credit or DTI requirements for conventional loans
You qualify for VA’s relaxed guidelines due to disability status
Your income is too high for other 100% financing programs
You’re purchasing a high-cost home above conforming limits
You value the ability to quickly and easily refinance as rates drop

VA loans are an incredible deal if you want to buy now but don’t have money for a down payment. The no PMI benefit also makes monthly costs drastically lower.

When Might a Conventional Loan Be Better?

Here are some cases where a conventional loan could beat out a VA loan:

You have an excellent credit score and down payment funds saved up
You are buying a lower-priced home within conforming limits
You need to close quickly in a competitive market
The property requires significant renovations or repairs
You are buying a second home or investment property
You may sell or move within 5 years

If you want maximum speed and simplicity, a conventional loan with 20% down can close quickly with no PMI. Conventional loans also give you more flexibility on property types purchased.

What Do Sellers Prefer?

One challenge for VA borrowers is that sellers often favor conventional loan offers over VA loans:

Appraisal objections: VA appraisals are stricter, potentially delaying or killing deals.
Loan uncertainty: Misconceptions about VA loans cause some sellers to view them as risky.
Renovation requirements: VA loans mandate any needed repairs be completed before closing.

That being said, VA loans can still compete successfully if you submit a strong offer with favorable terms. Be ready to negotiate and educate sellers on VA program benefits.

Making the Best Choice for You

There’s no universal answer to whether a VA or conventional loan is better. You have to look at your specific situation and goals. Key factors to consider are your credit profile, down payment funds, property type, primary residence status, and plans to move again soon.

I recommend having a loan officer research rates and run the numbers for both loan types. Look at projected monthly payments, out-of-pocket costs, and total interest paid over the life of the loan.

While VA loans have excellent perks, don’t rule out conventional financing either. The right conventional loan with a low down payment can potentially save you thousands over the long run.

Bottom line—take time to understand your options and choose the mortgage that best aligns with your financial picture and home buying needs.

va vs conventional loan

Credit score requirements

You will qualify for better rates with a higher credit score, regardless of loan type.

VA loans

A VA loan can be used to purchase a primary residence, and the property must meet minimum standards set by the VA.

VA Loans vs Conventional Loans: Which Mortgage Option is Best for You?

FAQ

Is it better to have a conventional loan or VA loan?

A VA loan may be your best bet if you don’t have a big down payment or have a higher DTI. You’ll pay the one-time VA funding fee but won’t bear the annual cost of private mortgage insurance. A conventional loan may cost less than a VA loan if you can put down 20% and skip mortgage insurance.

What are the disadvantages of a VA loan?

VA loans offer many benefits such as no down payment/mortgage insurance, easier qualifications and lower interest rates. However, they also have drawbacks such as a required funding fee, property restrictions and potentially less equity to start.

Why do sellers prefer conventional over VA?

Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.

How much lower are VA rates than conventional?

Typically, when you compare rates for the average 30-year VA loan and a 30-year conventional loan, VA loans usually have lower interest rates. The percentage difference tends to sit between 0.25% – 0.42%.

Is a conventional loan better than a VA loan?

A conventional loan may cost less than a VA loan if you can put down 20% and skip mortgage insurance. A conventional loan is also the way to go if you want to buy a second home or investment property. The only way to make an informed choice is to compare mortgage rates and fees for both types of loans, given your financial details.

Is a VA appraisal better than a conventional appraisal?

Typically, the appraisal with conventional financing will list the property as-is, while a VA appraisal will often have additional loan requirements, which can sour the deal in the eyes of sellers,” Crist cautions. Still, VA loans typically offer better deals for buyers (especially first-time buyers) than conventional loans.

Is a VA loan a good idea?

VA loans also tend to have lower interest rates and looser credit standards. However, VA loan borrowers will need to pay a funding fee, a one-time charge ranging up to 3.3 percent of the loan amount. A conventional loan is the most popular type of mortgage. In contrast to a VA loan, it isn’t backed by the government.

What are the pros and cons of a VA loan?

Here’s a look at the pros and cons of both types of loans. The first thing that stands out about VA loans is in most circumstances, there’s no down payment requirement. You also avoid paying for private mortgage insurance, or PMI, which most conventional loans require when you make a down payment of less than 20%.