The VA home loan is a government-backed mortgage for Veterans or active service members that comes with significant financial benefits, including purchasing without a down payment and no out-of-pocket costs. For the vast majority of military borrowers, VA loans are the most powerful and cost-effective mortgage program on the market.
But there are certainly times when a VA loan isn't the best answer, and a conventional loan may be a better option.
A conventional loan is a type of mortgage that isn't insured by the federal government and adheres to the standards of government-sponsored enterprises Fannie Mae and Freddie Mac. It's a popular choice for most homebuyers who either don't meet the eligibility requirements for other mortgage types or who can afford a larger down payment.
Let’s break down the difference between VA loans and conventional loans and when one option may be more favorable than the other.
For 2022, over 6,000,000 conforming loans were originated compared to 555,000 VA loans.
Choosing between a VA loan or a conventional loan can be a difficult decision. While some VA loan requirements are similar to conventional, there are notable distinctions between the two.
Below is a table outlining the essential factors when comparing VA loans to conventional loans.
|Borrower must be a Veteran, service member or surviving spouse with valid COE
|No special requirements
|3% to 20% of loan amount
|Private Mortgage Insurance (PMI)
|PMI for mortgages with less than 20% down
|Typically lower than conventional
|Typically higher than the VA
|Not set by the VA, but lenders often required at least a 620 FICO
|Typically a 620 FICO minimum
|Primary residence only
|Primary, secondary, investment and vacation properties
|VA Funding Fee (1.25% to 3.3% of loan amount)
|No program fees
Let’s explore the specifics of each factor and understand situations when one loan type might be more favorable than the other.
The most significant difference is who can use each loan type. VA loans are for Veterans, active duty military and surviving spouses with a valid Certificate of Eligibility (COE). Those who don't meet the basic service requirements won't be able to get a VA loan.
Conventional loans don't have any special borrower requirements. Anyone with the credit and finances to get a conventional loan may be eligible.
If you are a Veteran or active duty service member, it's usually best to use your VA loan benefits.
The most prominent benefit of the VA loan is the down payment requirements or lack thereof.
Most VA borrowers don't need a down payment to secure financing. If a VA borrower does need a down payment, it's typically due to diminished VA loan entitlement.
Conversely, conventional loans often require a down payment of at least 5 percent (in some cases, it may be 3 percent). According to the FED, the average home sale price in Q2 of 2023 was $503,000. A conventional borrower with a 5 percent down would need to bring more than $25,150 to closing for their down payment.
Choose a VA loan if you don’t have funds saved for a down payment.
VA loans do not require private mortgage insurance (PMI), saving the borrower thousands over the life of the loan.
Conventional loans with less than 20 percent down do require PMI. Depending on home price, credit score and other factors, PMI can easily run $150 to $200 monthly. But if you can afford to make a 20% down payment, conventional loans do not require PMI.
PMI protects the lender if you default on your loan and typically falls off after you reach 80 percent loan-to-value (the equivalent of placing 20 percent down).
To put that in perspective, the chart below illustrates how much individuals would need to pay to avoid PMI on a conventional loan.
|Down Payment Needed
If you're unable to afford a 20% down payment for a conventional loan and want to avoid PMI, a VA loan is your best choice.
A .323 percent difference in rate may sound small, but that can equal tens of thousands in interest savings over the life of the mortgage.
VA loans are backed by the Department of Veterans Affairs, giving lenders the confidence to extend more favorable rates to borrowers who may not have perfect credit.
Over the last year, VA interest rates were slightly lower than conforming rates. However, interest rates largely depend on your financial situation.
The Department of Veterans Affairs (VA) does not set a credit score minimum on VA loans, but most lenders do. Just like conventional loans, VA lenders typically like seeing a 620 or better mortgage credit score. However, some VA lenders will accept credit scores as low as 580.
You may still be eligible for a VA loan with a bad credit score if you meet certain “compensating factors,” such as a great debt-to-income ratio, long-term employment history or a healthy record of previous home ownership. Another option is working with a credit consultant to improve your credit score.
It may be easier to qualify for a VA loan than a conventional loan if your credit score is below 620.
A significant difference between VA and conventional loans is that VA loans are only for primary residences. The primary residency requirement doesn't rule out duplexes or fourplexes, but to use a VA loan, you must intend to live in the property you purchase.
Conversely, conventional loans are available to purchase primary residences, vacation homes, rental properties and other investment properties.
Choose a conventional loan if the home will solely serve as a vacation, rental or investment property.
VA loans come with what's known as the VA funding fee. The fee ranges from 1.25 to 3.3 percent and is applied to every VA purchase and refinance loan. The VA funding fee is often rolled into the entire loan amount to make for a true $0-down loan.
Conventional loans do not have any unique fees like the VA funding fee.
VA funding fee exemptions are available under certain circumstances. However, a conventional mortgage is better for avoiding program fees.
Another aspect that separates VA loans from traditional mortgages is the VA’s Minimum Property Requirements (MPRs). VA loan properties must meet certain criteria to ensure the home is safe, sanitary and structurally sound.
Also, VA loans don’t have loan limits if you have full VA entitlement, but conventional mortgages always do. These limits are set by each county, with most counties setting their limit at $766,550 for a single-family property.
Not necessarily. VA loans typically have more lenient qualification criteria compared to conventional loans, such as flexible credit score requirements, lower interest rates and no private mortgage insurance required. However, VA loans must adhere to the specific property guidelines set by the VA. At times, this can restrict the range of property options for VA buyers.
In today’s competitive market, appraisal contingencies are worth noting. A number of conventional loans are forgoing this step to enhance the appeal of their offers. However, VA loans require a VA appraisal to ensure that properties meet established standards. The inability to waive this contingency can sometimes place VA buyers at a disadvantage in highly competitive housing markets.
While VA loans and conventional loans have their own strengths, there are a few advantages a VA loan offers that are very helpful for homebuyers. According to our 2022 Veteran Homebuyer Report, here are the top reasons Veterans choose the VA loan:
Deciding if a VA loan or conventional loan is better comes down to your own situation and needs.
A VA loan might be the best option if you lack funds for a down payment or your debt-to-income ratio is on the higher side. Although there is a one-time VA funding fee, you won’t have the recurring expense of private mortgage insurance.
A conventional loan might be better if you're able to make a 20% down payment and avoid the need for mortgage insurance. If you want to buy a second residence or investment property, a conventional loan is your best option due to VA occupancy requirements.
No matter what your homebuying goals are, Veterans United is here to help. Talk with a VA home loan expert to get a complete comparison for your unique homebuying journey.