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VA loans offer 100-percent home financing to qualified veterans, active-duty servicemembers and surviving spouses. If you’re eligible for a VA loan, you might assume it’s a better option than a conventional loan. Here’s how they compare.
Differences between VA loans and conventional loans
When deciding between a VA loan and a conventional loan, consider your down payment savings, credit score, debt load and the type of property you’re looking to finance.
VA loans
A VA loan is for members of the military and veterans and can be used to purchase, build or refinance a home. It’s backed by the U.S. Department of Veterans Affairs (VA), meaning the VA guarantees the loan on behalf of the mortgage lender in the event the borrower stops making payments.
The benefits of a VA loan include no down payment and no mortgage insurance requirements. VA loans also tend to have lower interest rates and looser credit standards.
VA loan borrowers pay a funding fee, a one-time charge ranging up to 3.3 percent of the loan amount. The funding fee is dependent on a few factors, including the loan type, whether you’re refinancing or purchasing a home and your down payment amount. The home attached to the VA loan must also be a primary residence (meaning you’ll live there), not a second home or investment property.
VA loans are available from VA-approved mortgage lenders. There are national lenders and even some credit unions that specialize in this type of loan.
Conventional loans
A conventional loan is the most popular type of mortgage. In contrast to a VA loan, it isn’t backed by the government. It’s available through many kinds of mortgage providers, including banks and online lenders.
If you qualify, you can obtain a conventional loan with a down payment as low as 3 percent. However, if you put down less than 20 percent, you’ll need to pay for private mortgage insurance (PMI) for a time. You’ll most likely pay the PMI premiums with your monthly mortgage payment.
Unlike a VA loan, conventional loans typically have a minimum credit score requirement of 620. That said, you’ll generally need a 740 or higher to qualify for the best interest rate and terms.
VA loan vs. conventional loan requirements
| VA loan | Conventional loan | |
|---|---|---|
| Eligible properties | Primary residence only | Primary and secondary residences; investment properties |
| Credit score minimum | No formal minimum set by VA; many lenders look for 620 or higher | 620 |
| DTI ratio maximum | No formal maximum set by VA; many lenders look for 41% or lower | Typically 36%, but can range up to 50% in certain circumstances |
| Down payment minimum | None | 3% |
| Loan limits | No limit unless borrower has defaulted in the past or has two or more VA loans | $726,200; $1,089,300 in costlier housing markets |
| Mortgage insurance | No mortgage insurance | Mortgage insurance required if down payment lower than 20% |
| Fees | Closing costs plus funding fee ranging up to 3.3% of loan principal | Closing costs |
The key differences between VA loans and conventional loans include:
Credit score
VA loans sometimes have a more relaxed credit threshold compared to conventional loans. That’s because the VA doesn’t impose a minimum credit score requirement. Some lenders, however, do set their own minimum (known as an “overlay”), often 620. With a conventional loan, you’ll almost certainly need a credit score of at least 620.
Down payment
For most, the biggest appeal of a VA loan is the fact that there’s no requirement to put money down. For a conventional loan, you’ll need to put least 3 percent down.
DTI ratio
Your DTI ratio is the percentage of your gross monthly income spent on debt obligations, such as a car payment or student loans, compared against your total gross monthly income. Say you bring in $4,500 a month, but spend $1,200 of that on debt payments. In this case, your DTI ratio would be about 27 percent.
Again, the VA doesn’t impose a maximum DTI ratio, but many lenders like to see this figure at or below 41 percent anyway. For a conventional loan, most lenders hold fast at 36 percent. Some go up to 43 percent, or even 50 percent.
Mortgage insurance
Mortgage insurance is a type of policy, paid by you, that protects the lender in the event you stop repaying your mortgage. With a conventional loan, you’ll need to pay these insurance premiums if you put down less than 20 percent. With a VA loan, by comparison, there isn’t any mortgage insurance requirement at all.
Fees
Both types of loans come with closing costs, such as an appraisal fee or title insurance payment. VA loans, however, also charge a funding fee up to 3.3 percent of the amount you’re borrowing. (Note: Disabled veterans who receive disability payments are exempt from the VA funding fee).
Benefits of a VA loan vs. conventional mortgage
If you’re eligible for a VA loan, it could be a better option for your finances than a conventional mortgage. Here’s why:
- VA loans don’t require a down payment. If you have full entitlement to your VA benefits, you won’t have to spend months saving up to cover a down payment.
- VA loans don’t require mortgage insurance. Even with no down payment, you won’t be subject to mortgage insurance premiums.
- VA loans generally allow for greater flexibility. A lower credit score or higher debt load won’t necessarily disqualify you from a VA loan.
How to choose the best loan option for you
If you qualify for both a VA and conventional loan, take the following steps to determine which is best:
Step 1: Compare mortgage offers
Look at offers from at least three mortgage lenders, ideally all on the same day. The rates on VA loans can sometimes be more attractive than conventional loan rates, but it depends on the lender you work with and other factors. (If you can get a lower rate with a VA loan, that might make it worth it, especially now as rates move up. If your credit score needs work, a VA loan might also offer more flexibility than a conventional loan.)
Step 2: Determine your down payment amount
If you can afford to put 20 percent down, it might be better to go with a conventional loan to avoid the VA funding fee. Unlike a VA loan with no money down, you’ll also have some equity in the home right away if you get a conventional loan with 20 percent (or any amount) down.
Step 3: Consider how you’ll use the property
Keep in mind that with a VA loan, you can’t buy a vacation home or investment property, either. If that’s your goal, you’ll need to shop for a conventional or investment property loan.
