VA Loan vs. Conventional: How to Choose Your Best Loan Option

Qualifying members of the military receive exclusive benefits with VA loans. See how they compare to conventional loans.
Last updated Nov 4, 2021 | By Lee Huffman | Edited By Melinda Sineriz
Couple signing home loan paperwork

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Many members of our military are eligible for a mortgage that is backed by the U.S. Department of Veterans Affairs (VA). These loans offer competitive interest rates, no private mortgage insurance, and a down payment as low as $0. Are they a better choice than conventional loans? There are many reasons to apply for a VA loan, and comparing a VA loan vs. conventional one can help you decide which loan type is right for you.

In this article

VA loan vs. conventional loan

Comparing the benefits of a VA loan vs. conventional loan will help you decide which type is best for your situation. This table highlights many differences among the common attributes of each type of loan.

VA loan Conventional loan
Down payment requirement As low as 0% Generally 3% to 20% or more
Minimum credit score None required by VA

Varies by lender

At least 620
Debt-to-income (DTI) ratio No set DTI ratio, but you may need to provide compensating factors, like savings reserves, if it’s more than 41% Below 43% is ideal
Mortgage insurance required? None For down payments below 20%
Loan limit None (with full entitlement)

FHFA* county loan limit (with remaining entitlement)

In 2021, conforming loan limit is $548,250 to $822,375 (depending on county)

Nonconforming loans don’t have a loan limit

Closing costs 3% to 5% 3% to 6%
Best for... Qualifying active duty military and veterans who want to minimize their down payment. Borrowers with strong credit scores and larger down payments.
*Federal Housing Finance Agency

How do VA loans work?

The Department of Veterans Affairs oversees and guarantees VA loans, and the loans are offered through private lenders approved by the VA. VA loans can have a down payment as low as 0%. While these loans require an upfront VA funding fee of 1.4% to 3.6% of the amount borrowed, that funding fee can be included in the loan, and there is no monthly private mortgage insurance (PMI) or mortgage insurance premium (MIP) requirement. The waiver of PMI and MIP may save borrowers a couple of hundred dollars a month, depending on the size of their loan.

A VA loan can be used for a home purchase or refinancing an eligible borrower's primary residence. A primary residence is a home you live in full-time rather than rent out or use on occasion. While VA loans cannot be used to purchase a rental property, you can buy a multi-unit property of up to four units and live in one unit while renting out the other three.

Veteran home loans can be used to simultaneously purchase and improve a home with energy-efficient improvements, like new windows, insulation, solar systems, and others. You may also buy a manufactured (aka mobile) home, but some VA lenders may require a down payment on those loans.

Many lenders offer VA loans, including Veterans United Home Loans and Navy Federal Credit Union. Interest rates on VA mortgage loans can be fixed or variable. While many VA loans are for 30 years to keep the monthly payment lower, you can opt for a shorter term.

Who are VA loans best for?

VA loans are best for potential homebuyers who want to buy a home (or refinance one) with the possibility of not having to make a down payment. This makes it a popular choice for first-time homebuyers. Additionally, a borrower with a lower credit score or a higher debt-to-income ratio is more likely to be approved for a VA loan than a conventional loan.

How do conventional loans work?

A conventional loan is a mortgage that isn’t guaranteed by a government program. These loans may allow as little as 3% down, but many borrowers make a 20% or larger down payment to avoid private mortgage insurance (PMI).

Conventional mortgages can be used to purchase or refinance single-family and multi-family homes. These properties can be your primary residence, a second home, or an investment property.

Conventional loans are either conforming or nonconforming. Conforming loans have a maximum of $548,250 in most counties, but loan limits vary by county based on the median home price. High-cost areas are allowed to go up to $822,375.

Loans above these limits are considered nonconforming and are otherwise known as "jumbo mortgages." Jumbo loans may have a higher rate and more stringent underwriting than a conforming loan.

Conventional nonconforming loans don’t have to be jumbo mortgages, however. Nonconforming loans are any home loans that don’t follow the rules set by Freddie Mac or Fannie Mae, two government-sponsored enterprises that help stabilize the mortgage market. Nonconforming loans may allow less income documentation than conforming loans, for example.

The best mortgage lenders will have multiple conventional mortgage options available. These loans typically have the best rates because the larger down payments, higher FICO scores, and lower debt-to-income ratio of borrowers signify a lower risk to the lender. Rates may be fixed or variable, and loans typically range from 10 to 30 years.

Who are conventional loans best for?

Conventional loans are best suited for borrowers who can make a larger down payment and have stronger finances. Ideally, a conventional borrower has a FICO score of 740 or higher and can make a down payment of at least 20% to qualify for the best rates and avoid PMI.

4 important differences between VA loans vs. conventional loans

  • Eligibility: VA loans are limited to qualifying veterans, active-duty military, reservists, and spouses of veterans who have passed away. Borrowers must verify their "entitlement" to determine what type of loan they are eligible for.
  • Down payment: VA loan borrowers can put down as little as 0%, while conventional borrowers tend to put 3% to 20% down.
  • Credit score: The Veterans Administration does not have a minimum credit score requirement. However, the lenders that issue VA loans typically require a credit score of at least 620. Conventional loans usually require at least a 620 FICO score but require at least 740 to get the best interest rates and terms.
  • Debt-to-income (DTI) ratio: This ratio is the total of all of your minimum payments versus your monthly gross income. There is no set maximum DTI ratio for VA loans, while conventional loans usually top out at 43%.

Which loan product should you choose?

Buying a home is one of the largest purchases a person will ever make. Now that you know how to get a loan, picking the right type of mortgage can save a considerable amount of money over the life of the loan. The right mortgage for you depends on the current state of your finances.

Aspiring homeowners who are having trouble saving up for a down payment might consider a VA loan if they are eligible. While VA loans do have a funding fee, they allow you to get into a home more quickly because you don’t have to save for a down payment.

Borrowers who have at least a 3% down payment and are better off financially may qualify for a conventional loan. This eliminates the VA funding fee, and your stronger financial position may open up more attractive loan programs.

Example of a VA loan vs. conventional monthly payment

The smaller down payment of a VA loan means that you can get into a home faster. However, the monthly principal and interest payment will be higher for the same home because of the large loan balance.

In the example below, the VA loan monthly mortgage payment is $1,264.81, while the conventional loan with a 20% down payment is $1,011.85. The extra $252.96 in the VA loan monthly payment amount could be a struggle for some budgets. To compensate, the VA loan borrower may have to buy a less expensive home to afford the payment.

VA Loan Conventional
Purchase price $300,000 $300,000
Down payment $0 $60,000
Loan amount $300,000 $240,000
Interest rate 3.00% 3.00%
Monthly payment $1,264.81 $1,011.85
Difference -$252.96

Note that this example only includes principal and interest and is for comparison purposes only. It doesn’t reflect the typical mortgage of a $300,000 home, as that would include taxes, fees, insurance, and you’d also have to pay closing costs when buying the home.

FAQs

Which is better, a VA home loan or conventional mortgage?

The better mortgage option depends on who is applying for the mortgage and their personal circumstances. You must be a veteran, active duty military service member, reservist, or an eligible surviving spouse to qualify for a VA mortgage. These loans are a good option for borrowers having trouble saving up for a down payment. Borrowers may also have lower credit scores or a higher debt-to-income ratio that disqualify them from getting a conventional mortgage.

What are the drawbacks to VA loans?

While getting a VA loan is easier than a conventional loan, they do require a VA funding fee of 1.4% to 3.6% of the amount borrowed. You cannot use a VA loan to purchase rental properties. Borrowers that had a VA loan foreclosure may not be able to apply for another VA loan until at least two years have passed.

What are the drawbacks to conventional loans?

Conventional loans generally have tougher underwriting standards than a VA home loan. They require a larger down payment, higher FICO score, and a lower debt-to-income ratio. Additionally, if you have less than a 20% down payment, they typically require the borrower to pay for private mortgage insurance (PMI). These payments continue until you have at least 20% equity in your home and request the mortgage company eliminate the PMI requirement.

What’s a good credit score for a conventional loan?

Credit score requirements vary by the lender for conventional loans. Many have a minimum credit score of 620 to approve borrowers for a loan. However, if you want the best terms and lowest rates, you should have at least a 740 credit score.

Bottom line

As a service member, you may have access to exclusive loans backed by the VA. When considering whether to get a VA loan vs. conventional mortgage, the decision typically revolves around the size of your down payment. VA loans make it easier to buy a home with no down payment and no monthly PMI. On the other hand, conventional loans may offer better rates and terms due to larger down payments and more rigorous underwriting.

No matter which loan you apply for to buy or refinance a home, no decision is permanent. Neither loan type has a prepayment penalty. So, homebuyers could refinance at a later date (if they qualify) to take advantage of the other type of loan's rates, terms, or benefits.

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Author Details

Lee Huffman Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better. When Lee is not getting his passport stamped around the world, he's researching methods to earn more miles and points toward his next vacation.