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VA Loans vs. Conventional Loans: What’s Different and How Do You Choose?

TLDR

What You Need To Know

  • Conventional loans are mortgages that aren’t insured or backed by the government. VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs
  • Eligible VA loans over $144,000 no longer come with limits, meaning there’s no down payment[3]
  • Home sellers tend to favor offers from buyers using conventional loans over offers from buyers with VA loans

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When you’re house hunting, finding the right home is only part of the battle. You’ll also need to decide how to finance your home purchase. If you’re going to take out a loan, you need to know which type of mortgage to use.

Conventional loans and U.S. Department of Veterans Affairs (VA) loans are among the most popular mortgages. Both can be great ways to buy a home, but there are key differences between the two.

Conventional Loan and VA Loan Basics

Conventional loans are mortgages that aren’t insured by the government. VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs.

Anyone who meets a lender’s credit and debt-to-income (DTI) ratio requirements can qualify for a conventional loan. In contrast, VA loan eligibility is limited to certain service members, – including those on active duty and in the National Guard or Army Reserve – veterans of the U. S. military and their qualifying surviving spouses.[1]

Conventional loans are either conforming, meaning they meet the eligibility requirements of Fannie Mae and Freddie Mac, or non-conforming, meaning they don’t meet the minimum Fannie Mae and Freddie Mac standards to purchase the loan. Most conventional loans are conforming. However, some conventional mortgages, like jumbo loans (loans that have limits of up to $1 million – $2 million), are not conforming.

For the 2022 calendar year, conforming conventional mortgages have loan limits of $647,200 for a single-family home. However, in certain higher-cost areas, that limit increases to $970,800.[2] 

Eligible VA loans over $144,000 no longer come with limits, meaning there’s no down payment.[3]

Let’s take a closer look at some of the requirements for conventional loans and VA loans.

Comparing Conventional vs. VA Loan Requirements

Conventional loans and VA loans come with different requirements, from the type of property you can buy to the fees they charge.

Mortgage RequirementVA Loan Conventional Loan 
Property type Primary residences[4]Primary residences, second homes, investment property[5]
Credit scoreNo minimum requirement[6]Minimum of 620[7]
Down payment None[8]As low as 3%[7]
Mortgage InsuranceNot required[9]Typically required for down payments less than 20%[10]
FeesVA funding fee, origination fee, VA appraisal fee[11]Origination fee, appraisal fee

Property type

You can use a VA loan to purchase a primary residence, like a single-family home or residential property with 1 – 4 units.[3] Conventional mortgage loans can finance the purchase of primary residences and second homes, including vacation homes and investment properties.[5]

Credit score

To qualify for a conventional loan, most mortgage lenders expect a minimum credit score of 620.[7] The VA loan program doesn’t have specific credit requirements, though individual lenders can set their own minimums.[6]

Down payment

Qualified borrowers can put as little as 3% down on conventional loans.[7] Although, borrowers with lower credit scores may have to make a down payment of 10% – 20% to qualify for a conventional mortgage.[10] VA loans don’t have a down payment requirement, except in cases where the purchase price for the property exceeds its fair market value. 

Private mortgage insurance

When a borrower takes out a conventional loan with a down payment of less than 20%, they’re obligated to pay private mortgage insurance (PMI). PMI protects the lender’s investment if the borrower defaults on the loan. In other words, if you don’t pay your mortgage, your PMI will guarantee the lender gets their money. 

VA loans don’t have any mortgage insurance, even if you put down less than 20%. The government backs VA loans, and the program is funded in part by the upfront VA funding fee.

Mortgage rates

The 30-year fixed-rate VA loan interest rate average is generally slightly lower than the 30-year fixed-rate conforming conventional mortgage average.

Fees

When you take out a loan, most lenders charge an origination fee to process it. In some cases, you may be able to negotiate with your lender to reduce or eliminate the origination fee altogether.

Both conventional loans and VA loans can have origination fees. In addition, VA loans and conventional loans require a home appraisal, which the borrower typically pays for.

A key difference between VA loan fees and conventional loan fees is that VA-backed mortgages charge an upfront funding fee. VA funding fees range from 1.4% – 3.6% of the loan amount and vary based on the size of your down payment and whether you’ve used the VA loan benefit before.[11]

For example, if it’s your first time using the VA benefit and you put down 10% or more, you’ll only pay a 1.4% funding fee – compared with a 3.6% fee if it’s your second use and you put down less than 5%. 

How To Choose Between a VA Loan and Conventional Loan

Both VA loans and conventional loans can be excellent options to help military veterans and service members finance a home purchase. Choosing which type of loan to use comes down to personal preference and identifying the mortgage that best suits your needs.

If you’re having difficulty deciding, compare the benefits of VA mortgages and conventional mortgages to see which appeals to you more.

Benefits of a VA loan

Benefits of a VA home loan include:

  • No down payment requirements
  • No mortgage insurance
  • No minimum credit score requirements
  • Lower interest rates

Benefits of a conventional loan

Advantages of a conventional loan include:

  • Anyone creditworthy can qualify
  • More lender options
  • Usually favored by sellers (over government-backed loans, including VA, USDA and FHA loans)
  • No PMI (with a 20% down payment)
  • Can be used to purchase a second home or investment property
  • No upfront funding fee

Do sellers have a preference?

Home sellers tend to favor offers from buyers using conventional loans over offers from buyers with VA loans. Conventional loans are generally more flexible than government-backed loans, and they close faster on average.[12] Some sellers may also perceive buyers with conventional financing as more reliable and financially secure, since conventional loans have tougher credit requirements and often include larger down payments.

VA Loan or Conventional Loan: What’s Next?

Don’t have a sizeable down payment ready but still want the best interest rate? Sounds like a good fit for a VA loan. Want to make the strongest possible offer and skip the VA funding fee? Try a conventional loan. Once you’ve decided which loan is better for you, contact a reputable loan officer to get your conventional mortgage or VA preapproval.

  1. U.S. Department of Veterans Affairs. “Eligibility requirements for VA home loan programs.” Retrieved October 2022 from https://www.va.gov/housing-assistance/home-loans/eligibility/

  2. Fannie Mae. “Loan Limits.” Retrieved October 2022 from https://singlefamily.fanniemae.com/originating-underwriting/loan-limits

  3. United States Department of Veterans Affairs. “VA home loan limits.” Retrieved October 2022 from https://www.va.gov/housing-assistance/home-loans/loan-limits/#

  4. United States Department of Veterans Affairs. “VA Pamphlet 26-7, Revised.” Retrieved October 2022 from https://benefits.va.gov/WARMS/docs/admin26/m26-07/Chapter_3_The_VA_Loan_and_Guaranty.pdf

  5. Fannie Mae. “Eligibility Matrix.” Retrieved October 2022 from https://singlefamily.fanniemae.com/media/20786/display

  6. United States Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved October 2022 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

  7. Fannie Mae. “Selling Guide.” Retrieved October 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-1-Credit-Scores/1032996841/B3-5-1-01-General-Requirements-for-Credit-Scores-08-05-2020.htm

  8. United States Department of Veterans Affairs. “Purchase loan.” Retrieved October 2022 from https://www.va.gov/housing-assistance/home-loans/loan-types/purchase-loan/

  9. United States Department of Veterans Affairs. “VA Home Loans.” Retrieved October 2022 from https://www.benefits.va.gov/homeloans/

  10. Consumer Financial Protection Bureau. “What is private mortgage insurance?” Retrieved October 2022 from https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/

  11. United States Department of Veterans Affairs. “VA funding fee and loan closing costs.” Retrieved October 2022 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/

  12. National Association of Realtors. “Home Buyers With Government Loans Struggle to Compete.” Retrieved October 2022 from https://www.nar.realtor/magazine/real-estate-news/home-buyers-with-government-loans-struggle-to-compete#

ICYMI

In Case You Missed It

  1. VA loans are only available to eligible service members, veterans of the U.S. military and their surviving spouses

  2. Unlike conventional loans, VA loans don’t require a down payment, minimum credit score or mortgage insurance

  3. Drawbacks of VA loans include an upfront funding fee of 1.4% – 3.6% of the loan amount, plus longer closing times compared to conventional loans

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