The basics
The difference between conventional loans and VA loans comes down to who can use them and what's required. Conventional loans are available to anyone, but ideally, you should have a 20% down payment and a good credit score to get a good interest rate and avoid mortgage insurance. VA loans, on the other hand, are specifically for people who have served in the military and eligible surviving spouses. They offer big benefits like no down payment requirements and no need for private mortgage insurance.
Let’s dive into the fundamental differences between VA loans and conventional loans.
What are VA loans?
Simply put, VA loans are designed to make homebuying easier for borrowers who have served their country. These government-backed loans from the Department of Veteran Affairs (VA) are for eligible active service members, veterans and surviving spouses, whether they’re buying a primary home or refinancing a mortgage.
VA loans are offered through private lenders, but the VA guarantees the loan on behalf of the borrower, just in case they stop making payments. This support from the government allows lenders to offer lower rates and more generous credit standards to military folks. To score these benefits, you’ll have to meet VA loan requirements.
What are conventional loans?
Take a look around your neighborhood and chances are most homes you see are financed with a conventional loan. This is the most popular type of mortgage, and it isn’t insured or guaranteed by the federal government.
Instead, institutional lenders like banks and credit unions take on all the risk when they lend to you. They want to be sure borrowers can handle the payments, so they make conventional loan requirements a little tougher.
VA loans vs. conventional loans at a glance
Before we get into the finer details, here’s a bird’s-eye view of how VA loan requirements and conventional loan requirements measure up.
| What to consider | VA loans | Conventional loans |
|---|---|---|
| Special eligibility | Must be an eligible service member, veteran or surviving spouse | No special requirements |
| Property type | Primary residences | Primary, secondary and investment homes |
| Down payment | $0 required with 100% VA Loan Guarantee Benefit | 3% to 20% of amount borrowed |
| Private mortgage insurance (PMI) | No PMI, but there’s a funding fee of 1.25% to 3.3% of the loan amount | PMI required if down payment is less than 20% |
| Credit score | 620, but may consider as low as 580 | 620 minimum |
| Debt-to-income ratio | Usually 41% or lower | Typically 36%, but can be as high as 50% |
| Interest rates | Typically lower than conventional loans | Typically higher than VA loans |
Property types
Not every loan can be used for every type of property. Let’s break down the differences.
VA loans
If you’re banking on a VA loan, make sure your new ZIP Code will serve as your primary address. This means you’ll live in the home full time, or at least for most of the year. VA loans are exclusively set aside for primary residences and can’t be used to purchase investment properties or second homes, unless the home is for seasonal work or deployment.
Conventional loans
Conventional loans can be used for a range of property types, so you can get financing whether it’s a primary property, secondary home, vacation house or investment property.
Pro Tip
After you purchase a second home, the standards to qualify for a conventional loan may be higher. Lenders often expect you to have more assets if you’re juggling multiple conventional loans, so be ready to prove your financials are up to the task.
Down payment
Now to the big question: how much of your own money will you have to pay up front? The VA wins by a long shot, requiring zero down payment in most cases.
VA loans
VA loans are the star of the show here because they don’t have a minimum down payment requirement. This means you can get your home completely financed with a loan.
Conventional loans
A down payment is a given with most conventional mortgages. However, you can find some conventional loan options for as low as 3% down. Remember that a smaller down payment can trigger private mortgage insurance (PMI). If you put down anything less than 20%, expect mortgage insurance to appear as part of your mortgage payment.
Private mortgage insurance
Lots of loans require private mortgage insurance to protect the lender just in case the borrower defaults. VA loans let you off the insurance hook, while conventional loans often tack on this charge. However, there are ways to get around it.
VA loans
VA loans don’t make you pay for mortgage insurance, but you can’t totally escape fees. Instead, VA loans ask for an up-front funding fee of 1.25% to 3.3% of the amount you’re borrowing. How much you’ll pay is determined by the amount you put down and if you’ve used your VA loan benefits in the past.
Conventional loans
If you put down less than 20% on a conventional loan, private mortgage insurance (PMI) will kick in. Your credit score and down payment amount determine how much you’ll owe. According to Freddie Mac, you can expect to pay $30 to $70 per month for each $100,000 borrowed.
The good news? PMI is temporary. It will automatically be removed once you’ve paid off 22% of the loan.
Credit score requirements
A solid credit score is always a good thing since it helps you get a lower rate and better terms. If your score is on the lower end, a VA loan is more likely to give you the green light.
VA loans
The VA itself doesn’t ask for a certain credit score, but each lender has its own rules. Lenders usually hope to see a score of 620 or higher for VA loans. If yours is lower, don’t count yourself out. Some lenders will accept credit scores as low as 580 and take other financial factors into account, like your debt-to-income ratio, employment history and a glowing report card from previous homeownership.
Conventional loans
Conventional loans aren’t so different here. Most lenders want to see a credit score of at least 620. If your credit score doesn’t hit the mark, you’ll likely have better luck qualifying with a VA loan, which has softer limits.
Debt-to-income (DTI) ratio
Alongside the credit score, your debt-to-income ratio is how lenders size up your financial wellness. This ratio looks at how much of your gross monthly income goes towards monthly debt payments such as auto loans and credit cards.
Let’s say you bring in $5,000 a month but spend $1,500 paying off debt. That’s a 30% debt-to-income ratio. The lower your DTI, the better your chances may be of qualifying for a loan and nabbing a competitive interest rate.
Pro Tip
Want to reduce your DTI ratio before applying? Work on paying down your existing debt and avoid taking on any new forms of debt, whether that be a credit card or auto payments.
VA loans
The VA doesn’t set hard and fast rules around DTI, but lenders generally don’t love ratios above 41%. Some lenders let you squeak by with a ratio as high as 60%, but this comes with a more extensive underwriting process.
Conventional loans
Conventional loans can serve up a mixed bag. Most lenders want to see a ratio of 36% or below, while others are willing to accept ratios as high as 43% or even 50% in some cases. Overall, if you have a high DTI, a VA loan might be the better bet.
VA loans vs. conventional loans: Making the right choice
Now that we’ve covered the basics, it’s time to consider which loan is the better fit. If you’re noodling on VA loans vs. traditional loans, the decision comes down to your circumstances and what you’re looking for. Let’s take stock of the variables you should think about.
Factors to consider
How’s your financial health? If your credit score and debt-to-income ratio aren’t looking so hot, you’ll likely have better luck qualifying for a VA loan and getting a more reasonable interest rate.
What’s your down payment? Putting no money down sounds like the dream, but it might not be the most cost-efficient option in the long run. If you have enough saved up for a 20% down payment, you can go with a conventional loan to avoid paying for private mortgage insurance or the funding fee that comes with a VA loan. You’ll build equity in your home and likely secure an even better interest rate by paying more up front. That could shave off hundreds of dollars from your mortgage bill each month.
What are the current interest rates? When you’re ready for a home, it’s time to keep a close watch on interest rates. Tons of factors play into the current rates, from broader market conditions to the specific lender and loan type, so you might want to be ready to pounce when a great rate strikes. Most of the time, you’ll find that VA rates may beat out conventional loan rates, but it pays to pay attention.
How will you use the property? As long as this is your primary home, you’re good to go with a VA or conventional loan. Keep in mind, there are occupancy rules that come with a VA loan. You’ll have to move into the home within 60 days of the loan closure to be eligible. If you were thinking more along the lines of a vacation home or investment property, you’ll need to take out a conventional loan.
Is there a lot of interest in the home? If you expect there to be a lot of competition for your prospective home, it might be worth looking at things from the seller’s point of view. Sellers may opt for a buyer with a conventional loan, which is seen as more straightforward with less paperwork. VA loans can take longer to close due to a lengthy underwriting process and stricter property requirements during appraisal.
