Is a conventional loan or VA loan better?
When it comes to VA loans vs. conventional loans, it’s often an easy choice: VA, if you’re eligible. But mortgage loans aren’t one-size-fits-all and your situation could be different. Some homeowners are better off with a conventional loan — even if they’re VA-qualified.
Fortunately, it’s easy to compare your options. Your mortgage lender can run the numbers for a VA loan vs. a conventional loan and help you find the right product for your situation. Ready to get started?
In this article (Skip to...)
- VA loan vs. conventional
- Comparison chart
- VA loan pros and cons
- Conventional loan pros and cons
- When is VA better?
- When is conventional better?
- What do sellers prefer?
VA loan vs. conventional loan: Which is better?
If you are eligible, a VA loan is often better than a conventional loan. You can buy a home with no down payment, a higher debt-to-income ratio, and no private mortgage insurance. You’re also likely to have a lower mortgage rate and cheaper monthly payments. Those perks are hard to beat.
On the other hand, conventional loans are more flexible and can be used to buy almost any property — including a second home or vacation home. In addition, there are no special eligibility requirements to qualify.
Keep in mind that most VA-eligible borrowers can only have one VA loan at a time. So buying a second home would often require a conventional loan. Your VA entitlement can be used for two loans in certain circumstances; but, if you want to buy an additional home, you likely need to use a conventional loan despite your veteran status.
Of course, each type of loan has its drawbacks, too. Learn more about the pros and cons of both loan types before making your decision.
Conventional loan vs. VA loan comparison
To more easily compare a VA loan to a conventional loan, take a look at this chart:
|VA Loan||Conventional Loan|
|Special Eligibility||Eligible military service history||None|
|Min. Credit Score||Typically 580-620||620|
|Min. Down Payment||0%||3%|
|Private Mortgage Insurance||Not required||Required with less than 20% down|
|Upfront Funding Fee||0.5-3.6% of loan amount||None|
|Closing Costs||Often 2-5% of loan amount||Often 2-5% of loan amount|
|Max. Loan Amount||None||$ for a 1-unit home in most areas|
|Eligible Properties||Primary residences||Primary residences, second homes, investment properties|
Differences between VA loans and conventional loans
There are several differences between VA loans and conventional loans.
- Eligibility: Any home buyer can apply for a conventional loan. But with a VA loan, “you must have VA eligibility through military service, reserve service, or National Guard service or be a surviving spouse of a veteran who died in combat or from a service-connected illness or disability.” says Leanne Crist, a loan officer at Mortgage Network
- Down payment: VA loans allow 100% financing (no down payment), while conventional loans typically require at least 3% down
- Mortgage insurance: Conventional loans require that you purchase private mortgage insurance (PMI) if you put less than 20% down. VA loans don’t require any ongoing mortgage insurance premiums, but you are charged a VA funding fee that usually averages 1% to 3.6% of the loan, depending on your down payment
- Property requirements: VA loans can only be used to buy a primary residence, while conventional home purchase loans can be used for primary residences, second homes, or rental properties
- Government guarantee: “A VA loan is backed and guaranteed by the U.S. Department of Veterans Affairs, whereas a conventional loan is [usually] backed by Fannie Mae or Freddie Mac,” says Sam Atapour, branch manager for Embrace Home Loans
- Debt-to-income ratio: The VA has not established a DTI ratio limit, but most VA lenders will scrutinize borrowers with higher ratios. On the other hand, it’s best to have a DTI under 43% for a conventional loan
- Credit score: Similar to DTI, the VA has not set a minimum credit score for its loans. Still, lenders are allowed to set their own minimums, usually between 580 to 620. Buyers seeking a conventional loan should expect to have a FICO score of 620 or more
Either a conventional loan or a VA loan can offer a range of financing options, including fixed- and adjustable-rate home loans.
“Both loan programs have 30-year fixed-rate options, 15-year fixed-rate options, adjustable-rate mortgages, and jumbo options, depending on borrower needs, situations, and length of time they expect to live in the home,” notes Crist.
Pros and cons of VA loans
VA loans have their good and bad points. Some of the biggest benefits include no required down payment, no mortgage insurance required, and no maximum loan amount.
VA loan pros:
- VA loans are backed by the U.S. Department of Veterans Affairs. This guarantee allows banks and credit unions to offer lower interest rates, despite not securing the loan with a down payment. VA borrowers often qualify for a mortgage with lower credit scores, too
- VA loans can be much cheaper and quicker to refinance than conventional loans. The VA IRRRL, formally known as the Interest Rate Reduction Refinance Loan, is a streamlined refinancing option with much less documentation and fewer closing costs
- VA loans have no PMI. Conventional borrowers have to pay private mortgage insurance (PMI) when they put less than 20% down. This can often add $100 or more to the monthly mortgage payment. VA loans, on the other hand, never charge PMI
VA loan cons:
- VA loans are often slower to close. “Underwriting can take longer, which can, unfortunately, make VA offers less competitive when compared to cash or conventional buyers,” explains Tony Davis, Chairman and CEO of Atlantic Home Mortgage
- VA loans require a mandatory, one-time funding fee. The VA funding fee is usually around 1% to 3.6% of the loan amount, but it can be financed into the mortgage if you don’t want to pay it upfront
- VA loans have a slower home appraisal process. VA appraisals must assure that the property meets the VA’s “Minimum Property Requirements” or MPRs
“VA loans can often take twice as long to close, but the benefits are probably worth it,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “Ask your lender if they can start the process before you get on contract [to buy a house]. This is often an option for any loan, not just VA.”
VA loan eligibility
Additionally, you have to qualify for a VA loan, which leaves most borrowers out. To be eligible, you must meet one of the following military service requirements:
- Be on active duty and have served 90 continuous days
- Be a veteran who served 90 days in wartime
- Be a veteran who served 181 days in peacetime
- Have served six creditable years in the Selected Reserve or National Guard
- Be a surviving spouse of a service member missing in action, prisoner of war, or veteran who died while in service or from a service-connected disability and you have not remarried
“You may not be eligible if you received an other-than-honorable bad conduct or dishonorable discharge, although you can apply with the VA to upgrade your discharge status,” Davis adds.
Pros and cons of conventional loans
Home buyers have a lot to like about conventional loans. In fact, this mortgage program is the most popular type of loan, according to the most recent report from Ellie Mae.
Conventional loan pros:
- Conventional mortgage loans are backed by Fannie Mae and Freddie Mac. Also known as conforming loans, federal support keeps this loan type affordable and accessible to the general public
- Conventional loans are typically faster to close than VA loans. “Conventional loans [may] also receive appraisal waivers, reducing your closing costs and increasing certainty of closure for a real estate purchase,” says Davis. “And there is no funding fee for a conventional loan”
- Conventional loans have no property restrictions. As mentioned before, primary, second, or investment properties can all be purchased with a conventional loan. Home sellers often look more favorably on a conventional loan than a VA loan
Conventional loan cons:
However, conventional mortgage loans have their disadvantages.
- Conventional loans often require private mortgage insurance. Borrowers who are putting less than 20% down will have to carry PMI, which is paid on top of every mortgage payment until the loan reaches 20% home equity. PMI protects the lender in case of loan default or foreclosure
- Conventional loans have maximum loan limits. A conforming loan limits the amount of money you can borrow. The conforming loan limit is $ for a single-family home in most areas of the U.S.
When is a VA loan better?
If you qualify for a VA home loan, chances are that it’s going to offer a better financing deal for you than a conventional loan. That’s because you don’t have to put any money down, pay any mortgage insurance premiums, or worry about exceeding a maximum loan amount for your dream home’s purchase price.
“Say you are a veteran who wants to purchase a $300,000 home as a first-time buyer,” says Davis. “Assume you only have $6,000 in savings, which is not enough money to purchase a home using a conventional loan or an FHA loan. You can utilize your VA benefit to purchase the home with zero dollars down and structure the loan either with a lender credit or seller credit to help pay closing costs.”
In other words, a VA loan is a better bargain here, especially if you don’t have sufficient funds for a down payment.
“Another example where a VA loan is a better option would be if a borrower has a credit score below 620 as well as no money for a down payment. A VA loan is the optimal choice in this situation,” says Atapour.
When is a conventional loan better?
Despite all the perks of a VA loan, a conventional loan may be a better option under certain circumstances.
“Imagine you want to purchase that same $300,000 home as a first-time buyer. But in this scenario, you have $60,000 to put down and there are 15 other offers on the house you want to purchase,” Davis explains. “Here, a VA offer is unlikely to get accepted over a conventional offer because there is a greater perceived risk of issues with appraisal. But since you have 20% to put down, you can purchase the home with no mortgage insurance.”
Davis adds, “If your main priority is to get the house, a conventional loan might be the way to go — even if you qualify for both a conventional loan and a VA loan.”
Do sellers prefer VA loans or conventional loans?
One big challenge for veteran home buyers is that sellers tend to favor conventional loans over VA loans.
“With multiple offers for sellers to review, sellers may prefer contracts with conventional financing over VA financing. Typically, the appraisal with conventional financing will list the property as-is, while a VA appraisal will often have additional requirements, which can sour the deal in the eyes of sellers,” Crist cautions.
Still, VA loans typically offer better deals for buyers (especially first-time buyers) than conventional loans. So it’s worth working with your real estate agent and the seller’s agent to see if you can get the offer accepted as-is.
Make sure the seller and their agent understand how VA loans really work, and that they aren’t acting under any misconceptions about the VA mortgage program. This could help in getting your offer accepted.
How to choose the right mortgage for you
Ultimately, the right financing choice for you will depend on several factors, including:
- Your ability to qualify for the loan
- The type of home you’re buying
- Your personal finances
- The local real estate market
- Your urgency to purchase a property
“Talk with an experienced loan officer to identify the best loan and the best way to structure your financing,” recommends Davis. “There is not a one-size-fits-all approach, and what is best for one person may not be best for another.”