VA loan vs. conventional loan: Pros and cons 2022

Erik J. Martin
Erik J. Martin
The Mortgage Reports Contributor
October 27, 2021 - 7 min read

VA loan vs. conventional loan overview

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.

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VA loan vs. conventional loan: Which is better?

If you are eligible, a VA loan is often better than a conventional loan.

The main benefits of VA over conventional? 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 residence. And there are no special eligibility requirements to qualify.

In addition, most VA-eligible borrowers can only have one VA loan at a time. So if you want to buy an additional home, you might 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.

VA loan vs. conventional loan comparison chart

To more easily compare a VA loan to a conventional loan, take a look at this chart:

VA LoanConventional Loan
Special EligibilityEligible military service historyNone
Min. Credit ScoreTypically 580-620620
Min. Down Payment0%3%
Private Mortgage InsuranceNot requiredRequired with less than 20% down payment
Upfront Funding Fee0.5-3.6% of loan amountNone
Closing CostsOften 2-5% of loan amountOften 2-5% of loan amount
Max. Loan AmountNone$ for a 1-unit home in most areas
Eligible PropertiesPrimary residences Primary residences, second homes, investment properties

Differences between VA loans and conventional loans

There are several differences between VA loans and conventional loans.

The biggest one is that VA loans require a military service history to qualify.

“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. These folks can also apply for a conventional loan, but most people who choose a conventional loan are not eligible for a VA loan,” says Leanne Crist, a loan officer at Mortgage Network.

Secondly, VA loans allow 100% financing, while conventional loans typically require at least 3% down.

Third, conventional loans require that you purchase private mortgage insurance (PMI) if you put less than 20% down.

“Most people who choose a conventional loan are not eligible for a VA loan.” —Leanne Crist, Loan officer, Mortgage Network

VA loans don’t require PMI, but you are charged a funding fee that usually averages 1% to 3.6% of the loan, depending on your down payment.

Fourth, VA loans can only be used to buy a primary residence, while conventional purchase loans can be used for primary residences, second homes, or investment properties.

Fifth, “a VA loan is backed and guaranteed by the 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.

When it comes to similarities, “both loan programs generally require debt-to-income ratios under 50%, but preferably closer to 41%,” continues Crist.

She adds, “Both loan programs [also] have 30-year fixed-rate options, 15-year fixed-rate options, and adjustable-rate options, depending on borrower needs, situations, and length of time they expect to live in the home.”

Pros and cons of VA loans

VA loans have their good and bad points. On the plus side, there is no required down payment, no mortgage insurance required, and no maximum loan amount.

On the downside, “appraisals 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.

“Also, a funding fee is charged, which can be financed into the loan amount if you don’t want to pay it upfront.”

Additionally, you have to qualify for a VA loan, which leaves most borrowers out.

Davis explains that, to be eligible, you must meet one of the following 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

When it comes to conventional loans, they typically close faster than VA loans.

“Conventional loans also can 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.”

As mentioned before, primary, second, or investment properties can all be purchased with a conventional loan. And home sellers often look more favorably on a conventional loan than a VA loan.

“Conventional mortgages, however, require you to purchase private mortgage insurance if you are paying less than 20% down. And unlike VA loans, they usually require a down payment of 3% or more,” notes Nik Shah, CEO of Home.LLC.

Furthermore, unlike VA loans, conventional loans have maximum loan limits. These are set by each county; in most counties, the max loan amount you can borrow is $ for a single-family home.

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 PMI, or worry about exceeding a maximum loan amount.

“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.

“In today’s market, 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.”

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