VA Loan vs. Conventional Loan: Which Is Better?

Written by Meagan DrewUpdated: 28th Dec 2021
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Service personnel that qualify for a VA Loan might be wondering what all the hype is about.

VA Home Loans have a reputation for being the gold standard for qualifying buyers, but conventional loans are sometimes the right answer for service personnel even if they qualify for a VA Loan.

Creditworthiness and circumstance will dictate which type of loan is best for each individual.

Differences Between VA and Conventional Loans

The biggest difference between a conventional loan and a VA loan is the guarantee the U.S. Department of Veteran’s Affairs commits to the VA Loan. In other words, VA Loans are government-backed home loans, whereas conventional loans are not.

The guarantee allows lenders to be slightly more lenient with their approvals, but the VA has appraisal process is much stricter than a conventional loan.

>> More: How to Apply for a Home Loan

VA Loan & Conventional Loan Mortgage Rates

  • VA Loan: Loan rates are determined by each borrower’s individual creditworthiness, but the VA Loan guarantee helps to keep interest rates very competitive and sometimes cheaper.
  • Conventional Loan: Conventional rates are determined by a borrower’s creditworthiness, debt-to-income ratio, amount of down payment, and financial capability.

Down Payment Requirements

  • VA Loan: One of the most attractive benefits for qualified borrowers is that the VA Loan has no down payment requirements. Typically, down payments serve as a security deposit for the lender if the borrower defaults on the loan, but the VA Loan’s federal guarantee removes the need for a security deposit.
  • Conventional Loan: Conventional loans require a minimum down payment which protects lenders if there is a default. The amount of down payment required depends on the lender and the terms of the contract. As a general rule, borrowers can expect to pay at least 3% and 20% if they want to avoid paying private mortgage insurance or PMI.

Credit Score Requirements

  • VA Loan: The VA itself does not have credit score limits on those eligible to get loans, but borrowers are subject to the parameters set forth by their lender. Some mortgage lenders are more lenient on minimum credit scores for VA Loans, but that is not always standard practice.
  • Conventional Loan: Conventional loan acceptable credit scores must be at least 620.

Property Requirements

  • VA Loans: VA Loans are only for purchases of primary residences. Eligible service members hoping to rack up houses like in monopoly need not apply. These loans are not for investment properties, second homes, or buying your dream Airbnb.
  • Conventional Loans: Borrowers can use conventional loans to buy second homes, investment properties, and primary residences alike. Typically, non-primary residences will require even higher qualifications for approval than those of a primary residence, but they can be done.

Debt-to-Income Ratio

  • VA Loans: A VA Loan does not come with a maximum debt to income ratio requirement, but typically lenders like to see no more than 41% for those using. VA Loan. This can vary from lender to lender, and there are mitigating factors.
  • Conventional Loans: Most conventional loans will require a maximum debt to income ratio of 45% to qualify. Some loans will allow as much as 50%, but lower debt-to-income ratios will increase the likelihood for approval.

Mortgage Insurance Requirements

  • VA Loans: Eligible personnel using a VA Loan to fund their mortgage will find that they are not required to carry personal mortgage insurance or PMI on their loan. The federal guarantee that comes with a VA Loan removes the need for additional insurance.
  • Conventional Loans: PMI is what protects the lender from being left holding the bag if the borrower defaults on their loan. Private Mortgage Insurance is typically required for all mortgages where there is not a 20% down payment.

>> More: Best VA Mortgage Lenders

Do Sellers Prefer VA or Conventional Loans?

VA Loans have a reputation for being a bit of a hassle when it comes to VA Appraisals. The home appraisal process is notoriously strict and has caused contracts to fall through in the 11th hour.

Some sellers will prefer not to do business with buyers that intend to use a VA Loan because of the possibility of the deal falling through.

This is absolutely up to each individual seller, but some do prefer conventional loans.

When does a VA Loan Make Sense Financially?

Qualified personnel who qualify for a VA Loan are wise to consider it during the discovery process of buying a home.

The lack of down payment allows qualified borrowers to keep their savings for things like emergencies or other purchases.

Eligible borrowers using the VA Loan will also avoid PMI, which can add up based on the home’s purchase price.

Some VA Loan buyers will pay a one-time VA funding fee, but that is even waived for disabled veterans who received compensation.

>> More: How to Choose the Best Mortgage

When does a Conventional Loan Make Sense Financially?

VA Loans do not allow for purchases of investment properties or second homes. Anyone who qualifies for both loans might still need to pursue a conventional loan based on their personal needs.

Conventional loans that require a down payment will also have lower monthly mortgage payments, and borrowers will pay less interest over the life of the loan.

Are Conventional or VA Loans Cheaper?

VA Loans can mean that eligible service members bring $0 to the table and still walk away with keys to a house.

The $0 down payment, no private mortgage insurance (PMI), and the ability to roll closing costs into the mortgage remove much of the outright costs to the buy.

The VA does have a VA loan funding fee, but that is waived for anyone receiving disabled compensation. VA loans may cost borrowers more in interest fees in the long run because they’re paying interest on a larger amount than someone who paid a down payment.

Is it Easy to Qualify for a Conventional or VA Loan?

VA Loans are highly restricted due to restricted eligibility because of the federal guarantee. If a person is eligible (VA Certificate of Eligibility), the approval process is very similar to that of a conventional loan without the additional down payment component.

Mortgages are an incredible financial responsibility, so lenders want to make sure that the borrower is going to make repayments in a timely fashion.

Borrowers should have a good to excellent credit score, low debt to income ratio, and proof of financial capability. With this, mortgages are cumbersome to secure but easy to qualify for.

Bottom Line: VA Loan vs. Conventional Loan

As long as the borrower is eligible for a VA Loan, VA Loans and Conventional Loans both offer borrowers keys to their new home at the end of the process, but they each have merits and restrictions that make each of these loans better suited for different people.

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Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.