Here we compare the primary differences between VA loans and conventional loans to show you when each option may be the best.
For the vast majority of military borrowers, VA loans are the most powerful and cost-effective mortgage program on the market.
These government-backed loans come with significant financial benefits for eligible borrowers, including purchasing with no money down and no out-of-pocket costs.
But there are certainly times when a VA loan isn't the best answer and a conventional loan may be a better option. Here we break down the difference between the VA loan and conventional loans and when one option may be more favorable than the other.
VA loans typically have lower interest rates than conventional loans and require no down payment. They also come without mortgage insurance costs, which limit your buying power.
|VA Loans||Conventional Loans|
|Down Payment: $0||Down Payment: Up to 20% Down|
|Rates: Typically lower than conventional||Rates: Typically better than FHA, but higher than VA|
|Credit Standards: Not set by the VA, but typically lenders expect at least a 640||Credit Standards: Typically a 640 minimum, but much higher to get the best rates and terms|
|Occupancy: Can be used for primary residences only||Occupancy: Can be used for primary, secondary, investment property and even vacation homes|
|Program Fees: VA Funding Fee (1.4% - 3.6% of the loan amount)||Program Fees: No special fees are associated with conventional mortgages|
Conventional loans feature no government guarantees and adhere to the standards and requirements of government sponsored enterprises Fannie Mae and Freddie Mac.
Credit benchmarks can vary by lender and loan type. A 640 FICO score is a common benchmark for conventional loans, although you may need a much higher score to contend for the best rates and terms.
Other differences include:
A flagship benefit of the VA loan is that most VA borrowers don’t need a down payment to secure financing.
Conversely, conventional loans often require a down payment of at least 5 percent (in some cases it might be 3 percent or lower). However, conventional borrowers with less than 20 percent down will pay private mortgage insurance (PMI) – a fee that is not required with VA loans.
To put that in perspective, a 5 percent down payment on a $300,000 loan is $15,000. Borrowers would typically need to put down $60,000 on that loan to avoid paying PMI.
As previously mentioned, conventional loans with less than 20% down will require private mortgage insurance (PMI). Depending on home price, your credit score and other factors, PMI can easily run $150 to $200 each month.
PMI protects the lender if you default on your loan and typically falls off after you reach 80% loan-to-value.
VA loans do not require PMI, saving the borrower thousands over the life of the loan.
VA loan rates are often the lowest rates on the market. According to the mortgage origination software firm Ellie Mae, through Q3 of 2019, VA loans have had the lowest average rates at 4.27 percent – compared to conventional at 4.5 percent.
VA loans are backed by the Department of Veterans Affairs, giving lenders the confidence to extend more favorable rates to borrowers who may not have perfect credit.
The Department of Veterans Affairs (VA) does not set a credit score minimum on VA loans, but most lenders do. Similar to conventional loans, some lenders like to see a 640 or better mortgage credit score.
Also through Q3 of 2019, the average credit score for a VA purchase loan was 709 compared to conventional at 753 – showing you don’t need perfect credit to obtain a favorable VA loan rate.
A rather large difference between VA and conventional loans is that VA loans are only for primary residences. This doesn’t rule out duplexes or fourplexes, but to use a VA loan you must intend to live in the property you purchase.
However, conventional loans may be used to purchase primary residences, vacation homes, rental property and other investment property.
VA loans come with what’s known as the VA funding fee. The VA funding fee ranges from 1.4 to 3.6 percent and is applied to every VA purchase and refinance loan.
The VA funding fee is often rolled into the entire loan amount to make for a true $0-down loan.
The primary benefits of VA loans are $0 money down, no PMI, flexible credit requirements and highly competitive rates.
The VA loan might be a good fit for eligible veterans and service members without sterling credit or the ability to make a 20 percent down payment.
Conversely, borrowers with great credit and enough cash on hand for a large down payment may find that a conventional loan is a better fit.
Your Certificate of Eligibility (COE) verifies you meet the military service requirements for a VA loan. However, not everyone knows there are multiple ways to obtain your COE – some easier than others.
Midway through Fiscal Year 2021, the VA loan program is on pace to blow past last year's record-setting 1.2 million loans. See which cities are seeing the most growth compared to last year.