VA loan vs. conventional loan: How to choose
Conventional and VA loans are both secured through private lenders, though VA loans have certain benefits that standard mortgages do not, such as no down payment or PMI required.
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Nick Dauk is an authority on personal finance, specializing in both student and personal loans. His work has been featured by Business Insider, CBS News, MSN, Business Insider, and Fox Business.
Updated September 23, 2024, 3:19 PM EDT
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Reina Marszalek has over 10 years of experience in personal finance. She is a senior mortgage editor at Credible.
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According to a 2023 analysis from the RAND Epstein Family Veterans Policy Research Institute, about 80% of veterans own a home, compared to 60% of nonveterans. Purchasing a house is one of the largest financial decisions you’ll make in your lifetime, and you should make sure you understand your options, pros and cons, and how to apply. If you’re an active service member or veteran, you’ll also need to weigh whether to use a VA loan or a conventional loan.
Whether you’re currently enlisted and are purchasing a house near your base or are a veteran hoping to buy your forever home, here’s what you need to know about VA loans vs. conventional loans.
VA loans vs. conventional loans: What to know
There are similarities between VA loans and conventional loans, though their differences highlight the advantages and disadvantages of each.
How to qualify
The Department of Veterans Affairs (VA) backs the loans, which are originated by private lenders and financial organizations. The VA doesn’t have any loan requirements for credit score, though the individual lenders might set their own minimum. Homebuyers will also need a debt-to-income ratio (DTI) below 41%. You can calculate your DTI by adding up all your monthly debt payments — including credit cards, car loans, student loans, and your potential mortgage payment — and dividing the number by your gross monthly income. Additionally, there is no down payment requirement for a VA mortgage.
Conventional loans aren’t guaranteed by any government agency and are available from private lenders. Most lenders set their own qualifications, but typically you’ll need a minimum credit score of 620, a minimum down payment of 3%, and a DTI between 36% and 45%.
Keep in mind:
Many lenders require private mortgage insurance (PMI) if you put down less than 20% on a conventional loan, but you can typically have this removed once you have enough home equity.
How much you can borrow
VA loans don’t have a maximum amount you can borrow, but you’ll also want to check with your lender to see what its limits are. Additionally, most lenders will review your credit report, income, and financial situation to determine how much to approve you for.
Conventional loans that conform to standards set by Fannie Mae have a loan limit of $766,550 in most areas and $1,149,825 in high cost areas, including Alaska, Hawaii, Guam, and the U.S. Virgin Islands. You can use a search tool on Fannie Mae’s website to look up an address to see what the conforming loan limits are for that area.
What you can use the loan for
VA loans can only be used for property that you plan to use as your primary residence. You can buy a one- to four-unit home or a condominium as long as you intend to live there. You can also use a VA loan if you want to build a home, buy a manufactured home, or ma
Pros and cons of VA vs. conventional loans
Those who are eligible for a VA loan can take advantage of benefits conventional loans may not offer, but you’ll want to consider the pros and cons of each.
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You might benefit more from a VA loan if you want a mortgage with as few fees as possible, you don’t have a 20% down payment, or you’re purchasing a home to use as your primary residence. A conventional loan might be a better choice if you have a high enough credit score to secure a better interest rate, you have enough saved for a 20% down payment, or you’re purchasing a vacation or investment property.
How to apply for a conventional loan
Applying for your first conventional loan can feel overwhelming, which is why it’s best to take the process step by step so you can confidently navigate your way to homeownership.
Follow these tips from the Federal Deposit Insurance Corporation (FDIC) on how to apply for a conventional loan:
- Shop for a mortgage loan before you begin looking at homes.
- Investigate loan options from different lenders, compare rates, and don’t hesitate to negotiate to get the best deal.
- Identify the type of mortgage best for your needs and get pre-approved.
- When you find the house you wish to purchase, submit your application, and review the lender’s loan estimate.
- Approve the loan estimate and move on to the loan closing process.
How to apply for a VA loan
Applying for a VA loan is slightly different. The overall process is the same, with the exception that you’ll begin by requesting a Certificate of Eligibility (COE). Keep in mind that when you apply, you’ll apply through a private lender, not the U.S. government.
The U.S. Department of Veterans Affairs cites the following steps for applying for a VA loan:
- Apply for the COE from VA.gov to show to a lender as proof that you qualify for a VA loan.
- Assess your finances, including your credit profile, monthly budget, expenses, and income to decide how much you want to spend on your mortgage.
- Select your lender, being sure to compare rates, fees, and other costs before moving forward with the application process.
- Choose a real estate agent who will help you find a home in your price range.
- Formally apply for the loan once you’ve made a successful offer on the house you wish to purchase.
How to find the best lender for your mortgage type
Comparing VA loans and conventional loans requires more than evaluating general pros and cons. Conventional mortgage lenders may present you with a variety of options, some of which have advantages and disadvantages when compared to a VA loan.
Begin your search by researching the types of conventional loan lenders available, including traditional financial institutions like banks and credit unions, as well as online lenders. Some websites allow you to compare mortgage loans from a variety of lenders at once.
When you discuss options with each lender, make sure you’re getting all of the information you need. Lenders will often provide you with an annual percentage rate (APR) that takes into account lender fees, the potential interest rate, down payment, and PMI. Some lenders will also allow you to purchase discount points, which lets you spend money upfront to lower your interest rate. Review the elements that make up your quoted APR so you can evaluate which lender is best for you.
Ultimately, the best mortgage loan for you will be the one that works for your long-term needs and budget. That’s why the Department of Housing and Urban Development (HUD) recommends that borrowers always shop, compare, and negotiate before making a final decision.
Tip:
When you compare lenders, remember they’ll have different amounts for fees and discounts. For example, a bank might estimate an APR that includes a discount for existing customers, while another may have lower origination fees.
VA loan vs. conventional loan FAQ
Which loan is better: VA loan or a conventional loan?
VA loans are an attractive option to veterans and/or family members of veterans looking to avoid PMI, lock in low interest rates, and potentially avoid having to put money down. Conventional loans on the other hand, offer more flexibility in terms of property types that are eligible and could be more affordable than some other types of loans.
Do you need a good credit score to get a VA loan?
No, the VA does not require a minimum credit score. However, lenders have their own credit score requirements, which could sometimes start as low as 500 or 620. If you’re able to put down a larger down payment, that can influence your eligibility.
What are the closing costs for a VA loan vs. a conventional loan?
On closing day, you’ll pay closing costs, sign your loan agreement, and get the keys to your new house. The closing costs typically include your down payment, the lender’s origination fee, title fees, and homeowners insurance, among other charges. If you opt for a VA loan, you’ll also pay a funding fee at closing. The fee you’ll pay ranges from 1.25% to 3.3% of your loan amount, depending on your situation. For example, if it’s your first time using a VA loan and your down payment is below 5%, your funding fee will be 2.15%. You can find a chart with the different funding fee rates on the Department of Veterans Affairs website.