VA loans, available to qualifying military service members and eligible surviving spouses, compare favorably to conventional loans in several ways. They don’t require a down payment, private mortgage insurance, or a minimum credit score.
That said, a VA home loan may not always be the best choice for eligible borrowers. They impose a funding fee that conventional loans don’t, and putting nothing down could mean paying more interest in the long run.
The differences between VA and conventional loans
A VA loan is insured by the U.S. Department of Veteran Affairs, while a conventional loan is offered through a private lender and has no government guarantee.
While VA loans have more relaxed financial standards than conventional loans, they also come with stricter property standards.
Here’s a quick look at how VA loans compare to conventional loans:
Mortgage rates
When it comes to mortgage rates for VA loans and conventional loans, your financial strength as a borrower may matter more than the type of loan you’re applying for. VA loans can be a bit cheaper, but it depends on the lender and your profile.
VA loans
Good news: VA loan interest rates are competitive with the best conventional loan rates. In fact, on average, they’re slightly lower.
Conventional loans
For borrowers with excellent credit scores of 720 or higher, conventional mortgage rates will look similar to VA mortgage rates.
Credit score requirements
The VA loan program accepts borrowers with bad credit, but lenders have the final say and can raise the bar.
VA loans
The VA does not have a minimum credit score borrowers must meet to qualify for a VA loan. However, VA lenders’ standards may differ from the requirements set by the VA itself.
For example, one major VA lender requires borrowers to have a credit score of at least 650.
Conventional loans
The minimum credit score for a conventional loan that a lender will sell to Fannie Mae or Freddie Mac is 620. Again, individual lenders may require a higher score.
Debt-to-income requirements
Your debt-to-income ratio, also known as DTI, shows how much of your monthly income goes toward debt every month. It’s important to lenders because it indicates whether you can afford the mortgage you’re applying for on a monthly basis.
Here’s how to calculate your DTI:
(Total monthly debt) / (Gross monthly income) x 100 = DTI
VA loans
The VA allows borrowers to have any DTI ratio, but lenders usually prefer a DTI of no more than 41%.
Conventional loans
You may be able to qualify for a conventional mortgage with a DTI ratio as high as 50%. As with VA lenders, conventional lenders may require you to have a lower DTI.
Down payment requirements
If you’re struggling to save anything for a down payment, a VA loan may be a better option. However, conventional loans have lower down payment requirements than many borrowers realize.
VA loans
The VA loan is a true zero-down mortgage, and only a small percentage of borrowers put anything down. However, putting 0% down means you’ll pay more interest over time than someone who makes a down payment.
It also puts you at risk of having negative equity, which can be a problem if you need to sell.
Tip: It’s standard practice to make an earnest money deposit when you enter a contract with the seller, even if you’re not making a down payment. So, you’ll probably still need some cash to buy a home with a VA loan.
Conventional loans
Conventional loans require at least 3% down. It might be possible to put 0% down if you qualify for a low-income or first-time homebuyer program.
Mortgage insurance requirements
VA loans are more generous than other low-down-payment mortgages because they don’t require monthly mortgage insurance payments. However, they do require borrowers to pay a substantial fee that conventional loans don’t.
VA loans
While VA loans don’t require low-down-payment borrowers to pay PMI, they often require them to pay a VA funding fee. The fee can range from 1.4% to 3.6% of the total loan amount, depending on your down payment and if you’re a first-time VA borrower.
The fee can be paid in cash at closing or added to the mortgage. If it’s added to the mortgage, it will cost more in the long run because you are paying interest on it for your entire loan term. Your monthly payment will also be slightly higher.
For example
Say you take out a 30-year, $100,000 mortgage with an APR of 3%. A 2.3% funding fee ($2,300) rolled into your loan would increase your monthly principal and interest payment by $10, from $421 to $431.
Conventional loans
Conventional loans require borrowers who put down less than 20% to purchase private mortgage insurance. Borrowers can pay PMI as an up-front sum, similar to a VA funding fee.
More commonly, borrowers pay it monthly until their home equity reaches 20%. At that point, you can get rid of PMI.
Good to know
The smaller your down payment and the lower your credit score, the higher your PMI will be. Some lenders may charge a higher interest rate and waive your PMI requirement (they’ll pay the PMI themselves instead), but that’s not necessarily a better deal.
Property restrictions
If you’re buying a primary residence, both VA loans and conventional loans will work. Things get trickier if you’re looking to buy a second home or a residential investment property.
VA loans
VA loans can only be used to purchase a primary residence. You can’t buy a second home or an investment property with a VA loan — at least, not on purpose.
Here's the exception
If you have a VA loan on your current home and you have to move, but you don’t want to sell that home, you can start using it as a second home or investment property.
Conventional loans
You can buy your main home, second home, or an investment property with a conventional mortgage. The qualification requirements are tighter for secondary residences and investment properties, however.
For example, you must put at least 10% down to buy a second home and at least 15% down to buy an investment property.
When VA loans make the most sense
If any of these criteria apply to you, then a VA loan might make the most sense:
- You’re having trouble saving for a down payment
- You’d rather use your savings for something else (like an emergency fund)
- You want to avoid PMI
- You’re buying a primary residence
- You’re a service member who has earned a Purple Heart, or a veteran with service-connected disabilities, making you eligible for a funding fee waiver
When conventional loans make the most sense
Similarly, you might be better off with a conventional loan if this sounds like you:
- You can afford to put 20% down
- You’re buying a second home or investment property
- You want immediate equity in your home
- You have excellent credit
- You want a lower monthly payment
