VA loan vs. conventional loan: How to choose

Purchasing a house is one of the largest financial decisions you’ll make in your lifetime. It’s a big step, especially for enlisted and retired members of the military who need to weigh the pros and cons of VA loans vs. conventional loans. If you’ve never purchased a home before, you’ll want to make sure you understand each loan, the pros and cons, and how to apply.

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. The following chart provides a quick comparison of VA loans vs. conventional loans.

Let’s break this information down to understand the importance of each category.

• How to qualify: You should understand that you may not qualify for either loan based on lender and VA eligibility rules. Though credit score, debt-to-income ratio (DTI), and down payments are flexible or nonexistent, some lenders may still require certain qualifications to be met or fees to be paid. For instance, you may need private mortgage insurance (PMI) on a conventional loan if you don’t contribute a large enough down payment.
• How much you can borrow: Similarly, maximum loan amounts range and are ultimately approved by the lender. However, having a good DTI and credit score may make you eligible for a higher loan limit.
• What can you use the loan for: If you qualify for either loan, know that a VA loan can only be used for your primary residence while a conventional loan can be used for secondary, income, or vacation properties.

Pros and cons of VA loans

Those who are eligible for a VA loan can take advantage of benefits conventional loans may not offer. Pros of VA loans include:

• No down payment required
• Low interest rates
• Limited closing costs
• No PMI
• Can use VA guaranty multiple times

However, there are also some elements of a VA loan you should be aware of before applying. Cons of VA loans include:

• Potential 1% loan origination fee or other lender fees
• Must meet eligibility criteria
• Potential down payment required for VA home loan guaranty

Pros and cons of conventional loans

Conventional loans are simply loans not provided under a specific government program. These loans are common for many borrowers and have several advantages. Pros of conventional loans include:

• You can purchase any property you desire, such as an investment home that you want to rent out or a vacation home you’ll use on a limited basis
• Typically cost less than an FHA loan
• Your loan amount may not exceed certain county-specific limits

However, there are also costs associated with a conventional loan that VA loan borrowers may be exempt from. Cons of conventional loans include:

• You’ll be required to put a down payment on the loan, the amount of which could influence the interest rate you receive
• Your lender may require you to take out private mortgage insurance if your down payment is less than 20%
• You may be required to pay certain lender fees that may be waived for those taking out VA loans
• You must meet lender requirements, which may be stricter than FHA loan requirements

What is the application process for conventional loans?

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.

Consider these tips from the Federal Deposit Insurance Corporation (FDIC) on how to responsibly apply for a conventional loan:

1. Shop for a mortgage loan before you begin looking at homes.
2. Investigate loan options from different lenders, compare rates, and don’t hesitate to negotiate to get the best deal.
3. Identify the type of mortgage best for your needs and get pre-approved.
4. When you find the house you wish to purchase, submit your application, and review the lender’s loan estimate.
5. Approve the loan estimate and move on to the loan closing process.

What is the application process for VA loans?

Applying for a VA loan is slightly different. The overall process is the same, with the exception that you’ll begin by applying for a VA-backed home loan Certificate of Eligibility (COE). Keep in mind that when you apply, you will 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:

1. Apply for the COE to show to a lender as proof that you qualify for a VA loan.
2. Assess your finances, including your credit profile, monthly budget, expenses, and income to decide how much you want to spend on your mortgage.
3. Select your lender, being sure to compare rates, fees, and other costs before moving forward with the application process.
4. Choose a real estate agent who will help you find a home in your price range.
5. Formally apply for the loan once you’ve found the house you wish to purchase.

How to find the best lender for your mortgage type

Comparing VA loans vs. 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 regarding points, rates, fees, down payments, and PMI.

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.

VA loan vs. conventional loan FAQ

Which loan is better: a 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 loan types.

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 the homebuyer is able to put down a larger down payment, that can influence their eligibility.

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