VA vs Conventional Loans: Comparison
There are several mortgage options available for people who are looking to finance their home purchase, construction, or renovation. Two of the most popular financing options available for current or former members of the military or their eligible spouses are VA (Veterans Affairs) loans and conventional loans. Both loans are offered by private lenders, and each loan type has its own sets of requirements, benefits, and drawbacks.
VA vs Conventional Loans
VA loans are backed by the U.S. Department of Veterans Affairs and offered by authorized lenders. Because VA loans are guaranteed by the government and pose less risk to the lenders, the qualification requirements are more lenient compared to traditional loans. Eligible borrowers may qualify for a VA loan even with poor credit score and no down payment.
Conventional loans, on the other hand, are home loans that are not guaranteed by any government entity. They are offered by traditional lenders, such as banks, credit unions, and mortgage companies. The interest rates of conventional loans are typically higher than government-backed loans and borrowers need to meet stricter eligibility requirements to qualify.
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|VA Loans||Conventional Loans|
|Eligibility requirements||● Active duty military, veteran, or honorably discharged, or
● Rendered at least 90 consecutive days of active service during wartime or at least 181 consecutive days of active service during peacetime, or
● Rendered more than six years of service in the National Guard or Selective Reserve, or
● Surviving spouse of an active-duty military who died in the line of duty
|● Should have established credit, strong credit score, and acceptable debt-to-income ratio
● Should show proof of income that is sufficient to pay for the monthly amortizations and other obligations
● Should have enough cash reserves for the down payment
|Minimum credit score||None||At least 680 to 700|
|Varies per lender, typically 20% minimum down payment is required.|
The qualification requirements for VA loans are typically less rigid compared to a conventional loan. To qualify for a VA loan, you need to be a current or former member of the military, or a surviving spouse of an active duty military who died in line of duty. You also need to have a VA loan Certificate of Eligibility, which you can get by applying through your eBenefits online portal or through the lender.
With a conventional loan, your credit history and credit score are extremely important. You need to have an established credit, strong financial background, proof of sufficient and steady income, and enough cash reserves to qualify.
The credit score requirement for a conventional loan varies per lender, which usually starts at 680. If you have a higher credit score, you will have a higher chance of getting a lower interest and better terms for the loan. On the other hand, while VA loans have no minimum credit score requirement, most VA-authorized lenders would still require borrowers to have a FICO score of at least 620. Some VA lenders even require a minimum of 640 credit score.
It’s possible to get a VA loan with zero down payment. VA borrowers have the option to make a down payment too. For a conventional loan, however, you typically need at least 20% down payment — this varies per lender as some lenders require higher down payment, while some require a down payment as low as 3%.
Both VA and conventional loans require borrowers to show proof that they have enough income to pay for the monthly amortization. Just as with conventional loans, VA lenders also take into consideration a borrower’s debt-to-income ratio to ensure that the borrower does not have a huge debt load. A verifiable employment history and other income documents may be required upon application.
Loan Terms & Costs
|VA Loans||Conventional Loans|
|Maximum loan amount||No maximum loan amount, but the VA guarantee has a limit||Amount varies depending on the home value and buyer’s qualifications|
|Repayment terms||Up to 30 years||Term lengths vary, which typically range between 10 years to 30 years|
|Interest rates||Varies, typically starts at 2.25%||Varies per lender and loan terms, typically starts at 2.82%|
|Fees||Upfront VA loan funding fee and other fees, such as a loan origination fee||Varies by lender, typically includes a loan origination fee|
|Property types||Primary homes only.||Primary or vacation homes, investment properties|
|Typically requires a mortgage insurance if the down payment is less than 20%|
Loan Amount, Payment Terms, and Interest Rates
You can apply for a conventional loan to finance a primary home, vacation home, or investment property. The maximum loan amount you can get from a conventional loan varies based on several factors, such as the value of the property and the buyer’s qualifications and capacity to pay. It has variable loan repayment terms that range between 10 years to 30 years. The interest rates also vary per bank, and this will depend on the borrower’s credit score, loan amount, and repayment term — this typically starts at 2.82%.
VA loans finance primary residence only. While there is no fixed maximum amount for a VA loan, the amount of VA guarantee (which is the amount VA will pay to the lender in case a borrower defaults) has a certain limit. VA will guarantee up to 50% of a home loan, or a maximum of $45,000. For loans between $45,000 and $144,000, the minimum guarantee amount is $22,500, with a maximum guarantee of up to 40% of the loan or $36,000. This is subject to the amount of the veterans’s available entitlement. For loans of more than $144,000, the maximum guarantee is 25% or $104,250, whichever is less.
The maximum VA home loan term is 30 years and 32 days. However, the term should not exceed the remaining economic life of the property as determined by the appraisal. Borrowers can partially or fully pay a VA loan at any time without penalty. Partial payments should be equal to one monthly installment or $100, whichever is less. VA loans offer lesser interest rates (usually starts at 2.25%) compared to conventional loans.
With a conventional loan, borrowers usually need to pay for loan origination fees and closing fees. Other fees may also apply depending on the lender. Also, private mortgage insurance is usually required especially for loans with less than 20% down payment. This protects the lender if the borrower defaults on the loan.
VA loans do not require private mortgage insurance. However, VA loan borrowers need to pay an upfront VA loan funding fee that ranges from 1.40% to 3.60%. The VA funding fee depends on the amount of down payment, and whether it’s the borrower’s first-time use of the benefit. Other applicable fees, including a loan origination fee and appraisal fee, may also be charged. Generally, it’s possible to include your VA closing costs into the loan amount.
Pros and Cons
|VA Loans||Conventional Loans|
|Pros||● Have more lenient credit qualifications
● Requires no down payment
● Closing costs may be included in the loan amount
● No private mortgage insurance required
● Offers lower interest rates
● No prepayment penalties
● Reusable VA benefits
|● Available for anyone who meet the credit qualification requirements
● Can be used for primary residences, vacation homes, and investment properties
● Offers better terms for borrowers with high credit scores
|Cons||● Available for military, veterans, honorably discharged, and surviving spouses only
● Should be used for primary residences only — not available for vacation homes and investment properties
● VA funding fee is required
● The VA guarantee has limits
|● They have stricter credit requirements
● Requires mortgage insurance
● Interest rates are typically higher compared to VA loans
● Down payment is required
● Private mortgage insurance is required for loans with less than 20% down payment
Which Loan is Right For You?
The type of loan that is best for you depends on several factors, including your eligibility, creditworthiness, cash reserves, and purpose for buying the property.
If you meet the eligibility requirements for a VA loan, it is a better option if your purpose for buying the property is to use it as your primary residence and you plan to stay there for long-term. VA loans are also ideal for those who don’t have a stellar credit history and low credit scores. Borrowers who cannot provide a high down payment may also find VA loans to be a better choice.
A conventional loan may be a better option if you can meet the credit requirements and you have sufficient money to pay for a down payment of at least 20% or higher. Conventional loans are best for borrowers who have high credit scores because they can negotiate a more favorable term with the lenders. Further, those who can make higher down payments will be exempted from paying the private mortgage insurance. A conventional loan is also the right choice if you plan to buy a vacation home or investment property instead of using it as a primary residence.
VA Mortgag Lenders – This article discusses the mortgage and lender options for VA loans.
Conventional Mortgages – See what conventional loans are all about and what to expect when applying for a mortgage
VA Loan Eligibility – This article will help you to determine what your VA eligibility is.