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VA Loan Vs. Conventional Loan: What’s The Difference?

Victoria Araj6-Minute Read

April 25, 2022

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Not all borrowers have the same loan opportunities available to them. But if you’re an eligible current or former service member (or a surviving spouse), you have the option of a VA loan.

VA loans stand out against other loans for their low costs and flexible requirements. However, they’re not the only choice out there. Conventional loans can also offer competitive rates based on the lender and your financial profile. So, which one should you choose?

Here’s a rundown on how a VA loan vs. conventional loan stack up against each other.

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Comparing VA Loans Vs. Conventional Loans

VA loans and conventional loans are two types of mortgages available to borrowers looking for a home. However, they both come with unique traits. Let’s start with the most basic difference: the type of loan they are. VA loans are considered government or nonconforming loans, whereas conventional loans are conforming loans (except for jumbo loans, which are conventional non-conforming).

This means that a conventional loan meets the guidelines to be sold to mortgage buyers. Namely, they can be sold to Freddie Mac or Fannie Mae. In contrast, since it’s non-conforming, a VA loan must be held by their lender or sold to another – but not Fannie Mae or Freddie Mac.

Conforming loans tend to be more common, with a relatively standardized process. Additionally, since lenders can offload the mortgage and its potential risk to mortgage buyers, they are usually cheaper.

Non-conforming loans include more than VA loans. They also include jumbo loans, FHA loans, and USDA loans. While their requirements vary, they usually have less restrictive loan limits compared to conventional loans. That makes them more accessible to borrowers outside the middle class.

However, these differences are just the start of what separates VA loans and conventional loans, though.

Mortgage Requirements For VA Loans Vs. Conventional Loans

While some requirements for VA loans are similar to that of conventional loans, they have their key differences. Some of the most important distinctions involve how you qualify for the mortgage loan, the best-suited borrower, and additional fees.

Here’s a table to break down these and other crucial features in both types of loans.

Mortgage Qualifications

VA Loan

Conventional Loan

Credit Score

Usually 580 – 620

620 

Down Payment

0%

3%

Debt-To-Income Ratio (DTI)

None, but preferred below 41%

Maximum of 50%

Private Mortgage Insurance (PMI)

Not required

Required with a down payment less than 20%

Property Type

Primary residence

Primary residence, secondary home, or investment property

Special Borrower Eligibility

Need a Certificate of Eligibility (COE)

No special eligibility requirements

Additional Fees

VA funding fee along with other potential fees, like loan origination

Varies according to lender, usually involves an origination fee

 

Credit Score

It’s generally easier to receive a VA loan approval than a conventional one. Part of that comes from the low credit requirements for the former.

The VA itself does not have a minimum credit score they require. Instead, the minimum comes from the mortgage lenders that offer VA loans. Although they vary, it may be more flexible criteria than you would find with a conventional loan. While conventional loan lenders will also have different minimum credit scores, it usually sits around 620. Rocket Mortgage® offers VA loans with a minimum credit score of 580. 

Down Payment

One of the major benefits of a VA loan is the lack of a minimum down payment. Your lender may still require some money down if the property’s purchase price is high. However, this is more common in a competitive market with multiple bids.

On the other hand, lenders that offer conventional loans typically prefer larger down payments. The minimum may be 3%, but they recommend 20% or larger. By doing so, you avoid paying private mortgage insurance.

Debt-To-Income Ratio 

Lenders look at your debt-to-income ratio (DTI) before they approve you. This measurement reveals the amount of income put toward debt each month. Through this, the lender can estimate whether you can reasonably afford the mortgage payments you apply for.

The VA will accept borrowers with any DTI ratio. But the lenders they work through may prefer DTI that doesn’t exceed 41%. In comparison, a conventional mortgage may allow you to qualify with a DTI as high as 50%. Although, lenders may prefer borrowers with a lower ratio.

Private Mortgage Insurance

Traditionally, paying less than 20% down with a conventional loan will result in private mortgage insurance (PMI). Your credit score may also be a contributing factor as well.

Your lender may require PMI so that they can protect themselves from the potential loss. That’s because a low down payment or credit score are red flags for default. The PMI may be a one-time closing charge, a regular fee added to your monthly payment, or a combination of the two. The exact amount will vary between lenders.

VA loans, however, don’t require any mortgage insurance. That’s partially due to the lack of a minimum down payment requirement. So, instead, the VA relies on the VA funding fee.

Property Eligibility

If you want to buy a primary residence, then either a VA loan or a conventional loan will work. However, you can’t purchase a second home or investment property using a VA loan. You may still be able to earn rental income by making your primary residence a multi-unit property, but this can be complex.

While conventional loans allow you to buy investment properties or secondary homes, the qualifications may shift. It may be slightly harder to purchase other types of properties after you buy a second home. For example, a lender may require a slightly higher down payment. 

Borrower Eligibility

In terms of borrower eligibility, there are no special requirements when it comes to a conventional loan. You and the property have to qualify, but this depends on standard factors, such as income level or credit score.

This works differently for VA loans. The process of showing your eligibility hinges on a document called a Certificate of Eligibility (COE). To obtain a COE, you must meet the minimum service requirements, be a spouse of a service member who died in the line of duty or have a qualifying discharge.

Borrower Fees

When it comes to fees between these two loans, it’s important to know about the VA funding fee. This is a singular, upfront cost that usually sits between 1.4% – 3.5% of the loan’s amount. However, the actual percentage can depend on whether you previously used your VA loan benefit and your down payment.

The funding fee is designed to cover potential costs in case the borrower defaults. And while it’s a one-time charge, it often gets rolled into the total loan amount. That adds to your monthly payment and the amount of interest you pay over the loan’s life.

Veterans receiving VA disability compensation do not have to pay this fee, though.

Then, most loans require an origination fee. Lenders charge this fee to cover the cost of processing the loan. It generally costs 0.5% –1% of the loan’s total amount, and you pay it as part of your closing costs. Lenders who don’t charge an origination fee tend to make it up elsewhere.

While both loans share origination fees, VA loans require a cap on the amount. They also do not allow certain fees, such as prepayment penalties or settlement charges.

Additional Requirements To Consider

While the above sections are vital to know, they’re not the only differences between these two loan types.

For example, VA loans don’t possess loan limits, but conventional loans do. These limits are set by each county, with most counties setting their limit at $647,200 for a single-family property in 2022.

They also differ in their mortgage rates. Typically, when you compare rates for the average 30-year VA loan and a 30-year conventional loan, VA loans usually come in lower. The percentage difference tends to sit between 0.25% – 0.42%.

The VA also caps closing costs, like origination fees. So, that feature along with competitive interest rates can make them financially favorable.

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Are There Benefits Of A VA Loan Vs. A Conventional Loan?

There are certain benefits of a VA loan vs. conventional loan that are hard to ignore. For example, there is no minimum down payment requirement. So, you can still purchase a home with no down payment. Plus, you don’t face consequences like PMI if you go that route.

Without PMI or a large down payment, VA loans stand out as more affordable upfront.

VA loans are backed by the government, too. Because of this, lenders don’t have to be as afraid of you defaulting on the loan. That reflects in their terms. You can find relatively low-interest rates and other favorable features in a VA loan as a result.

Overall, VA loans tend to be more flexible during the approval process and include a range of low-cost benefits.

The Bottom Line: Which Loan Option Is Right For You?

At the end of the day, it’s a personal choice. VA loans are promising cost-wise and during approval. However, conventional loans can also include favorable terms based on the lender.

If both VA loans and conventional loans are available to you, compare their requirements. You may find one fits your situation better than the other. Once you find the one that meets your needs, consider getting preapproved for a mortgage to jumpstart the home buying process.  

Get approved to buy a home.

Rocket Mortgage® lets you get to house hunting sooner.

See What You Qualify For

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.