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

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

Department of Veterans Affairs (VA) loans stand out against other home loans for their low costs and flexible requirements. However, they’re not the only option out there. Conventional loans can also offer competitive rates based on the lender and your financial profile. So which one should you choose when buying or refinancing a home?

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

VA loans and conventional loans are two types of mortgages available to borrowers looking for a home. However, they both come with unique traits.

Conventional Loan

Most conventional loans are conforming loans, which means they meet the guidelines to be sold to mortgage buyers such as Freddie Mac and Fannie Mae. An exception is a jumbo loan, which is a conventional home loan that’s considered non-conforming – instead of conforming – because it exceeds the loan limits set by Fannie Mae and Freddie Mac.

As a type of conforming loan, conventional 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’re usually cheaper than non-conforming loans.

VA Loan

VA loans are considered government or non-conforming loans. Because VA mortgages are non-conforming, they cannot be sold to Fannie Mae or Freddie Mac. Government loans are instead sold to Ginnie Mae, a U.S. Government agency that provides liquidity for government-backed loans. Non-conforming loans also include jumbo loans, Federal Housing Administration (FHA) loans and U.S. Department of Agriculture (USDA) loans.

While their requirements vary, non-conforming loans usually have less restrictive loan limits compared to conventional loans. That makes VA loans – and other non-conforming loans – more accessible to borrowers who are looking to qualify for a loan.

While some requirements for VA loans are similar to those of conventional loans, each loan program has its key differences. Some of the most important distinctions involve how you qualify for the loan, what the loan’s eligibility requirements are and the additional fees you’ll be required to pay.

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

Credit Score

It’s generally easier to receive a VA loan approval than a conventional mortgage because of the low credit score requirements for VA loans.

The Department of Veterans Affairs itself doesn’t require a minimum credit score. Instead, the minimum comes from the mortgage lenders that offer VA loans. Although the credit score requirements vary, you may find that they use more flexible criteria than a conventional loan does. While conventional loan lenders will also have different credit score requirements, the minimum 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 your credit score is low. They may also require a down payment 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 mortgage insurance.

Debt-To-Income Ratio

During the underwriting process, your lender will look at your debt-to-income ratio (DTI), which measures the amount of gross income you put toward debt each month. Your DTI helps your lender estimate whether you can reasonably afford the mortgage payments you apply for based on your current personal finances.

The VA will accept borrowers with any DTI ratio. But VA lenders 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%. However, lenders may prefer borrowers with a lower ratio.

Debt-to-income ratio is just one piece of your financial information lenders will evaluate as you embark on the loan preapproval process. 

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. A low down payment or credit score are red flags for loan default, so your lender may require PMI so that they can protect themselves from the potential loss.

The PMI may be a one-time closing charge, a regular fee or premium 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. 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, purchasing a second home or investment property using a VA loan is not allowed. You may still be able to earn rental income by making your primary residence a multi-unit property.

While conventional loans allow you to buy investment properties or secondary homes, it may be slightly harder to purchase other types of property after you purchase a second home because the qualifications may shift. For example, a lender may require additional reserve assets depending on how many conventional loans you’re currently borrowing on.

Borrower Eligibility

Conventional loans don’t have special requirements to determine borrower eligibility. You and the property have to qualify, but this depends on standard factors, such as income level or credit score.

Borrower eligibility 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 have at least one of the following qualifications:

• Meet the minimum military service requirements for an active-duty or veteran borrower

• Be a surviving spouse of a service member who died in the line of duty

• Have a qualifying discharge

Borrower Fees

Both conventional and VA 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 have a cap on the amount. They also do not allow certain fees, such as prepayment penalties or settlement charges.

VA Funding Fee

VA loans also require a VA funding fee, which is a singular, upfront cost that usually sits between 1.25% – 3.3% of the loan’s amount. 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. While it’s a one-time charge, the fee 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.

Additional Requirements To Consider

While the above comparisons 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 $726,200 for a single-family property in 2023.

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 have lower interest rates. The percentage difference tends to sit between 0.25% – 0.42%.

The VA also caps closing costs, which – along with competitive interest rates – can make VA loans financially favorable.

Certain benefits of a VA loan versus a conventional loan are hard to ignore. Let’s review the advantages of VA loans one more time:

• No down payment: VA home loans have no minimum down payment requirement, so you can still purchase a home with no money down.

• No mortgage insurance: You don’t face consequences like private mortgage insurance if you forego a down payment on a VA loan.

• More lenient terms: Because VA loans are backed by the government, the lender’s potential loss if you default is lower, which is reflected in their more lenient 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. Without PMI or a large down payment, VA loans stand out as more affordable upfront.

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. For example, if you’re a first-time home buyer, you may find the mortgage qualifications of VA loans to be more accessible. If you’re already a homeowner and looking to purchase a second home or investment property, you’ll need to finance with a conventional loan.

Once you find the one that meets your needs, start your mortgage application to see how much you qualify for.