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.

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.

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.

Mortgage Requirements For VA Loans Vs. Conventional Loans

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