VA Loans vs. Conventional Loans
When buying a home, one of your biggest decisions is choosing the right mortgage type. Two popular options to consider are VA loans and conventional loans.
To make the right choice for you, it's important to understand the key differences between these two loan types and weigh their pros and cons based on your unique situation and needs.
The first step in choosing between a VA loan or a conventional loan is examining the differences between these mortgages.
The chart below provides a brief overview of these distinctions:
| VA Loan | Conventional Loan | |
|---|---|---|
| Eligibility | Military Veterans, active service members, members of the National Guard or Reserves and surviving spouses of Veterans | Based on borrower’s financial situation |
| Minimum Down Payment | None | Generally 3-20% of total loan amount |
| Minimum Credit Score | None | 620 |
| Mortgage Insurance | No PMI | PMI required with down payments less than 20% of loan amount |
| Property Requirements | Must serve as borrower’s primary residence, satisfy VA’s minimum property requirements and borrower must move in within 60 days after closing | None |
| Interest Rate | Typically lower | Typically higher |
| Maximum Loan Limit | None for borrowers with full VA entitlement | $766,550-$1,149,825; varies by location |
| Closing Costs | Generally 3-6% of loan amount | Generally 3-6% of loan amount |
| Maximum Seller Concessions | 4% | 9% with 25% down payment |
| Program Fees | VA funding fee | None |
After comparing VA and conventional loans, you may ask yourself which option is better. The answer isn't one-size-fits-all; it depends on your preferences, needs and circumstances. To help you make an informed decision, let's look deeper into the pros and cons of each mortgage type.
One significant advantage of VA loans is that they don't require a down payment. In contrast, conventional loans typically require a 3-20% down payment.
VA borrowers can purchase a home without saving for a substantial upfront payment. The absence of a down payment makes VA loans more accessible for many potential homebuyers, allowing them to allocate their funds towards other important expenses.
Another benefit of VA loans is the more lenient approach to credit scores. While there isn't a specific minimum credit score requirement, most VA lenders look for a 620 FICO credit score.
This benchmark is comparable to the minimum credit score requirement for conventional loans. Still, VA loans tend to be more forgiving for borrowers with lower credit scores, which often provides more flexibility for VA-eligible borrowers when qualifying for home financing.
Unlike conventional loans, VA loans do not require private mortgage insurance (PMI), regardless of the down payment amount. This contributes significantly to the overall affordability of VA loans over their conventional counterparts, as VA borrowers can accumulate substantial savings over the life of the loan by avoiding PMI.
VA loans generally offer lower interest rates compared to conventional loans. VA loans are government-backed and partially guaranteed by the Department of Veterans Affairs, which helps mitigate the risk of these loans for VA lenders. As a result, VA-eligible borrowers are more likely to enjoy better loan terms, increasing the overall cost-effectiveness of the loan.
For those with their full VA entitlement, there's no maximum loan limit for VA loans. This can be advantageous for VA borrowers, especially in high-cost housing markets.
For Veterans with reduced entitlement, standard VA loan limits will still apply. However, these limits still share the same range of conventional loans: $766,550 to $1,149,825, depending on the property's location.
While VA loans offer numerous benefits, they also have more specific eligibility requirements. To qualify, borrowers must meet the VA's minimum service requirements, obtain a Certificate of Eligibility and satisfy their private lender's financial criteria.
Conventional loans have no additional eligibility requirements, making them more accessible to a broader range of homebuyers.
VA loans come with specific property restrictions. The property must be the borrower's primary residence and meet the VA's Minimum Property Requirements (MPRs) during the mandatory appraisal process.
Conventional loans, on the other hand, offer more flexibility in terms of property type. These loans can be used for various residences, including investment properties and second homes, which are not eligible for VA financing.
When considered at face value, the 4% maximum seller concessions for VA loans may seem significantly lower than the 9% maximum limit for conventional loans. However, this 9% seller concessions limit is only available to conventional loan borrowers who have contributed a 25% down payment towards their home purchase.
With a down payment between 10-25%, conventional loan borrowers will qualify for up to 6% seller concessions, and borrowers with less than a 10% down payment may only negotiate up to 3% in seller concessions. That being said, although technically lower, VA loans may still offer substantial negotiation room compared to conventional loans.
The VA funding fee, typically ranging from 1.25-3.3%, is an additional cost unique to VA loans. While VA and conventional loans do share other traditional home loan fees, conventional loans do not feature any additional program-related fees.
Choosing between a VA loan and a conventional loan can seem complicated, but evaluating your eligibility, financial situation and the pros and cons of each loan can help simplify your decision. Both VA loans and conventional loans have their benefits and drawbacks, but ultimately, it comes down to what works best for you.
