As a Veteran or Active-Duty Service Member, you've earned unique advantages, especially when it comes to one of the most significant investments of your life: buying a home. The VA home loan is a powerful tool designed to make homeownership more accessible and affordable for our nation's heroes. But how does it stack up against a conventional loan?
This guide will walk you through a detailed comparison of VA loans and conventional loans, empowering you to make an informed decision and take the next step toward achieving the American Dream.
Quick Comparison: VA Loan vs. Conventional Loan
Understanding the VA Home Loan
A VA home loan is a mortgage option guaranteed by the U.S. Department of Veterans Affairs. This government backing gives lenders a greater degree of security, allowing them to offer more favorable terms to eligible Veterans, Active-Duty Service Members, and select military spouses.
VA lenders who focus on serving Veterans are experienced in navigating the VA process and helping borrowers take full advantage of their benefits.
Key Benefits of VA Loans
There are some strong benefits to VA loans.
No Down Payment Required
One of the most important benefits of the VA loan is that it requires no down payment. For many Americans, saving tens of thousands of dollars for a down payment is the single largest obstacle to homeownership. The VA loan eliminates that hurdle for military families entirely, allowing eligible borrowers to finance up to 100 percent of the home’s value.
No Private Mortgage Insurance (PMI)
Most conventional loans require private mortgage insurance (PMI) when the down payment is less than 20 percent. PMI protects the lender, not the borrower, and can add $100 to $300 or more to a monthly mortgage payment. VA loans do not require PMI, which directly lowers monthly housing costs.
Flexible Credit Standards
The VA itself does not set a minimum credit score requirement. While individual lenders may establish their own benchmarks, this flexibility allows Veterans who have faced financial challenges to still qualify.
Limits on Closing Costs
The VA limits what closing costs can be charged, keeping expenses fair and manageable. For many Veterans, this cap makes the difference between being able to close on a home or not.
Eligibility
To qualify, borrowers must meet service requirements, typically including:
- At least 90 days of active duty during wartime, or
- 181 days of active duty during peacetime, or
- Six years in the National Guard or Reserves, or
- Being the surviving spouse of a service member who died in service or from a service-related cause.
Each borrower must also obtain a Certificate of Eligibility (COE) from the VA to confirm their qualification.
The VA Funding Fee Explained
While VA loans don't have PMI, they do have a VA funding fee. This is a one-time fee that helps to cover the costs of the VA loan program, ensuring it remains available for future generations of Veterans. The fee varies depending on your service, the amount of your down payment, and whether it's your first time using your VA loan benefit.
- First-time use with no down payment (less than 5%): 2.15% of the loan amount
- Subsequent use with no down payment (less than 5%): 3.3% of the loan amount
Importantly, many Veterans with service-connected disabilities are exempt from the VA funding fee. The fee can also be rolled into the total loan amount, so you don't have to pay it up front.
What is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government. These are the most common type of mortgages and are offered by a wide range of lenders.
Key Requirements of Conventional Loans
Conventional loans come with some requirements.
Down Payment
Conventional loans typically require at least 3 percent down. To avoid PMI, most lenders require a down payment of 20 percent or more. On a $300,000 home, that would mean bringing at least $60,000 to closing.
Credit Score
Conventional lenders usually require a minimum credit score. Borrowers with higher scores generally receive lower interest rates, while those with lower scores may pay significantly more in interest over time.
Debt-to-Income Ratio
Lenders evaluate the borrower’s debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. A DTI below 43% is often preferred.
For a strong borrower with excellent credit and substantial savings, conventional loans can be competitive. But for many families, especially first-time buyers, the upfront costs are a barrier that delays homeownership for years.
Which Loan is Right for You?
For most eligible Veterans, the VA loan is often the most cost-effective choice. The benefits of no down payment, no PMI, and more flexible credit requirements make it an unbeatable option. It's a benefit you've earned through your service, and it's designed to make homeownership a reality.
A conventional loan may be a better option in a few specific scenarios:
- Purchasing an Investment Property: VA loans are for primary residences only. If you're buying a vacation home or an investment property, a conventional loan is the way to go.
- If You Have a Large Down Payment: If you have a down payment of 20% or more, a conventional loan may be competitive. However, it's always worth comparing the interest rates and closing costs of both options.
Final Thoughts
For most eligible Veterans, the VA loan is the clearest path to affordable, sustainable homeownership. It removes barriers like down payments and PMI while offering competitive terms designed specifically for those who served.
If you’re ready to explore your options, you can learn more by exploring guides on the VA loan process to see how your service can unlock the benefits you’ve earned.
FAQs
Can you use a VA loan more than once?
Yes. As long as entitlement is available, you can use the VA benefit multiple times.
Do VA loans have better rates?
Often, yes. Because they are guaranteed by the government, VA loans frequently carry lower interest rates than conventional loans, especially for borrowers with mid-range credit scores.
Can you switch from a VA loan to a conventional loan later?
Yes. Some Veterans refinance into a conventional loan to remove the VA funding fee or to free up entitlement.
Do VA loans take longer to close?
Not necessarily. With the right lender, VA loans can close as quickly as conventional loans.
Is a conventional loan ever cheaper?
It depends on your credit and downpayment. VA home loans are often a better option because no downpayment is required, there is no requirement for PMI, and there are more flexible credit standards.
