Most people have heard of conventional loans, but there are plenty of other mortgage options available to borrowers. Veterans, in particular, have access to VA loans, which are backed by the Department of Veterans Affairs and come with favorable terms, especially for people with restricted finances.
Is a conventional loan better than a VA loan? VA and conventional loans are two popular mortgage options. If you are unsure which option is best for you, Society Mortgage has professional and trained loan officers who can explain the difference between VA and conventional loans to decide which one best suits your needs.
To get a full picture of how a traditional mortgage vs VA loan compares, let’s take a look at their similarities and differences so you can better assess how they fit within your financial planning.
VA Loans
Guaranteed by the U.S. Department of Veterans Affairs, VA loans are available to eligible veterans, active-duty service members, and certain surviving spouses. This program was established in 1944 as part of the GI Bill to help returning service members purchase homes.
VA loans can either be purchase loans to buy a home or cash-out refinance loans to refinance an existing loan.
The main features of VA loans include no down payment requirement, no private mortgage insurance, competitive interest rates, and more flexible credit requirements.
Conventional Loans
Conventional loans are not backed by any government agency. These loans are offered by private lenders and conform to guidelines set by Fannie Mae and Freddie Mac, government-sponsored enterprises that buy and sell mortgage-backed securities.
Most conventional loans are conforming loans that match the loan limits set by the Federal Housing Finance Agency (FHFA). Non-conforming conventional loans are often referred to as jumbo loans.
Conventional loans are flexible regarding the property type and loan amount, as long as the borrower’s income can support it. They can have potentially lower interest rates for borrowers with excellent credit. If you can put a down payment of 20%, then you don’t have to pay private mortgage insurance.
VA Loan vs Conventional Loan
Eligibility requirements
To be eligible for a VA loan, applicants must meet certain service requirements, such as 90 consecutive days of active service during wartime, 181 days of active service during peacetime, or 6 years of service in the National Guard or Reserves. A surviving spouse of a service member can also qualify. To prove VA status, borrowers must obtain a Certificate of Eligibility (COE).
For conventional loans, eligibility is more flexible as long as borrowers have a minimum credit score of 620 and can provide a down payment. They must also have stable and verifiable income to cover mortgage payments and other debts and obligations.
Credit score requirements
The VA doesn’t set a minimum credit score requirement. However, many VA lenders look for a credit score of at least 620. Some may go as low as 580, especially if the borrower has a strong overall financial profile and cash reserves to mitigate the risk.
Credit score requirements for conventional loans are generally stricter. Most lenders require a minimum score of 620, but to qualify for the best rates and terms, a score of 740 or higher is often needed.
Debt-to-Income Ratio (DTI)
For a VA loan, the preferred DTI is 41% or lower, but lenders may approve DTI ratios above 50% if the borrower meets residual income requirements.
Conventional loans typically require a DTI of 43% or lower. However, some lenders may accept up to 50% for borrowers with excellent credit and significant cash reserves to lower the risk and show creditworthiness.
Property value limits
The VA doesn’t set a cap on how much you can borrow, but it does limit the liability it assumes. If the home’s value is beyond what the VA deems reasonable, borrowers may be required to cover the difference.
Conventional loans have conforming loan limits set by the Federal Housing Finance Agency. These limits vary by location and are adjusted annually. For 2024, the loan limits for a conventional loan have been set at $766,550 for most of the US. Loans exceeding these limits are considered jumbo loans and may have different terms and requirements.
Down payment requirements
VA loans offer 100% financing, meaning eligible borrowers can purchase a home without a down payment. This is particularly helpful for first-time homebuyers who struggle to save towards a down payment.
Conventional loans require a down payment of at least 3% to 5%. To avoid private mortgage insurance, however, borrowers often need to put down 20% or more.
Interest rates
VA loans feature some of the lowest interest rates on the market; often lower than conventional loans.
Interest rates for conventional loans vary based on the borrower’s credit score, down payment, and other factors. Borrowers with excellent credit may secure rates competitive with VA loans.
Income limits
There are no income limits for VA loans, but income will determine how much a borrower can borrow. The lender wants to be sure the borrower will be able to repay the mortgage.
There are no set income limits for conventional loans. Again, income is important because it determines the amount a borrower can qualify for.
Geographical limits
In the conventional vs. VA loan comparison, geography is not an issue, as neither is geographically restricted. Both can be used to purchase properties in urban, suburban, or rural areas across the United States.
Mortgage insurance
VA loans do not require ongoing mortgage insurance. However, most borrowers must pay a one-time VA funding fee. To make things easier for homebuyers, this fee can be rolled into the loan amount to soften its impact on people’s finances.
Private Mortgage Insurance (PMI) is required for conventional loans with a down payment of less than 20%. PMI can be removed once the borrower reaches 20% equity in the home.
Talk to Society Mortgage About Your VA or Conventional Loan
Is a VA loan better than a conventional loan? Both VA and conventional loans can help prospective homeowners reach their homeownership expectations.
VA loans are aimed at veterans to help them buy a home on favorable terms. Only they qualify for these loans. If you are not eligible for VA status or are not an active-duty service member, then a VA loan is out of reach. If, however, you do have VA status, a VA loan makes homeownership more affordable and easier, as these loans have no mortgage insurance and require no down payment.
Conventional loans are perfect for any borrowers with good credit scores. If you have enough money for a 20% down payment, then the terms of the loan will be especially favorable. A conventional loan helps you buy any type of home for whatever purpose. Â
Depending on your finances, eligibility and choice of home, you can choose the right mortgage type for you. If you are unsure, contact Society Mortgage. Our Loan Officers will be happy to explain loan differences and terms and help you with any questions you might have as well as your loan application.Â
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Frequently asked questions
What are the benefits of a VA loan vs conventional?
VA loans offer significant benefits, including no down payment, no private mortgage insurance (PMI), and lower interest rates. However, VA loans are only available to veterans and aim to help them buy a home on favorable terms. On the other hand, conventional loans are especially favorable to homebuyers who have enough money for a 20% down payment and an excellent credit score.
What is the difference between a VA loan and a conventional loan?
VA loans are backed by the U.S. Department of Veterans Affairs and are designed specifically for eligible veterans, active-duty service members, and certain members of the National Guard and Reserves. Conventional loans, on the other hand, are not insured or guaranteed by the government and are available to a broader range of borrowers. Key differences include down payment requirements, mortgage insurance, and eligibility criteria
Can I refinance a VA loan into a conventional loan?
Yes, refinancing a VA loan into a conventional loan is an option if you meet the credit and income requirements for a conventional mortgage. Borrowers may choose to refinance to take advantage of lower interest rates or to eliminate the funding fee associated with VA loans.Â
How do VA loans affect closing costs compared to conventional loans?
Closing costs for VA loans can be similar to conventional loans, but VA loans often have some restrictions on what fees can be charged to the borrower. For example, lenders can’t charge certain fees, and the VA limits the amount a borrower can pay for closing costs. This may lead to lower overall closing costs for VA loans, making them a more cost-effective choice.
