VA loans vs. conventional loans
Quick insights
- VA loans are available to qualifying veterans and their surviving spouses and require a Certificate of Eligibility (COE).
- VA loans can offer borrowers lower interest rates, higher debt-to-income (DTI) ratio requirements and lower down payment requirements compared to conventional mortgages.
- By comparison, conventional loans do not typically have minimum property requirements.
If you’re a veteran of the U.S. Armed Forces and are looking to buy a home, you may be wondering whether you should use a conventional loan or a U.S. Department of Veterans Affairs (VA) loan. Both have their advantages, but understanding the key differences between these two types of loans can help you make the right decision.
What is the difference between VA loans vs. conventional loans?
Conventional loans are the most common type of mortgage offered in the U.S. These loans are offered by banks, credit unions and other lenders. To be considered a conventional loan, a borrower needs to meet the credit score, income and down payment requirements set by Fannie Mae® and Freddie Mac®.ec-equifax-types-of-conventional-loans
VA home loans are also provided by banks and other mortgage lenders. The key difference is that VA loans are backed by the U.S. government. This allows lenders to offer loans to eligible veterans even if they don’t meet the credit and down payment requirements of a conventional loan.
Eligibility
When considering whether a conventional loan or a VA loan is right for you, the eligibility requirements are important.
Conventional loans
Conventional loans are available to the general public as long as they meet the requirements set by Fannie Mae or Freddie Mac, as well as the lender. VA loans are only available to veterans of the U.S. Armed Services, including the National Guard, and qualifying surviving spouses.
VA loans
To qualify for a VA loan, you’ll need to provide a Certificate of Eligibility (COE) demonstrating that you met the minimum requirements of service. This usually requires between 90 days and 24 months of service depending on the circumstances.ec-va-eligibilityec-va-eligibilityec-va-eligibilityec-va-eligibility
Interest rates
The interest rate, or the amount you’ll pay the lender, is another point of comparison between conventional and VA loans.
Conventional loans
Conventional loan interest rates are determined by the lender and are usually based on the standards set by Fannie Mae and Freddie Mac. Lenders will also consider factors such as your down payment, credit score and income history when determining your interest rate.
Because rates can vary by lender, it may be a good idea to shop around and compare rates to see your options.
VA loans
Because VA loans are government-backed, the interest rates offered by the lender tend to be lower—or at least competitive with conventional mortgage rates.ec-va-gov-lgy-eligibility-toolkit This is especially true for a borrower who may be making a smaller down payment or have a lower credit score.
Credit score
This is often reviewed by lenders regardless of whether you’re applying for a conventional loan or a VA loan. Your score can determine whether you qualify and what interest rate the lender offers.
Conventional loans
The minimum credit score for a conventional loan backed by Fannie Mae or Freddie Mac is typically 620.ec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loans This may vary based on your credit history, income history and the size of your down payment.
VA loans
VA loans don’t have a required minimum credit score,ec-va-gov-lgy-eligibility-toolkit but most lenders will prefer a credit score to be at least n the low 600s.ec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loans However, lenders may accept a lower credit score depending on your income and down payment.
Down payment requirements
The amount of money you’re required to pay upfront may also differ depending on whether you use a conventional loan or VA loan.
Conventional loans
It’s possible to qualify for a conventional loan with a down payment of as little as 3% for a primary residence. However, you’ll need to pay for PMI if you put down less than 20%.ec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loansec-equifax-types-of-conventional-loans
VA loans
VA loans don’t have a minimum down payment requirement and don’t require monthly mortgage insurance.ec-va-gov-lgy-eligibility-toolkit You may need to pay an upfront funding fee, which can range from 1.25%–3.3% of the loan’s value. The funding fee is determined based on the size of your down payment and if you’re a first-time homebuyer.ec-va-funding-fee-and-loan-closingec-va-funding-fee-and-loan-closing Another benefit is that your funding fee can be added into your loan.
That said, you may need to put down a larger down payment to qualify for a mortgage if the selling price is significantly higher than the appraised value. This can be common in a competitive market, when buyers get into bidding wars on a desirable property.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is defined as your fixed monthly debts, including your mortgage payment, divided by your gross monthly income.
Conventional loans
For conventional loans, Fannie Mae prefers that lenders use a DTI of 36% or lower. While it may be possible to get a conventional mortgage with a higher DTI, it might mean a higher interest rate.ec-fm-b3-6-02-2025ec-fm-b3-6-02-2025
VA loans
For VA loans, a DTI of up to 41% is allowed, and lenders may also be able to approve lenders with higher DTIs based on their income, credit and down payment.va-loan-requirements-experianva-loan-requirements-experian
Types of properties you can buy
One area where conventional loans have an advantage is the type of home you can buy with them. Conventional loans can be used to purchase a primary residence, second home or investment property.
VA loans are primarily intended to buy a primary residence. It’s possible to buy a multi-family property with up to four units with a VA loan, but you would need to live in at least one of the units.ec-va-gov-lgy-eligibility-toolkit
Appraisal requirements
To qualify for both conventional and VA loans, lenders will require a valuation of your home. This is done to ensure the value of the loan doesn’t exceed the value of the home. Otherwise, the lender risks not being able to recoup the cost of the loan if they need to foreclose on the property.
The key difference is that VA loans require a VA-approved appraiser whereas conventional loans may be eligible for an appraisal waiver. Also, while conventional loan appraisals may allow buyers to purchase a property “as-is,” VA appraisals may have higher standards.
VA appraisal requirements are designed to ensure that the property is safe, sound, and sanitary, with the primary goal of protecting the interests of the veteran. These requirements help ensure that the home is in good condition and suitable for living, safeguarding the veteran from potential issues related to the property's safety and habitability.
What are the benefits and disadvantages of a VA loan vs. a conventional loan?
For eligible veterans, there are some key benefits to a VA loan compared to conventional loans:
- No down payment requirements
- No monthly mortgage insurance premiums (such as PMI)
- Competitive interest rates
- Lower credit score requirements
- Higher DTI allowed
While VA loans have some great benefits for eligible buyers, they also have appraisal requirements and limits on the types of homes you can buy.
Is a VA loan better than a conventional loan?
VA loans are a valuable benefit for servicemembers and veterans, providing advantages such as no down payment, no PMI, and competitive interest rates. These features can make VA loans an attractive option, especially for those who may not have substantial savings for a down payment.
However, as veterans transition to civilian life and continue to build their credit history and income, they might find that conventional loans offer competitive terms, especially if they have a strong financial profile. Conventional loans can provide flexibility in terms of property types and may have fewer restrictions compared to VA loans.
Ultimately, the choice between a VA loan and a conventional loan depends on individual circumstances, including financial goals, credit history, and personal preferences. It’s important for veterans to evaluate both options and consult with a knowledgeable lender to determine the best fit for their needs.
In summary
VA loans have some benefits in terms of lower down payment and credit score requirements, but they may also come with limitations compared to conventional loans. The choice of which loan to use will ultimately depend on the borrower’s financial situation and their borrowing goals. Working with the right lender can help you find options that suit your needs.
