When you’re comparing different types of mortgages, there are some great reasons to consider a loan from the U.S. Department of Veterans Affairs (VA) if you’re eligible for one. Some of the best VA loan benefits include no down payment requirement, no private mortgage insurance, and the potential to get a lower interest rate.
There are, however, some advantages to getting a conventional loan instead, even if you qualify for VA financing. Comparing the benefits of a VA loan vs. a conventional mortgage can help you decide which one might be right for you.
Key Points
• VA loans do not require a down payment, while conventional loans typically require a down payment to avoid private mortgage insurance.
• The VA loan program does not have a minimum credit score requirement, but lenders may set their own requirements.
• VA loans can be approved with a debt-to-income ratio of up to 41%, while conventional loans typically require a ratio of 36% or less.
• VA loans are designed for primary homes, while conventional loans can be used for primary homes, second homes, or investment properties.
• VA loans require a funding fee, which varies based on factors such as whether the borrower is a first-time homebuyer and the amount of down payment, if any.
Comparing VA Loans vs Conventional Loans
If you’re a first-time homebuyer, it’s good to know a little about different types of mortgages and how they work. VA loans and conventional loans can both help you to buy a home, but one might be a better fit than another, depending on your financial situation.
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Conventional Loan
A conventional loan is a mortgage loan that’s not backed by the federal government. Examples of government-backed loans include VA loans and Federal Housing Administration (FHA) loans, which are designed to make buying a home more affordable for buyers. Conventional loans can be conforming, meaning they meet standards set by government-sponsored enterprises Fannie Mae or Freddie Mac, or non-conforming.
Conventional loans might be what you automatically think of when discussing mortgage loans. You can get a conventional mortgage from a traditional bank or credit union, but you can also find them offered through online lenders. Conventional mortgages typically require a down payment, which is money you pay upfront to reduce the amount you need to borrow.
VA Loan
What is a VA loan? A VA loan is a loan that’s backed by the federal government. The Department of Veterans Affairs operates the VA loan program to help eligible current and former military members (including the National Guard and the Reserve) and their surviving spouses purchase housing. Borrowers can get a loan through an approved VA lender to buy a home, build a home, or pursue a mortgage refinance.
If a borrower defaults on a VA loan, the government steps in to help the lender recover some of its losses. This is one of several VA loan benefits. With a conventional loan, the lender can’t call on the government to get any of its money back if the borrower fails to pay what’s owed.
Mortgage Requirements for VA Loans vs Conventional Loans
What are the benefits of a VA loan vs. a conventional loan? A lot of the main advantages pertain to what’s needed to qualify and what you’ll pay as a borrower. Here are some of the main mortgage requirements to know when you’re looking at the benefits of VA loan financing side by side with conventional loans.
Credit Score
Lenders can use your credit score to qualify you for a mortgage, and your credit history can also influence the rates you pay for a home loan. One of the main benefits of using a VA loan to buy a home is that the VA program does not have a minimum credit score requirement. That could make a VA loan attractive for borrowers with less-than-perfect credit.
However, VA-approved lenders may set their own minimum credit score requirements for loans. Of course, lenders can do the same for conventional mortgages. Generally speaking, an acceptable credit score for a mortgage is usually 620 or higher, though the better your score the easier it may be to get approved.
Down Payment
Putting money down on a home reduces the amount you need to borrow and if you’re getting a conventional loan, it may help you to avoid private mortgage insurance (PMI). PMI is insurance that covers the lender in the event that you default on your loan and it’s typically required for conventional loans when you put less than 20% down.
The VA, however, doesn’t require a down payment for loans. That’s one of the nicer VA loan benefits for homebuyers, since you don’t have to part with a large chunk of cash all at once. Instead, you could save your money to buy new furniture, make improvements to your new home, or pad your emergency fund so that you’re prepared in case the roof springs a leak or you need to replace your water heater.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio reflects the amount of your income that goes to debt repayment each month. For conventional home mortgage loans, a good DTI ratio is 36% or less, though it’s possible to find lenders that will work with you if your DTI is above that amount.
With VA loans, it’s possible to get approved with a DTI ratio of up to 41%. However, having a higher DTI ratio could make it more difficult to keep up with your mortgage payments. For that reason, it’s a good idea to work out a detailed home-buying budget to determine how much you can afford without straining yourself financially.
Private Mortgage Insurance
As mentioned, private mortgage insurance is a feature that can be included in a conventional mortgage if you put less than 20% down. Premiums are added into your monthly mortgage payment and once your equity reaches 20%, you can request to have PMI removed from your loan. Lenders are supposed to drop PMI automatically once your mortgage balance reaches 78% of the home’s original value, assuming you are up to date on your payments.
One of the benefits of a VA home loan is that you don’t have to worry about any of that. There is no PMI for these loans, so you don’t have to factor in any added costs when estimating how much your monthly mortgage payments will be.
Property Eligibility
VA home loans can be used to purchase a variety of home types, including:
• Single family homes with up to four units
• Condos in a VA-approved project
• Manufactured homes
The VA loan program requires an appraisal to make sure that the home is structurally sound and that its value is compatible with the amount that you want to borrow. If a home has any obvious defects, such as a cracked foundation, it may need to be addressed in order for you to move ahead with the loan.
VA loans are designed for purchasing primary homes. In other words, you can only get one for a home you plan to live in. Conventional loans, on the other hand, can be used to purchase a primary home, second home, or investment property. While an appraisal is usually required for a conventional loan, an inspection may be optional if the lender allows.
Borrower Fees
When you get a conventional loan, you’ll typically pay 2% to 5% of the purchase price in closing costs. Closing costs cover things like attorney’s fees, mailing fees, and recording fees. You’ll need to bring a cashier’s check to closing or wire the amount to your closing attorney to pay those fees, along with your down payment.
A VA lender can also charge closing costs and borrowers must usually pay a VA funding fee as well. This fee is used to cover the costs of the VA loan program and it’s paid just once. The amount you pay for a VA loan funding fee depends on factors that can include whether you’re a first-time homebuyer or repeat buyer and how much money you put down, if any.
Additional Requirements to Consider
Aside from having a good credit score and steady income, there’s one more thing you’ll need to qualify for a VA loan. Borrowers are expected to produce a Certificate of Eligibility (COE) demonstrating that they’re eligible for the VA loan program.
Veterans, service members, and surviving spouses can apply for a COE online through the VA website. To get your COE, you must be able to meet minimum duty and service standards. If you’re currently on active duty, you’ll need to get a statement of service from your commander, adjutant, or personnel officer.
If you don’t meet the service requirements for a COE, you may still be able to qualify if you were discharged. Exceptions are also made for the spouses of veterans and for people who served in certain organizations. However, if you’re not able to meet those requirements then you’ll need to consider another home loan option.
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Pros and Cons of a VA Loan vs a Conventional Loan
The benefits of a VA mortgage loan are undeniable, particularly for first-time buyers who may not have a lot of cash to put toward a down payment. To recap, here are the main VA home loan benefits to know, as well as some of the drawbacks, when comparing them to conventional financing options.
| VA Loans | Conventional Loans | |
|---|---|---|
| Pros |
No down payment is required. No private mortgage insurance is necessary. Potentially lower interest rates apply. |
No VA funding fee is required. PMI is not charged if you can put down 20% or more. You can purchase a primary home or investment property. |
| Cons |
VA funding fee is usually required. Comprehensive appraisal is required. Properties must meet eligibility standards. |
PMI can add to total home-buying costs. Interest rates may be higher. A higher credit score may be required to qualify. |
How to Choose the Right Mortgage For You
Weighing the benefits of VA loan financing against conventional loans is important when it comes to choosing the best loan option. If you meet the criteria for a VA loan, then you might consider prequalifying for this type of mortgage first to see what kind of rates and terms you’re eligible for.
On the other hand, if you’re ineligible for a VA loan because you don’t have a COE or you can’t meet a lender’s credit requirements, then a conventional loan might be better. Visit a home loan help center to explore more options.
With any mortgage, it’s helpful to consider:
• Interest rates and what you might pay
• Repayment terms
• Closing costs and other fees
• Appraisal and inspection requirements
• Down payment requirements
• Funding speed
It’s also to your advantage to make yourself as creditworthy as possible before applying for a home loan. Some of the best tips to qualify for a mortgage include paying down existing debts to reduce your debt-to-income ratio, making sure you’re paying all your bills on time, and holding off on applying for other loans or lines of credit.
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The Takeaway
There are several VA home loan benefits. Getting a VA loan could save you money if you’re able to get a lower interest rate and avoid making a large down payment. Conventional loans, on the other hand, are still worth a look, especially if you want to buy a second home or an investment property.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What is the advantage of a VA loan vs a conventional loan?
VA loans do not require a down payment or private mortgage insurance (PMI). Conventional loans may require a 20% down payment to avoid PMI. VA loans may also have lower interest rates for qualified borrowers.
Are VA rates better than conventional?
VA loans can have lower interest rates than conventional loans, which could save you some money as a homebuyer. The interest rates you’re able to qualify for with a VA loan vs. conventional loan can depend largely on your credit scores and credit history.
Why do sellers prefer conventional over VA?
Home sellers may prefer to sell to buyers who have conventional loan funding simply because VA loans tend to have stricter requirements when it comes to the property itself. Buyers must be able to get the home evaluated and appraised in order to move ahead with a VA purchase loan.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/designer491
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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