Whether you’re a first-time homebuyer or selling and moving into a new house, you will most likely need to take out a home loan to finance your purchase. But choosing a loan can be more complicated than simply picking one off a list — there are myriad considerations that go into selecting and getting approved for the right mortgage.
Military members and veterans can take out a VA loan, which offers advantages like 0% down and no minimum credit score requirement. Still, it’s important to look into the specifics of VA loans and cross-compare with conventional loans to determine the best option for you and whether you should shop around for the best mortgage lenders or the best VA lenders.
This guide will break down the ins and outs of VA and conventional loans, explain their differences and help VA-qualifying homebuyers decide what type of loan to choose.
What is a conventional loan?
Conventional home loans are any type of mortgage not backed or insured by a government agency like the Federal Housing Administration or the Department of Veterans Affairs. They’re offered by private lenders like banks and mortgage companies, and they typically require a down payment between 3% and 20% of a home’s sale price.
Two government-sponsored enterprises (GSE), Fannie Mae and Freddie Mac, set the guidelines and requirements for conventional loans. Conventional loans will usually require a strong credit history and score — as well as a certain income and stable finances — for borrowers to qualify for competitive interest rates and terms. Borrowers may have more flexibility when it comes to property type and loan amounts compared to government-backed loans.
Types of conventional loans
There are several types of conventional home loans to consider, each with its own terms and requirements.
Conforming vs. non-conforming loans
Conforming home loans have lending criteria set by Fannie Mae and Freddie Mac. These guidelines can include factors like credit and income requirements, down payment minimum, debt-to-income ratios, and more.
Conforming loans usually have lower interest rates because lenders consider them lower risk for their strict standard lending criteria. GSEs set a maximum limit on conforming loans, which can vary depending on location.
Non-conforming loans don’t adhere to the criteria established by Fannie Mae and Freddie Mac. These loans have higher maximum loan limits than conforming loans, often making them necessary for larger loan amounts. For instance, “jumbo loans” are a common type of nonconforming loan for properties that exceed the maximums set by GSEs.
Interest rates are generally higher for non-conforming loans because they are riskier for lenders, who may also demand a bigger down payment than they would for a conforming loan. Eligibility for non-conforming loans can be more flexible and they’re often underwritten manually, which means an underwriter will evaluate your documents and verify whether you’re qualified to borrow.
Fixed-rate vs. adjustable-rate loans
When choosing a home loan, you’ll also have to decide between a fixed-rate loan or an adjustable-rate loan (ARM). Your selection will depend on your financial situation, risk tolerance, and how long you expect to live in the home you purchase.
A fixed-rate loan (aka fixed-rate mortgage) stays the same throughout the entire term, while an ARM’s interest rate can change at designated points of a loan’s term after an initial fixed-rate period. Fixed-rate loans offer more stability, which can help you plan out your expenses and budget more easily. When interest rates are low, they allow borrowers to lock in a favorable rate for the long term.
ARMs often have lower initial interest rates, which means your monthly payments will also be lower during the fixed-rate period. However, interest rate adjustments are unpredictable, and those payments may increase, resulting in higher housing costs.
VA loans explained
VA loans are specifically designed to provide active-duty military, veterans and eligible spouses assistance in purchasing or refinancing a home. They’re backed by the U.S. Department of Veterans Affairs and offer various benefits, but you have to meet specific service requirements and provide a Certificate of Eligibility from the VA.
Key differences between a VA loan vs a conventional loan
There are a few advantages to VA loans, like a $0 down payment and competitive interest rates for eligible veterans and military personnel. While conventional loans are more widely available, you normally have to pay money down and meet more stringent criteria.
Loan eligibility requirements
Qualifying for a VA loan is primarily tied to your military service record and status. Active-duty service members, honorably discharged veterans, National Guard and Reserve members who meet service requirements and certain surviving spouses are typically eligible.
You will also need a Certificate of Eligibility from the VA as proof of your service. VA loans tend to be more flexible than conventional loans regarding credit requirements, but lenders can still look into your credit history and income to determine whether you can afford the loan you’re applying for.
The home you buy with a VA loan has to meet the VA’s standards for safety and habitability, and it must be your primary residence.
Conventional loan requirements vary but are typically more strict than government-backed loans. You will usually need a credit score of at least 700 to get the best interest rates. The stronger your credit history, the more likely you are to qualify — be prepared to provide documents that show proof of income, bank statements and more to prove financial stability.
You’ll also need to meet property standards for conventional loans and pay for an appraisal to determine the property’s condition and value.
Loan closing costs and fees
VA loans require a funding fee in most cases, a one-time payment that depends on factors like service status and whether you used a VA loan in the past. The amount of your fee depends on the amount of your loan and the type of loan you get.
Conventional loan closing costs also depend on the type of loan you get, your loan amount and where you live. Closing costs typically vary between 3% and 6% of your loan amount and can include appraisal fees, attorney fees and processing fees you pay your lender to process your loan.
Down payment requirements
Minimum requirements for conventional loan down payments usually start between 3% and 5% of a home’s sale price, though paying 20% is considered ideal by many lenders and can reduce the cost of your monthly mortgage payment.
VA loans do not require any down payment, which can make homeownership more affordable for qualifying borrowers. Paying money down can, however, reduce your funding fee and decrease your monthly mortgage payment and interest.
Loan limits are adjusted periodically to accommodate changes in the housing market — the baseline conventional conforming loan limit in the U.S. for 2023 is $726,200, according to the Federal Housing Finance Agency. It’s higher in Alaska and Hawaii ($1,089,300) because average home prices are more expensive in those regions.
The standard limit for VA loans also increased to $726,000 in 2023 for most U.S. counties.
Mortgage insurance requirements
With a conventional loan, if your down payment is less than 20%, your lender may require Private Mortgage Insurance (PMI) for protection against default. This adds to your monthly costs but can be removed once you reach a loan-to-value ratio of about 80% or lower.
VA loans do not require PMI or any other type of ongoing mortgage insurance.
The condition and characteristics of a property can impact whether you qualify for a conventional loan. Requirements vary, but typically, you must ensure the property meets specific safety and habitability standards — so if there is significant damage to the foundation or roof, you may be denied or need to make repairs before closing.
An appraisal is required to determine the property’s value and confirm that it meets lender and loan-to-value ratio requirements. Property type matters, too: Most single-family loans in sound condition qualify for conventional loans, but eligibility can vary for condominiums, townhouses or multi-unit properties.
Lenders usually require homeowner’s insurance to protect their investment, especially if the home is in a high-risk area. You’ll need to ensure there are no issues with the home’s title like outstanding liens or disputes.
Many of the same property requirements apply to VA loans, although there are some differences. The property you’re purchasing must be your primary residence and satisfy the VA’s Minimum Property Standards, which concern areas like structural integrity, roofing, HVAC, plumbing and more. You will need to have a VA appraisal to assess the property’s value and confirm that it meets the Minimum Property Standards set by the VA.
Other requirements specific to VA loans include stipulations regarding distance to military facilities and private road access. The lender may impose additional safety restrictions if you purchase a home near a military facility, such as an airfield. Properties located on private roads must be accessible year-round and well-maintained, and you will need to have a written road maintenance agreement.
Resale and refinancing
If you want to refinance with a conventional loan, lenders will evaluate your eligibility by looking at your credit score, income stability and debt-to-income ratio. In most cases, you can refinance as soon as you want, although you may have to wait several months to refinance with the same lender.
You’ll sign the new loan agreement, replacing the old one, if you are approved. There is no time requirement for reselling a home after purchasing it with a conventional loan.
Homeowners with a VA loan looking to refinance can do so with VA-backed cash-out refinance loans or the Interest Rate Reduction Refinance Loan (IRRRL).
Both refinancing options require you to wait about 240 days, or six to seven payments, whichever period is longer. The VA does not impose any time requirements if you have a VA loan and want to resell your home.
The benefits of a VA loan vs conventional loan
A VA loan can offer distinct advantages compared to a conventional loan, but only for active service members, veterans and qualifying spouses. Conventional loans typically require down payments of at least 3%, whereas VA loans do not.
Unlike conventional loans, VA loans can further reduce monthly costs because they don’t require private mortgage insurance and often have more lenient credit score requirements.
The benefits of a VA loan
- No down payment required
- No private mortgage insurance required
- More lenient lending criteria
- VA funding fee can be rolled into the loan amount, reducing upfront costs
- Access to VA cash-out refinance and IRRRL loans
- Low interest rates
- More stringent appraisal process
- Potentially longer closing timeline
The benefits of a conventional loan
- Accessible to a wider pool of borrowers
- Fewer property use restrictions
- Competitive interest rates
- Beneficial for buyers with strong credit
- Diverse term options and potential for lower total interest cost
- Down payment usually required
- PMI requirements for down payments less than 20%
- Stricter qualification requirements
Is a VA loan better than a conventional loan?
For those who qualify, VA loans can be more advantageous than conventional loans because of their low interest rates and no down payment requirement, which can mean significant long-term savings. Not having to pay any money down also makes homeownership more affordable for many people entering the market for the first time.
VA loans typically don’t require PMI, and they feature more lenient lending criteria than conventional loans, making them a better option for borrowers with a limited credit history.
Finally, including the VA funding fee in the loan, can reduce the upfront expense of buying a home.
Summary of Money’s VA loan vs conventional loans
Veterans, active duty military and some spouses can use a VA loan or a conventional loan when making a home purchase.
Conventional loans can benefit homebuyers with strong credit and enough money to make at least a 20% down payment. But with VA loans, there is no down payment or PMI requirement, which can lead to major savings on monthly mortgage payments.
VA loans aren’t as customizable as conventional loans, and it may take longer to close on a house because VA loans have a stricter appraisal process. However, the advantages of a VA loan, which typically include low interest rates and more lenient lending criteria, may outweigh these drawbacks.