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When it comes to financing a home, choosing the right loan is one of the most important decisions you'll make. For eligible active-duty service members and surviving spouses, VA loans are a fantastic option with a wide range of benefits that makes buying or refinancing a home easier than ever, including flexible credit requirements and no down payments.
However, it’s always a good idea to compare your options. If you’re choosing between a conventional loan and a VA loan, there are several key differences to consider. Below, we’ll dive into a few of the differing factors between these loan types to help you determine which loan best suits your needs and long-term financial goals.
One major difference between conventional loans and VA loans is the fact that VA loans are only available to eligible borrowers that meet a specific criteria of requirements:
Meanwhile, conventional loans do not have a set criteria for eligibility.
In addition to the borrower eligibility requirements, VA loans also have a criteria for eligible properties. These loans are strictly limited to financing primary residences, which must meet specific VA appraisal standards to ensure safety and structural soundness. This means you cannot use a VA loan for a vacation home, investment property, or fixer-upper in need of significant renovations.
Conventional loans, on the other hand, are flexible; they can be used to finance primary residences, vacation homes, or even investment properties.
One of the biggest benefits of a VA loan is the fact that you are not required to make a down payment. That’s right: Qualified borrowers can finance 100% of the home’s purchase price! This feature makes VA loans an excellent choice for anyone looking to conserve their savings or enter the housing market sooner. (We should note, though, that if you’re bidding on a home at a purchase price higher than its market value, your lender may require a down payment.)
Mortgage insurance is another area where VA loans stand out. With a conventional loan, borrowers who put down less than 20% are typically required to pay private mortgage insurance (PMI), which increases monthly costs.
One great advantage to VA loans is that they do not require any form of mortgage insurance, regardless of the down payment amount. Instead, there is a one-time VA funding fee, which helps sustain the loan program. Funding fees are typically .5% for Interest Rate Reduction Refinance Loans, 2.15% for a first VA cash-out refinance, and 3.3% for any other VA cash-out refinance loans following this one. This fee can be paid at closing, but it is often rolled into the loan amount, ensuring VA borrowers can avoid the recurring cost of PMI altogether.
Conventional loans usually have stricter credit score requirements. Most lenders expect a minimum score of 620 or higher. If you have a lower score, you may still qualify, but you risk higher interest rates or additional fees.
Meanwhile, VA loan requirements are more flexible. While individual lenders may set their own minimums, these loans are generally more forgiving, with some lenders approving borrowers with scores as low as 580. This makes VA loans a more accessible option if you have a less-than-perfect credit.
Your debt-to-income (DTI) ratio measures how much of your income is used to pay debts–including your new mortgage. Although there are sometimes exceptions for those with great credit scores or other strong financial factors, most conventional loan lenders have a set maximum DTI ratio. Fannie Mae’s maximum total DTI, for example, is 36% (with exceptions).
As with most other requirements, VA loans are lenient in this area. There is no official maximum DTI ratio set by the Department of Veterans Affairs. However, most lenders do prefer a DTI ratio of 41% or lower.
In any case, the lower your DTI is, the better chances you have of qualifying for a better mortgage.
There are other differences between VA loans and conventional loans to consider as you make your decision, including the fact that VA loans have no loan limits, lower mortgage rates, and lower closing costs.
Choosing between a conventional loan and a VA loan ultimately depends on your financial situation, long-term goals, and eligibility. Conventional loans offer flexibility in property types and down payment options, while VA loans provide unmatched benefits for veterans, active-duty service members, and their families, including no down payment and no mortgage insurance. Understanding these differences can help you make an informed decision and move forward with confidence.
If you’ve found that a VA loan is the right choice for you and you’re ready to explore your options, Commander Mortgage is here to help. Our experienced team will guide you through every step of the process, putting homeownership within reach for veterans.
Contact us today to start your journey toward homeownership!
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