The choice between a VA loan vs. conventional loan depends on your eligibility and your specific financial circumstances and goals. VA loans offer excellent advantages for military families, but conventional loans provide greater home price flexibility for more borrowers.
A VA loan is a good choice if you’re a veteran, active-duty service member, or qualifying spouse purchasing a primary residence and you don’t have much money for a down payment. That said, if you’re not eligible for a VA loan or you have excellent credit and a large down payment, a conventional loan might be better since you don't have to pay the VA funding fee, you're not subject to county loan limits, and you don't have to deal with a stricter VA appraisal.
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VA loans vs. conventional loans: quick breakdown
| VA loans 🎖️ | Conventional loans 🏘️ |
|---|---|
| No down payment required | Minimum 3% down payment (20% for no PMI) |
| Mortgage insurance never required | PMI required for down payments <20% |
| No official minimum credit score, but 620+ desirable | Usually 620+ credit score required |
| Can only be used for primary residence | Primary, investment, and secondary properties eligible |
| Up to 41% DTI (higher with residual income) | Usually up to 50% DTI |
| Loan limit varies by lender and county | Loan limit of $806,500 for most of the U.S.; higher in high-cost areas |
| One-time funding fee of 1.25% to 3.3% | No funding fees |
| Assumable for qualified buyers | Usually not assumable |
| No prepayment penalty | Prepayment penalty, often equal to three months’ interest |
Pros and cons of VA loans
Pros
- No down payment: VA loans don’t require a down payment, which removes one of the biggest obstacles to homeownership for many buyers.
- No mortgage insurance: VA loans are one of a number of low- or no-PMI mortgage programs and never require mortgage insurance, saving you hundreds of dollars per month. Conventional loans require PMI if your down payment is less than 20%. Although you will have to pay a one-time VA funding fee.
- Low interest rates: Because they’re backed by the federal government, VA loans can be offered with interest rates that are competitive with conventional loans.
- Flexible credit/income requirements: While a 620+ credit score is desirable, VA loan providers are generally more flexible if you have a lower credit score or past financial challenges.
- Assumable for qualified buyers: VA loans can be assumed by qualified future buyers, which can make your home easier to resell. With interest rates running high, assuming a seller’s loan is an enticing way for buyers to land a great rate.
Cons
- Military service requirement: You’ll only be eligible for VA loans if you’re a veteran, active military member, or eligible surviving spouse. You may also need to meet minimum service-length requirements.
- Residence type restriction: VA loans can only be used for the purchase of your primary residence, not a second home or investment property.
- VA funding fee: Unless you’re a disabled veteran, you’ll likely have to pay a one-time fee of 1.25–3.3% of the loan amount.
- Stricter appraisal standards: Your purchased property will need to pass the VA Minimum Property Requirements during its appraisal, which are more stringent than appraisal standards for conventional loans.
- Potentially lower loan limits: Loan limits vary depending on the county and lender and may not be sufficient in high-end markets.
Pros and cons of conventional loans
Pros
- Available to all qualified borrowers: Conventional loans are more widely available since they don’t have any military service requirements.
- More eligible property types: You have more freedom with how you use your conventional loan, including for primary homes, vacation properties, or rental investments as long as you meet qualifications.
- Higher loan limits: While conforming limits mean most conventional loans are capped at roughly $800,000 (or more in high-cost counties), jumbo loans can exceed these conforming limits.
- Faster closing: Conventional loans can close faster, often because the appraisal process is less strict and less likely to cause delays compared to VA loans.
- No funding fee or PMI if you have a 20% or higher down payment: If your down payment is at least 20% of your loan, then you'll pay less fees with a conventional loan than with a VA loan.
Cons
- Minimum down payments: Some conventional loans have down payment minimums of 3%, but most are at least 5–10%. You’ll need 20% to eliminate PMI costs.
- High credit requirements: You’re unlikely to qualify for a conventional loan with a credit score under 620, and you’ll likely need a score of 720+ for the best interest rates.
- Mandatory private mortgage insurance: PMI, which can range from 0.1– 5% of your loan, is required for conventional loans with down payments under 20%. PMI can potentially add hundreds of dollars to your monthly mortgage bill.
- Higher income standards: Private lenders are generally less forgiving about previous financial challenges and have higher debt-to-income and savings requirements.
- Possible prepayment penalty: Some conventional loans include a prepayment penalty if you try to pay off the loan early. The penalty varies by lender but is often equivalent to three months’ interest.
- Not assumable: Most conventional loans aren’t assumable, so you may have a somewhat harder time trying to attract new buyers when you need to sell.
When should you choose a VA loan?
A VA loan is a great option for many military families, especially first-time homebuyers who don’t have enough savings for a large down payment. Combined with the lack of mortgage insurance, VA loans are an excellent tool for getting on the property ladder quickly while still saving on the full cost to buy a house.
VA loans are also worth considering if you’re looking for a house in a high-cost area, where saving up for a 20% down payment would otherwise take years. However, VA loan limits vary by county, so you’ll need to check that you’re eligible for a high enough limit in your desired area.
Finally, older veterans who are buying a house at 65 years old or older can benefit from VA loans thanks to the zero down payment and no PMI. Disabled veterans can also save on one-time funding fees.
When should you choose a conventional loan?
Conventional loans are the most practical choice for most buyers since they have fewer eligibility requirements than VA loans. Especially if you have excellent credit, a stable income history, and substantial cash reserves, you can likely get a great interest rate with a conventional mortgage.
If you’re considering buying a vacation home or investment property, a conventional loan will likely be your only option. Similarly, luxury properties may exceed VA loan limits and will require a jumbo loan instead.
Time considerations are also important. Because VA loans have a stricter appraisal process that you’ll need to add to your homebuying checklist, conventional loans tend to close faster. That makes conventional loans a good option if you’re in a competitive market where a fast closing can give you an advantage.
Choosing the right mortgage for you
Comparing VA loans vs. conventional loans shows that each mortgage option has clear advantages in certain situations. While VA loans can help eligible military families buy their first property fast, conventional loans provide increased flexibility for a broader pool of buyers.
Whichever mortgage option you choose, it’s important to discuss each step of your homebuying journey with a qualified professional. Contact Clever today to connect with a licensed Clever Concierge, who can advise you on your next steps and refer you to a top realtor. Just fill out a quick form to get started.