VA Loan vs. Conventional Loan: Which Mortgage Should You Choose?

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. If you’re not eligible for a VA loan or you have excellent credit and a large down payment, a conventional loan gives you more options.

The choice between a VA loan vs. conventional loan depends primarily on your eligibility and your specific financial circumstances and goals. VA loans offer excellent advantages for military families, but conventional loans provide greater flexibility for more borrowers.

We’ll break down what each loan type is, its advantages and disadvantages, and how to decide which one is right for you.

Understanding VA loans

VA loans are one of the most valuable benefits provided to veterans, service members, and their families. These loan types are guaranteed by the U.S. Department of Veterans Affair to help eligible borrowers more easily purchase a home. Because they’re backed by the federal government, VA loans can be offered with terms that would otherwise be unlikely with conventional mortgages.

The program addresses barriers that often prevent military families from being able to afford a house. Specifically, VA loans enable eligible borrowers to get a mortgage with little or no money down.

Who qualifies for VA loans?

VA loan eligibility varies depending on a number of factors, including your length of service and whether you served during peace or war. The following borrowers are eligible for VA loans:

• Active duty members who served at least 90 consecutive days during wartime or 181 days during peacetime
• Members of the National Guard or Reserve who completed at least six years of service
• Surviving spouses of service members who died in combat or from service-related disabilities

In addition to meeting the military service requirements, you’ll generally also need the following:

• Certificate of Eligibility from the VA
• Debt-to-income (DTI) ratio under 41% (higher with residual income)
• Minimum two-year employment history (some exceptions)
• Intention to use the home as your primary residence
• Pass a home appraisal meeting VA minimum property requirements
• Two months of bank statements

Understanding conventional loans

Conventional loans are the more mainstream mortgage option and are chosen by most homebuyers. These home loans aren’t guaranteed by the federal government, although they still must follow guidelines set by government-sponsored entities Fannie Mae and Freddie Mac.

Because conventional loans aren’t guaranteed by the government, the lender assumes all the risk for them. This setup results in conventional loans having stricter eligibility standards. At the same time, because conventional loans are independent, lenders can be more flexible about loan terms, such as the types of properties the loans can be used for.

Who qualifies for conventional loans?

It’s up to each private lender to decide who does and doesn’t qualify for a conventional loan. Generally, borrowers must meet the following requirements:

• Minimum down payment of 3% (or 20% to avoid mandatory private mortgage insurance or PMI)
• Credit score above 620
• Debt-to-income ratio up to 36–50% of gross monthly income
• Stable employment history covering the last two years
• Adequate savings to cover closing costs
• Property appraisal to confirm the home’s value

Detailed comparison: VA loan vs. conventional loan

Pros and cons of VA loans

VA loans: Benefits

• 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 for down payments of less than 20%.
• 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.
• No prepayment penalty Unlike conventional loans, you can pay off your VA loan early without facing any fees or restrictions.
• 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.

VA loans: Drawbacks

• 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 standard: 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 limit: Loan limits vary depending on the county and lender and may not be sufficient in high-end markets.

Pros and cons of conventional loans

Conventional loans: Benefits

• 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.
• 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.

Conventional loans: Drawbacks

• 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.
• Prepayment penalty: Many 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 to 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 to 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.