Choosing between VA loans vs. conventional loans is one of the biggest decisions veterans and active-duty service members face when buying a home. Both options offer paths to homeownership, but they differ in cost, eligibility, and long-term value. VA loans provide unique benefits for those who qualify, while conventional loans remain the go-to choice for most American homebuyers. This guide breaks down both mortgage types so borrowers can make a confident, well-informed choice.
Key Takeaways
- VA loans require zero down payment and no PMI, making them ideal for veterans and service members with limited savings.
- Conventional loans require at least 3% down, with PMI required until you reach 20% equity in the home.
- VA loan interest rates typically run 0.25% to 0.50% lower than conventional rates, saving borrowers thousands over time.
- VA loans have more flexible credit requirements (often 580–620), while conventional loans typically require a minimum score of 620.
- Conventional loans are better for investment properties, vacation homes, or buyers with 20% down who want to avoid the VA funding fee.
- The choice between VA loans vs. conventional loans depends on your eligibility, available cash, and long-term homeownership goals.
What Is a VA Loan?
A VA loan is a mortgage option backed by the U.S. Department of Veterans Affairs. Private lenders issue these loans, but the VA guarantees a portion of each loan. This guarantee reduces risk for lenders and allows them to offer favorable terms to borrowers.
VA loans are available to veterans, active-duty service members, certain National Guard and Reserve members, and eligible surviving spouses. The program was created in 1944 as part of the GI Bill to help returning World War II veterans purchase homes.
The standout feature of VA loans is the zero down payment requirement. Qualified borrowers can finance 100% of a home’s value without putting money down at closing. VA loans also don’t require private mortgage insurance (PMI), which saves borrowers hundreds of dollars each month.
Interest rates on VA loans tend to be lower than conventional loan rates. According to recent mortgage data, VA loan rates often run 0.25% to 0.50% below conventional rates. Over a 30-year mortgage, that difference adds up to significant savings.
VA loans do come with a funding fee. This one-time fee ranges from 1.25% to 3.3% of the loan amount, depending on down payment size and whether it’s a first-time or subsequent use. Some veterans, including those with service-connected disabilities, are exempt from this fee.
What Is a Conventional Loan?
A conventional loan is any mortgage that isn’t backed by a government agency. These loans follow guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy mortgages from lenders.
Conventional loans are available to any qualified borrower, regardless of military service. They’re the most common type of mortgage in the United States, accounting for roughly 70% of all home loans.
Borrowers typically need a down payment of at least 3% to 5% for a conventional loan. Those who put down less than 20% must pay private mortgage insurance until they build enough equity in the home. PMI costs range from 0.5% to 1.5% of the loan amount annually.
Credit score requirements for conventional loans are generally stricter than VA loans. Most lenders want to see a minimum score of 620, though borrowers with scores above 740 get the best rates and terms.
Conventional loans offer flexibility that VA loans don’t. They can be used for vacation homes, investment properties, and second residences. VA loans are limited to primary residences only. Conventional loans also have no funding fee, which can make them cheaper upfront for borrowers who put down 20% or more.
Key Differences Between VA and Conventional Loans
Understanding the key differences between VA loans vs. conventional loans helps borrowers pick the right option. Here’s how these two mortgage types compare on the factors that matter most.
Down Payment and Mortgage Insurance
Down payment requirements create the biggest gap between VA and conventional loans. VA loans require no down payment for qualified borrowers. Conventional loans require a minimum of 3% down, with 20% needed to avoid PMI.
For a $400,000 home, a conventional loan borrower needs $12,000 to $80,000 upfront. A VA loan borrower could finance the entire purchase with zero down. That’s a massive difference for buyers working with limited savings.
Mortgage insurance is another key distinction. VA loans never require PMI. Conventional loans with less than 20% down require PMI payments that can add $100 to $400 monthly to housing costs. PMI on conventional loans can be canceled once equity reaches 20%, but those payments add up over the years.
The VA funding fee does offset some of the no-down-payment benefit. First-time VA borrowers pay 2.15% of the loan amount with no down payment. On a $400,000 loan, that’s $8,600, but it can be rolled into the loan rather than paid at closing.
Credit and Eligibility Requirements
VA loans have more flexible credit requirements than conventional loans. The VA doesn’t set a minimum credit score, though most lenders require scores of 580 to 620. Conventional loans typically require minimum scores of 620, with the best rates reserved for borrowers above 740.
Eligibility differs significantly between these loan types. VA loans require military service, generally 90 consecutive days during wartime or 181 days during peacetime. Active-duty members need 90 days of service. National Guard and Reserve members typically need six years of service.
Conventional loans have no service requirements. Any borrower who meets credit, income, and down payment standards can qualify. This makes conventional loans the only option for non-military buyers.
Debt-to-income ratios also differ. VA loans allow higher debt-to-income ratios, sometimes up to 60% with strong compensating factors. Conventional loans typically cap at 43% to 50% debt-to-income.
When to Choose a VA Loan Over a Conventional Loan
VA loans make sense for most eligible borrowers, but the decision depends on individual circumstances. Here’s when each option shines.
Choose a VA loan when cash is tight. The zero down payment requirement lets buyers purchase sooner without years of saving. The lack of PMI also keeps monthly payments lower.
VA loans work best for buyers with lower credit scores. The flexible credit requirements help borrowers who might struggle to qualify for conventional financing. Someone with a 600 credit score will find VA loans much more accessible.
The lower interest rates on VA loans vs. conventional loans benefit borrowers over time. On a $350,000 mortgage, a 0.5% rate difference saves roughly $35,000 in interest over 30 years.
Conventional loans make sense in specific situations. Buyers with 20% down can avoid both PMI and the VA funding fee, potentially saving money upfront. Those purchasing investment properties or vacation homes need conventional financing since VA loans only cover primary residences.
Borrowers planning to sell quickly might prefer conventional loans. The VA funding fee increases costs for short-term ownership. Someone buying a starter home for two to three years might come out ahead with a conventional loan.
VA loan limits were eliminated in 2020 for borrowers with full entitlement, but conventional loans may still work better for jumbo purchases in some cases. The decision between VA loans vs. conventional loans eventually comes down to eligibility, available cash, and long-term plans.
