Conventional Mortgage vs. VA Loan: Information for Home Buyers

Posted by Lauren Schneider on Monday, August 31st, 2020 at 10:24am.

Should I Choose a Conventional Loan or a VA Loan?For those who qualify, the VA loan may seem like the best choice for a prospective home buyer. However, there are reasons to consider other types of loans, depending on the finances and long-term goals of the borrower. The following information details the pros and cons of each loan type to help buyers make an informed decision.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Mortgages Basics

The biggest difference between a conventional loan and a VA loan is that a conventional lender will have to assume more risks in case the buyer defaults or otherwise can't pay back their loan. The terms for the VA loan tend to be more forgiving than a conventional mortgage.

There is no down payment required for VA loans, nor will borrowers have to pay for Private Mortgage Insurance until they reach 20% equity in their home, as they would with a conventional mortgage. Compared to conventional loans, VA loans tend to offer about .5% lower interest rates on average.

Who Is Eligible for a VA Loan and a Conventional Loan?

The VA loan is available to anyone who has served at least 181 days in peacetime (or 90 days in wartime) in the Marines, Air Force, Coast Guard, Navy, or Army. Members of the Reserves or National Guard can apply for a VA loan after 6 years of service. There are no restrictions on who can apply for a conventional loan, though each lender will set their own eligibility requirements.

Down Payment Requirements

A conventional loan can be achieved with as little as a 3% down payment. There is also a loan origination fee charged for conventional loans, which will vary by lender but is generally between .5% and 1% of the total price of the loan. A VA loan charges a funding fee based on the amount of the buyer's down payment. This charge will go toward the Department of Veterans Affairs and can be anywhere from 1.5% to 3.5% the cost of the loan.

Debt and Credit

It is important for borrowers of either type of loan to have a low debt-to-income (DTI) ratio for the following reasons:

  • Conventional mortgages are usually available to those with a 50% DTI ratio or under. (Though again, lower is always better.)
  • A VA loan does not technically have a minimum DTI, though some VA lenders may have to provide additional justification for approving a loan for a candidate who has a ratio of more than 41%.

There is no official minimum credit score for a VA loan. However, many conventional mortgage lenders are often looking for a score of at least 620.

The lower interest rates and more forgiving terms of VA loans make them the more-popular choice for many home buyers who qualify. The best thing home buyers can do is shop around and compare with several lenders for best possible opportunity.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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