VA Loan Vs. Conventional Loan: Your Guide

What Are The Key Differences Between VA And Conventional Loans?

Conventional loans generally have stricter lending requirements than VA loans and other government-backed loans – such as FHA loans and USDA loans – because lenders assume most of the risk with conventional loans.

Let’s take a deep dive into the different requirements for VA and conventional loans so you can decide which mortgage product is more suitable for your home buying needs and goals.

VA Loan Vs. Conventional Loan: Property Type

One of the biggest differences between VA and conventional mortgages is the type of property you can finance with each type of home loan. 

  • VA loans: According to VA loan occupancy requirements, if you’re financing with a VA loan, the home or property must serve as your primary residence. While you can’t use a VA loan to directly purchase a second home, investment property or vacation home, you can purchase a multifamily property of up to four units to rent out – as long as you occupy one of the units as your primary residence.
  • Conventional loans: Conventional loans don’t require you to occupy the home you’re purchasing as your primary residence. This means you can use a conventional mortgage loan to purchase a second home, vacation home, rental home or other investment property with no strings attached, as long as your lender approves it.

VA Loan Vs. Conventional Loan: Credit Score

Because your credit score represents how well you’ve managed debt, mortgage lenders rely on this three-digit number to assess your risk as a borrower. 

And while the VA doesn’t set a minimum credit score requirement, you’ll still need to meet your lender’s minimum credit score requirement, regardless of which loan product you’re applying for. 

Here are the credit score requirements for conventional and VA loans:

  • Conventional loans: The minimum credit score benchmark will vary by lender, but in general, you’ll need a score of at least 620 to qualify for a conventional loan.
  • VA loans: Because the government insures VA loans, lenders can offer lower credit score requirements than conventional loans. Some lenders may still require a 620-credit score, but a 580 score can qualify you for a VA loan with Rocket Mortgage®.

VA Loan Vs. Conventional Loan: Down Payment

One of the most attractive features of VA loans is that they generally don’t require a down payment – although some lenders might require a small down payment if your credit score is low. 

For conventional loans, most lenders will require you to put at least 3% of the purchase price down, depending on your financial situation and credit score. However, if you make a down payment of at least 20%, you can also forgo paying private mortgage insurance (PMI) from the beginning of your loan term. 

VA Loan Vs. Conventional Loan: Mortgage Insurance

Depending on your loan type, down payment amount and other factors, lenders may charge you mortgage insurance to offset the risk of a loan default. Mortgage insurance can be a one-time cost you pay at closing, a regular fee rolled into your monthly mortgage payment, or both. 

Let’s look at the mortgage insurance requirements for conventional loans versus VA loans:

  • Conventional loans: Lenders will require you to pay private mortgage insurance (PMI) on a conventional loan until you reach 20% equity in your home. While the exact amount varies from lender to lender, PMI is usually 0.1% – 2% of your loan amount per year. Once you reach 22% home equity, your lender should automatically remove PMI from your monthly payments, but you can request they do so once your home equity reaches 20%.
  • VA loans: While VA loans don’t require mortgage insurance, they do require you to pay a VA funding fee, which is an upfront cost of 1.4% – 3.6% of the loan amount. Similar to mortgage insurance, the funding fee offsets the potential risk of a loan default and can be built into the total loan amount.

VA Loan Vs. Conventional Loan: Debt-To-Income Ratio (DTI)

Your debt-to-income (DTI) ratio is a percentage representing how much of your monthly gross income goes toward recurring monthly debts like rent, student loans, auto loans and credit card payments. 

Your lender looks at your DTI to determine how likely you are to make your mortgage payments on time each month. The lower your DTI, the less risk you pose to your lender.

  • VA loans: While VA loans don’t have specific requirements for DTI, most lenders prefer a DTI of 41% or lower. Lenders are also required to look at compensating factors – such as your credit score, liquid assets or military benefits – so you can possibly qualify with a DTI higher than 41%.
  • Conventional loans: While most lenders prefer your DTI to be lower than 40%, you might be able to qualify for a conventional loan with a DTI as high as 50% – although your lender will likely raise your mortgage interest rate to offset the risk your high DTI may pose.

VA Loan Vs. Conventional Loan: Mortgage Rates

Housing market conditions, inflation and even the Federal Reserve all factor into current mortgage rates. Your personal mortgage interest rate will also be influenced by your loan amount, down payment and credit score, as well as whether you’re applying for an adjustable-rate mortgage (ARM) or fixed-rate mortgage.

VA mortgages generally offer lower interest rates than conventional loans at a percentage difference of 0.25% – 0.42%. For example, for a 30-year fixed-rate loan closing at the end of July 2022, the average mortgage rate for a VA loan was 5.375% versus 5.5% for a conventional loan with the same term.

However, if you were closing on a 15-year fixed-rate conforming loan at the end of July 2022, you might’ve locked in an interest rate as low as 5.125% in exchange for a higher monthly payment.

VA Loan Vs. Conventional Loan: Loan Limits

For a single-family home in most U.S. counties in 2022, you can use a conventional loan to finance a home of up to $647,200. The conforming loan limit increases to $970,800 for high-cost areas in California, Alaska, Hawaii and other states. If your property exceeds the conforming loan limits of your area, you’ll need to use a jumbo loan – a type of non-conforming conventional loan.

VA loans don’t technically have loan limits. Instead, they have VA loan entitlements. If you’ve never used your VA loan benefit – or you’ve fully repaid a VA loan – you have full entitlement, which means the VA will repay up to 25% of any loan amount you’re approved for. 

However, if you’re making payments on a VA loan or you’ve defaulted on a VA loan, you have partial entitlement. You can still purchase a home with a VA loan using partial entitlement. The VA, however, will only guarantee your loan up to the conforming loan limit minus the entitlement you’re using.

VA Loan Vs. Conventional Loan: Closing Costs

Closing costs are various fees you pay your lender to process your loan. Included in these costs are origination fees, home appraisal fees, title search fees and more.

While VA loans cap their origination fees at 1% of the total loan amount, these fees similarly tend to only range from 0.5% – 1% for conventional loans. Appraisal fees for conventional loans are usually lower, typically ranging from $300 – $400 for a single-family home versus $425 – $875 for a VA appraisal. It’s important to note that appraisal fees for a home being financed with any loan can cost north of $600 or even $2,000 depending on where you live, how big your house is, etc.

Overall, you’ll generally pay 3% – 5% of your loan amount to close on your VA loan, and you’ll likely pay 2% – 6% to close on your conventional loan.

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