Skip to Content

Comparing VA Loans to Conventional Loans

Here we compare the primary differences between VA loans and conventional loans to show you when each option may be the best.

VA Loan vs Conventional Home Graphic

For the vast majority of military borrowers, VA loans are the most powerful and cost-effective mortgage program on the market.

These government-backed loans come with significant financial benefits for eligible borrowers, including purchasing with no money down and no out-of-pocket costs.

But there are certainly times when a VA loan isn't the best answer and a conventional loan may be a better option. Here we break down the difference between the VA loan and conventional loans and when one option may be more favorable than the other.

VA Loans vs Conventional Loans: A Quick Comparison

VA Loans Conventional Loans
Down Payment: $0 Down Payment: Up to 20% Down
Rates: Typically lower than conventional Rates: Typically better than FHA, but higher than VA
Credit Standards: Not set by the VA, but typically lenders expect at least a 620 Credit Standards: Typically a 620 minimum, but much higher to get the best rates and terms
Occupancy: Can be used for primary residences only Occupancy: Can be used for primary, secondary, investment property and even vacation homes
Program Fees: VA Funding Fee (1.25% - 3.3% of the loan amount) Program Fees: No special fees are associated with conventional mortgages

VA Loans vs Conventional Loans

Conventional loans feature no government guarantees and adhere to the standards and requirements of government sponsored enterprises Fannie Mae and Freddie Mac.

Credit benchmarks can vary by lender and loan type. A 620 FICO score is a common benchmark for conventional loans, although you may need a much higher score to contend for the best rates and terms.

Other differences include:

Down Payment

A flagship benefit of the VA loan is that most VA borrowers don’t need a down payment to secure financing.

Conversely, conventional loans often require a down payment of at least 5 percent (in some cases it might be 3 percent or lower). However, conventional borrowers with less than 20 percent down will pay private mortgage insurance (PMI) – a fee that is not required with VA loans.

To put that in perspective, a 5 percent down payment on a $300,000 loan is $15,000. Borrowers would typically need to put down $60,000 on that loan to avoid paying PMI.

Mortgage Insurance

As previously mentioned, conventional loans with less than 20% down will require private mortgage insurance (PMI). Depending on home price, your credit score and other factors, PMI can easily run $150 to $200 each month.

PMI protects the lender if you default on your loan and typically falls off after you reach 80% loan-to-value.

VA loans do not require PMI, saving the borrower thousands over the life of the loan.

Rates

VA loan rates are often the lowest rates on the market. According to the mortgage origination software firm Ellie Mae, through Q3 of 2019, VA loans have had the lowest average rates at 4.27 percent – compared to conventional at 4.5 percent.

VA loans are backed by the Department of Veterans Affairs, giving lenders the confidence to extend more favorable rates to borrowers who may not have perfect credit.

Credit Standards

The Department of Veterans Affairs (VA) does not set a credit score minimum on VA loans, but most lenders do. Similar to conventional loans, lenders typically like to see a 620 or better mortgage credit score.

Also through Q3 of 2019, the average credit score for a VA purchase loan was 709 compared to conventional at 753 – showing you don’t need perfect credit to obtain a favorable VA loan rate.

Occupancy Requirements

A rather large difference between VA and conventional loans is that VA loans are only for primary residences. This doesn’t rule out duplexes or fourplexes, but to use a VA loan you must intend to live in the property you purchase.

However, conventional loans may be used to purchase primary residences, vacation homes, rental property and other investment property.

Loan Fees

VA loans come with what’s known as the VA funding fee. The VA funding fee ranges from 1.25 to 3.3 percent and is applied to every VA purchase and refinance loan.

The VA funding fee is often rolled into the entire loan amount to make for a true $0-down loan.

Benefits of VA Loans vs Conventional Loans

The primary benefits of VA loans are $0 money down, no PMI, flexible credit requirements and highly competitive rates.

The VA loan might be a good fit for eligible veterans and service members without sterling credit or the ability to make a 20 percent down payment.

Conversely, borrowers with great credit and enough cash on hand for a large down payment may find that a conventional loan is a better fit.

Speak with a home loan specialist to help determine what option is best for you.