Looking to buy your first or next home but aren’t sure what type of loan to apply for?
On this page, you’ll discover the key differences between VA loans and conventional loans and which is the best choice for your circumstances.
A VA loan (Department of Veterans Affairs Loan) is a government-backed mortgage that helps qualified Veterans, service members, surviving spouses, and select others to purchase, refinance, and refurbish homes.
The ultimate goal:
To make home buying easier for those who serve our great nation.
The Department of Veterans Affairs (previously known as the Veterans Administration) guarantees a portion of the loan – meaning the government will repay the lender a portion of a VA loan if the borrower, for any reason, is unable to make payments.
As a result, lenders are able to offer some of the most powerful loan options on the market with a wide range of benefits.
Although highly specialized, VA loans are provided by private lenders, such as banks and mortgage companies.
Just like a regular loan!
As the name implies, only qualified U.S. veterans, active-duty military personnel, and surviving spouses are eligible for VA loans.
You’re eligible if you meet one or more of the following criteria:
Please note that if you don’t meet the minimum requirements, you may still be eligible.
VA loan limits were eliminated in 2020.
In other words, there is now no limit on how much you can borrow, provided you’re on active duty or are a veteran with full VA loan entitlement.
After using a VA mortgage to purchase a home, you can even get another VA loan.
Once you earn the VA loan benefit, it’s yours for life.
You’re eligible for another VA loan under the following conditions:
Please note: Loan limits still apply to borrowers who already have a VA loan or have defaulted on a VA loan.
There are plenty of factors to consider when choosing a loan.
Although a VA loan may seem like the obvious choice for veterans and soldiers on active duty, how can you be 100% sure?
The table below shows the comparisons of VA loan requirements and conventional loan requirements.
Further down the page, you’ll find a detailed breakdown of each section.
|Primary Home, Secondary Home, Vacation Home, Investment Property
|Minimum Down Payment
|VA funding fee, along with other potential fees, like loan origination
|Varies according to lender, usually involves an origination fee
|No mortgage insurance required
|Usually required if the down payment is less than 20%.
|Varies by lender, no requirement set by VA.
|Debt To Income Ratio
|None, but preferred below 41%
|Maximum of 50%
It’s important to note that VA loans can ONLY be used to purchase, restore or refinance a primary home.
A VA-approved appraiser will also have to evaluate the home you wish to buy.
This is so they can estimate its value and ensure it meets the VA’s minimum property requirements.
In contrast, a conventional loan can be used in a variety of ways: to purchase a new home, a new investment property, a vacation property, and so on.
In most cases, VA loans require no down payment at all.
The only exception is where the purchased property is higher than its current market value – as is sometimes the case when a home is bought through an auction.
Conventional loans do require down payments.
However, the exact amount will vary from lender to lender.
Traditionally, lenders prefer to offer conventional loans to people with large down payments – with 20% being the recommended amount to avoid paying mortgage insurance.
Nevertheless, it is possible to find down payments as low as 3%.
VA loans demand what’s known as the VA Funding Fee – which varies depending on your unique circumstances.
For first-time buyers, this is typically 2.3% of the purchase price of the property.
For subsequent purchases, the fee is 3.6%.
This Funding Fee goes directly to the Department of Veterans Affairs to ensure the continuation of the VA Loan program.
This fee can be rolled into the overall loan amount, should you choose not to pay it upfront – however, this will increase the interest you pay over the loan’s lifetime.
Note: in some cases, veterans and surviving spouses are exempt from paying the funding fee entirely, such as veterans who receive VA disability compensation.
This is assessed on a case-by-case basis.
Although both VA loans and conventional loans have origination fees, it’s worth noting that VA loans have a cap on this amount. Conventional loans don’t.
Conventional loans also come with a variety of other fees, which vary from lender to lender, including:
Simply put, VA loans don’t require mortgage insurance.
With conventional loans, if your down payment is less than 20%, you will need private mortgage insurance.
This can be a one-time charge paid at closing, an ongoing fee built into your monthly payment, or a combination of both.
Although the VA doesn’t set a minimum credit score, lenders do in almost all cases.
However, this is still slightly lower than the typical minimum score for conventional loans.
Most VA-approved lenders are looking for between 580 and 620.
Conventional loan lenders are looking for around the 620 mark.
Although you may see some marketing stating that there is no maximum debt-to-income ratio for VA loans, their official guidelines also state:
“A lender must provide compensating factors if the total debt ratio is over 41%.”
Should your debt to income ratio exceed 41%, you won’t automatically be rejected, but you may have to supply additional information to your lender, such as your residual income.
You’ll generally need a DTI of 50% or less to qualify for a conventional loan.
Under certain circumstances, you may be able to qualify with a higher DTI, but this will be at the discretion of the lender and may be limited to refinancing options.
Statistically, VA loans are likely to have lower interest rates than conventional loans.
The percentage difference tends to sit between 0.25% – 0.42%.
For some homebuyers, this can make all the difference, even without all the additional features of a VA loan.
If you qualify for a VA loan, the huge range of benefits that come with it is, in most cases, enough to tip the scale towards them over conventional loans.
However, every veteran’s situation is different.
When making a decision, it’s important to consider your circumstances and think about the following factors:
(If you wish to purchase a property that will NOT be your primary residence, a VA loan is not the right choice for you.)
(If you do not have any money available to make a down payment, a VA loan is the ideal choice)
(Typically, VA Loans do take a little longer to pay out, which may push you towards a conventional loan instead)
If you decide that a VA loan is for you, there are several types of VA Loans available for your consideration.
There are numerous different VA Loans available depending on your needs.
Whether you’re buying your first home, refinancing your home, or making some long overdue home improvements – there’s a VA Loan for you.
Consult the table below for an overview of your options:
|VA Loan Type
VA Purchase Mortgage
|Allows qualified service personnel or veterans to buy a home with no minimum down payment
VA Cash-Out Refinance
|Replaces a VA mortgage or a conventional mortgage with a VA loan.
This option allows you to turn home equity into cash.
|VA Streamline Refinance
Also known as VA IRRRL:
(Interest Rate Reduction Refinance Loan)
|Replaces your current VA mortgage with a VA loan to lower your interest rate or refinance from an adjustable rate to a fixed rate.
|VA Rehab And Renovation Loan
|Finances the cost of home improvements
|Native American Direct Loan
|Helps eligible Native American veterans buy, build, improve or refinance a home on federal trust land.
Applying for a VA Loan is extremely simple to help service personnel, veterans, and their families fulfil their housing needs as soon as possible.
The process can be broken down into 3 distinct steps:
A VA certificate of eligibility shows lenders that your military service history meets the requirements for a VA loan.
However, you don’t have to source this certificate yourself:
A VA-approved lender can obtain the document for you, or you can request the certificate from the VA online.
Not all VA lenders offer the same rates or ask for the same requirements.
Shop around to find a lender tailored to your situation – for example, if you have a weaker credit score or need a certain type of VA loan.
After you’ve made an offer on the property you wish to purchase, the lender will evaluate your finances and order a VA appraisal to ensure it meets regulations.
In short, it must be clean, structurally secure, and ultimately safe for you and your family to live in.
Once your application and appraisal are approved, the only steps are to close on the loan and move into your new home.