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VA vs Conventional Loans

VA Loan vs. Conventional Loan: Key Differences

Whether you are a first time homebuyer or are looking to purchase an investment property, it can be difficult to figure out which loan option will provide the best outcome in the long run. VA and conventional loans are two of the most widely known mortgage options – so how can you determine which is right for you?

While the differences between the two are clear on paper, it remains ambiguous if one option is definitively better than the other. In this guide, we dive deeper into the key differences between these popular loans and share tips to help you select the best option for your unique home buying situation.

What Are VA Loans?

The VA loan program was established to make the home buying process easier and more affordable for American veterans and active service members. In addition, spouses and/or citizens who have served in other federal organization can often qualify for a VA loan.

A VA loan is a mortgage option that is fully backed by the U.S. Department of Veteran Affairs. As a result of this guarantee, VA mortgages require no private mortgage insurance and make the qualification process easier. They typically have more favorable interest rates and conditions than other loan types, including conventional loans.

VA loans can be used for the following:

  • Buying a home or condominium unit in a VA-approved project
  • Building a home
  • Purchasing and renovating a home
  • Improving a home by installing energy-efficient features or making energy-efficient upgrades
  • Buying a manufactured home and/or lot
  • Refinancing an existing VA-guaranteed or direct loan for the purpose of a lower interest rate
  • Refinancing an existing mortgage loan or other indebtedness secured by a lien of record on a residence owned and occupied by the veteran as a home

The Benefits of VA Loans

If you meet the qualifications, there are many advantages to pursuing a VA loan. Some of the most notable benefits include:

  • Zero down payment
  • Low interest rates
  • Lower minimum credit score of 620
  • No private mortgage insurance (PMI) required
  • No application fees
  • Reusable eligibility
  • Seller can pay certain closing costs
  • VA funding fee may be financed

What Is a Conventional Mortgage?

The most common type of loan, conventional mortgages are private-sector loans that are federally backed by Fannie Mae and Freddie Mac. If you have good credit with available funds for a down payment, a conventional loan can be an incredibly affordable option for long-term homeownership.

Borrowers with a conventional loan may choose between 15-year, 20-year and 30-year mortgages. There are two types of conventional mortgages: fixed rate and adjustable rate.

Fixed rate mortgages maintain a fixed interest rate for the life of the loan. They offer predictable payments and are ideal for buyers that intend to stay in their home for a long time. On the other hand, adjustable rate mortgages have a convertible interest rate. They allow buyers to start out with a lower monthly payment, however after an initial fixed period of 3 to 10 years, that rate can be adjusted yearly based on the performance of an index.

The Benefits of a Conventional Mortgage Over a VA Loan

As opposed to VA loans, conventional loans are not government backed and therefore have stricter requirements. However, there are several benefits for a conventional mortgage over a VA loan, including:

  • Non-military home buyers can qualify
  • Can be used to purchase a primary residence, second home or investment property
  • Borrowers with high credit scores have access to lower interest rates and flexible terms
  • Stable interest rates
  • More appealing to sellers
  • Viewed as less risky for lenders
  • Shorter underwriter approval process
  • No extra fees

Which Loan is Easier to Qualify For? [infographic in this section]

While VA loans are available throughout the country, each state has its own set of eligibility standards to qualify. Factors such as your length of service, duty status and character of service can all affect your eligibility to qualify for a specific VA loan.

When applying for a VA loan, you must verify your eligibility with a Certificate of Eligibility (COE). To obtain a COE, you must meet the following VA loan eligibility requirements:

  • Served for 90 days during a time of war
  • Served for 181 days during a time of peace
  • Served for 6 years or more in the National Guard or Reserves
  • You are the spouse of a service member killed in the line of duty or as the result of a service-related incident
Requirement VA Loan Conventional Loan
Property type Primary home Primary home, second home, investment properties
Minimum down payment None As low as 3%
Minimum credit score No set requirement 620
Mortgage insurance None Required if down payment is less than 20%
Debt-to-income ratio None (but typically not more than 41%) Maximum 50%
Additional fees VA loan funding fee, loan origination charge Origination charge

Which Loan is Right for Me?

Many assume that if you can qualify for a VA loan, this option will be the best to pursue. Not so fast – our experienced team of mortgage brokers have learned that this is not always the case! Even if you have already obtained your COE, we recommend you take the time to explore some of the conventional loan offerings. In some scenarios, a qualified veteran may be better off with a conventional loan.

Before deciding between a VA loan vs. conventional loan, consider the following:

VA Funding Fee

The VA funding fee is a one-time governmental fee that is applied to any VA-backed home loan.

The money goes directly to the Department of Veterans Affairs and is used for general program costs, as well as to cover losses. The total cost of this fee will vary based on type of loan, the total amount of the loan and whether or not it is a buyer’s first-time using a VA loan.

Buyers can pay the full fee at closing; however, some opt to finance the amount into their monthly mortgage payment. Note that the cost of this fee is still likely to be significantly less expensive than the mortgage insurance that you would pay with a conventional loan.

Occupancy Requirements

It is expected that you will occupy the house you purchase with a VA loan as your primary residence. If you qualify for VA but wish to use the property as a vacation home or rental property, you should consider a conventional loan instead.

Property Requirements

When it comes to property requirements of a home, lenders of conventional loans are far less strict than the VA. With a VA loan, any property you buy must comply with their set minimum property requirements (MPR), such as having adequate roofing and working electric, heating and cooling systems.

Still not sure which one sounds like you? Here is a general breakdown to help decide:

VA Loan is right for you if:

  • You are eligible to obtain a COE
  • You do not have cash available for a down payment
  • You want to avoid PMI
  • The property you are buying will be your primary residence

Conventional loan is right for you if:

  • You have cash available to put 20% down
  • You have a high credit score and want a lower monthly payment
  • You have a low credit score and may not meet VA lender standards
  • The property you are buying is a second home or investment property
  • You want to build equity immediately

Every individual’s journey to homeownership is different, which is why we recommend speaking with a mortgage expert throughout the process. At Blue Water, we make it our mission to guide you toward the financial decision that will help you achieve your goals. Contact us today to start a conversation about how we can help to navigate the home loan process and land the home of your dreams.

Blue Water Mortgage is licensed in New HampshireMaineMassachusettsConnecticut, Vermont, Rhode Island, Florida, North Carolina, Colorado, Texas, Georgia, and South Carolina.

Roger Odoardi

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.