VA Loans vs. Conventional Mortgage Loans

If you're in the market to buy a home and you're a veteran, you have two big choices for a mortgage: a VA loan or a conventional loan. 

If you don't have any money for a down payment, the choice is obvious: Choose the VA loan. But it may not always be quite so clear. We'll help you decide which loan is right for you. 

VA Loan vs. Conventional Loan Side By Side

You'll need to weigh the pros and cons of each loan type when deciding which one is right for you. As you go down this list comparing VA loans and conventional mortgage loans, consider whether each factor is important in your situation. 

Down Payment

The biggest feather in the VA loan's cap is that it generally doesn't require any down payment. By contrast, with almost any other mortgage program, the minimum down payment is 3%. Using a VA loan, you can buy a home at any price with no money down if you have "full entitlement," which means that you've either never taken out a VA loan before, or you’ve reimbursed the VA for any past VA loans or foreclosures.

However, there are some cases in which you'll still need to use a down payment with a VA loan. If you only have partial VA loan entitlement, such as if you've used or defaulted on a VA loan in the past, you may only have a portion of your entitlement available to you. Your lender can help you determine how much your down payment will need to be. Most require that your entitlement, down payment, or both cover 25% of your loan.

Interest Rates

The interest rates on a VA loan tend to be lower than on a conventional loan. In fact, according to data collected by The Balance, the average VA 30-year fixed-rate mortgage on Feb, 1, 2022, was 3.70% APY. The rate for a 30-year conventional mortgage was 3.78% APY.

That might not sound like much, but on a $500,000, 30-year mortgage, that difference in interest rates would save you more than $20,000 in interest charges alone. Your monthly payment would also be about almost $60 less.

Property Type

Conventional loans are commonly used to buy homes. But you can also use them to buy other properties, whether that's a vacation home, a secondary home for your parents, or a rental investment property. 

The sole purpose of VA loans, on the other hand, is to help veterans and active-duty servicemembers buy their homes. Thus, you can only use VA loans to buy your primary residence. 

However, if you used a VA loan to buy your current home, you are allowed to use a secondary VA loan to buy another property to move into as your primary home, and rent out the first one for income. However, your VA loan entitlement will be reduced because of your first loan, which will affect the size of the down payment you may need, and possibly the VA loan funding fee.

Private Mortgage Insurance (PMI)

Normally, with conventional loans, you'll need to pay for private mortgage insurance (PMI) if you make a down payment of less than 20%. This insurance is designed to protect the lender in the event that you default on the loan. It's not a great deal for you, as it only increases the amount of your monthly payment.

With VA loans, however, a major benefit is that you don't have to pay PMI, even if you put no money down. That's because the VA will reimburse the lender for part of the loan if you default, so there’s no need for more insurance for the lender.

However, to pay for this service, the VA loan does charge a one-time, upfront funding fee. This fee ranges from 1.4% to 3.6% of the total loan amount, and it can be financed into the loan or paid upfront.

Credit Required

Most conventional loans require a credit score of 650 or higher, although this may vary by lender. In general, the higher your credit score, the easier it will be to get a mortgage.

VA loans, on the other hand, have no official minimum credit score requirements. However, just like with conventional loans, lenders can set their own internal requirements.

In June 2021, the average credit score for people approved for VA loans was 722, versus 758 for conventional loans.

Average Closing Speed

VA loans do take slightly longer to close than conventional loans, on average. That's because the home appraisal can only be done by a VA-approved appraiser, and it must pass certain inspections and requirements. 

The difference in closing speeds isn't large, though. In June 2021, it took an average of 55 days to close on a VA loan, versus 49 days for a conventional mortgage. However, that might make an impact in a competitive market where sellers are more likely to choose offers that close quickly. 

VA Loan vs. Conventional: Which Is Best for You?

If you don't have a down payment saved, then the decision is clear. Choose a VA loan, because you won't have to pay PMI.

If you have plenty of savings, however, it's a bit more of a challenge to choose. If you're concerned about getting the best rates, choose the VA loan. If you'd like to avoid the upfront funding fee of a VA loan, choose a conventional loan. You can always ask your lender to run the numbers for both scenarios to see which is more affordable in terms of monthly payments and overall loan costs.