Deciding between VA loans vs conventional loans can shape a borrower’s financial future for decades. Both mortgage types help people buy homes, but they serve different borrowers with distinct benefits and requirements. VA loans offer unique advantages for eligible veterans and service members, while conventional loans remain accessible to a broader range of buyers. This guide breaks down the key differences, eligibility rules, and costs so readers can determine which mortgage fits their situation best.
Key Takeaways
- VA loans vs conventional loans differ primarily in eligibility, with VA loans reserved for veterans and service members while conventional loans are open to all qualified borrowers.
- VA loans allow zero down payment and eliminate private mortgage insurance (PMI), potentially saving borrowers tens of thousands of dollars over the loan term.
- Conventional loans require a minimum 3% down payment and charge PMI when borrowers put down less than 20%.
- VA loans typically offer lower interest rates and more flexible credit requirements, accepting scores as low as 580–620 compared to the 620+ needed for conventional loans.
- Conventional loans provide more flexibility for purchasing investment properties, vacation homes, or second residences—options VA loans don’t allow.
- Comparing specific rate offers from multiple lenders is essential, especially for borrowers with excellent credit and 20% down who may find conventional loans competitive.
What Are VA Loans?
VA loans are home mortgages backed by the U.S. Department of Veterans Affairs. The government doesn’t issue these loans directly. Instead, private lenders provide the funding, and the VA guarantees a portion of each loan. This guarantee reduces risk for lenders, which allows them to offer favorable terms to borrowers.
Eligible borrowers include active-duty service members, veterans, National Guard members, and some surviving spouses. The VA loan program exists specifically to help those who’ve served their country achieve homeownership.
Several features make VA loans stand out. Borrowers can purchase a home with zero down payment. They don’t pay private mortgage insurance (PMI), even without putting money down. Interest rates on VA loans often run lower than rates on conventional mortgages. The VA also limits what lenders can charge in closing costs, keeping upfront expenses manageable.
There’s a catch, though. VA loans require a one-time funding fee, which ranges from 1.25% to 3.3% of the loan amount depending on down payment size and prior VA loan use. Some veterans with service-connected disabilities qualify for a funding fee exemption.
What Are Conventional Loans?
Conventional loans are mortgages that don’t carry government backing. Private lenders issue these loans and assume full risk if a borrower defaults. Because lenders take on more risk, they typically enforce stricter qualification standards.
Anyone can apply for a conventional loan. There are no military service requirements or special eligibility rules tied to employment or background. This accessibility makes conventional loans the most common mortgage type in the United States.
Conventional loans come in two categories: conforming and non-conforming. Conforming loans meet guidelines set by Fannie Mae and Freddie Mac, including loan limits that vary by location. Non-conforming loans, often called jumbo loans, exceed these limits and carry their own qualification criteria.
Borrowers generally need a credit score of at least 620 to qualify for a conventional loan, though scores above 740 unlock the best interest rates. Down payments can range from 3% to 20% or more. When borrowers put down less than 20%, lenders require PMI until the loan-to-value ratio drops below 80%.
Conventional loans offer flexibility that VA loans don’t always provide. Buyers can use them for investment properties, second homes, or primary residences without restriction.
Key Differences Between VA and Conventional Loans
Down Payment and PMI Requirements
The down payment difference between VA loans vs conventional loans is significant. VA loans allow qualified borrowers to finance 100% of a home’s purchase price. No down payment means buyers can preserve savings for moving costs, furniture, or emergencies.
Conventional loans require some money down. While 3% down payment options exist, many buyers aim for 20% to avoid PMI. That’s a substantial sum, $60,000 on a $300,000 home.
PMI adds monthly costs that can stretch budgets. On a conventional loan with 10% down, PMI might cost $100 to $200 per month depending on credit score and loan size. VA loans eliminate this expense entirely. The VA funding fee is a one-time cost that borrowers can roll into the loan, spreading it across the mortgage term.
Eligibility and Credit Standards
Eligibility represents the clearest divide between these mortgage types. VA loans restrict access to military-connected borrowers. Applicants must meet minimum service requirements, typically 90 consecutive days during wartime or 181 days during peacetime for active-duty members. Veterans need an honorable discharge to qualify.
Conventional loans have no service requirements. Any borrower who meets credit and income standards can apply.
Credit requirements differ too. VA loans don’t set a minimum credit score at the federal level, though most lenders want scores of 580 to 620. Conventional loans generally require 620 or higher, with better rates reserved for scores above 740.
Debt-to-income ratios also vary. VA loans can approve borrowers with DTI ratios up to 41%, sometimes higher with compensating factors. Conventional loans typically cap DTI at 43% to 45%, depending on the lender and other qualifications.
When to Choose a VA Loan Over a Conventional Loan
VA loans make sense for most eligible borrowers buying a primary residence. The zero down payment option alone saves thousands of dollars upfront. Skipping PMI saves even more over the life of the loan, potentially tens of thousands on a 30-year mortgage.
Borrowers with limited savings benefit most from VA loans. A family that qualifies for both loan types but lacks a 20% down payment will almost always pay less with a VA loan. Even with the funding fee factored in, monthly payments stay lower because there’s no PMI.
Veterans with lower credit scores should also consider VA loans first. The flexible credit requirements mean approval is possible even when conventional lenders say no.
But, conventional loans work better in certain situations. Buyers purchasing investment properties or vacation homes can’t use VA loans, these mortgages apply only to primary residences. Borrowers who’ve already used their VA loan entitlement and haven’t restored it may need conventional financing.
Some buyers with excellent credit and substantial savings might find conventional loans competitive. If a borrower puts 20% down on a conventional loan, they skip both PMI and the VA funding fee. In this scenario, comparing specific rate offers from multiple lenders reveals the better deal.
Repeat VA loan users face higher funding fees on subsequent loans, which can narrow the cost advantage. Running the numbers on both options helps borrowers see which mortgage truly costs less over time.
