What are the main differences between VA and conventional loans?
Conventional loans generally have stricter lending requirements than VA loans and other government-backed loans — like FHA loans and USDA loans — because lenders assume most of the risk with conventional loans.
Let’s take an in-depth look at the different requirements for VA and traditional loans so you can decide which mortgage product is a better fit for your homebuying needs and goals.
VA Loan vs. Conventional Loan: Type of Property
One of the biggest differences between VA and traditional mortgages is the type of property that each type of home loan allows you to finance.
- VA loan: If you are financing with a VA loan, the home or property must serve as your primary residence per VA loan occupancy requirements. While you can’t use a VA loan to directly purchase a second home, investment property, or vacation home, you can purchase an apartment building with up to four units for rent — as long as you use one of the units as your primary home.
- Conventional Loans: Traditional loans do not require you to use the home you are buying as your primary residence. This means you can use a traditional mortgage loan to buy a second home, vacation home, rental home, or other investment property with no strings attached, as long as your lender approves.
VA Loan vs. Traditional Credit: Credit Score
Because your credit score is a measure of how well you’ve managed your debt, mortgage lenders rely on this three-digit number to gauge your risk as a borrower.
And while the VA does not set minimum credit requirements, you must still meet your lender’s minimum credit requirements, regardless of the loan product you are applying for.
Here are the creditworthiness requirements for conventional and VA loans:
- Conventional Loans: The minimum credit rating benchmark varies by lender, but generally you need a score of at least 620 to qualify for a traditional loan.
- VA loan: Because the government insures VA loans, lenders can have lower creditworthiness requirements than traditional loans. Some lenders may still require a loan score of 620, but a score of 580 can qualify you for a VA loan with Rocket Mortgage®.
VA Loan vs. Traditional Credit: Down Payment
One of the most appealing features of VA loans is that they generally don’t require a down payment — although some lenders may ask for a small down payment if your credit score is low.
With conventional loans, most lenders require a down payment of at least 3% of the purchase price, depending on your financial situation and credit rating. However, if you pay a minimum of 20% down payment, you can also waive the payment of Personal Mortgage Insurance (PMI) from the beginning of the loan period.
VA Loan vs. Conventional Loan: Mortgage Insurance
Depending on the loan type, down payment amount, and other factors, lenders may charge you for mortgage insurance to offset the risk of default. Mortgage insurance can be a one-time fee you pay when you take it out, a recurring fee that goes into your monthly mortgage payment, or both.
Let’s look at the mortgage insurance requirements for traditional loans versus VA loans:
- Conventional Loans: Lenders require you to pay Personal Mortgage Insurance (PMI) on a traditional loan until you reach 20% equity in your home. While the exact amount varies from lender to lender, the PMI is typically 0.1% – 2% of your loan amount per year. Once you reach 22% home equity, your lender should automatically remove PMI from your monthly payments, but you can request it once your home equity reaches 20%.
- VA loan: While VA loans do not require mortgage insurance, you must pay a VA finance fee, which is an upfront cost of 1.4% – 3.6% of the loan amount. Similar to mortgage insurance, the financing fee offsets the potential risk of default and can be built into the total loan amount.
VA Loan vs. Conventional Loan: Debt to Income Ratio (DTI)
Your debt-to-income ratio (DTI) is a percentage that shows how much of your gross monthly income goes towards paying for recurring monthly debts like rent, student loans, car loans, and credit card payments.
Your lender looks at your DTI to determine how likely you are to make your mortgage payments on time each month. The lower your DTI, the less risk you pose to your lender.
- VA loan: While VA loans do not have specific requirements for DTI, most lenders prefer a DTI of 41% or less. Lenders must also consider compensating factors — such as your credit history, cash on hand, or military accomplishments — so you may qualify with a DTI greater than 41%.
- Conventional Loans: While most lenders prefer a DTI of less than 40%, you may qualify for a traditional loan with a DTI of up to 50% — although your lender will likely increase your mortgage rate to offset the risk of your high DTI pose.
VA Loan vs. Conventional Loan: Mortgage Rates
Housing conditions, inflation, and even the Federal Reserve all factor into current mortgage rates. Your personal mortgage rate is also affected by your loan size, down payment, and creditworthiness, as well as whether you apply for an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.
VA mortgages generally offer lower interest rates than traditional loans with a percentage difference of 0.25% – 0.42%. For example, for a 30-year fixed-rate loan ending in late July 2022, the average mortgage rate on a VA loan was 5.375% versus 5.5% for a traditional loan of the same term.
However, if you take out a 15-year fixed-rate loan in late July 2022, you may have locked in an interest rate of just 5.125% in exchange for a higher monthly payment.
VA Loan vs. Traditional Credit: Credit Limits
For a single-family home in most US states in 2022, you can finance a home of up to $647,200 with a conventional loan. The compliant loan limit increases to $970,800 for high cost areas in California, Alaska, Hawaii and other states. If your property exceeds your region’s compliant credit limits, you must use a jumbo loan – a type of non-compliant traditional loan.
Technically, VA loans have no credit limits. Instead, they have VA loan claims. If you have never drawn your VA loan benefit – or you have repaid a VA loan in full – you have a full entitlement, which means the VA will repay up to 25% of any loan amount you were approved for.
However, if you are making payments on a VA loan or have defaulted on a VA loan, you have a partial claim. You can still buy a home with a fractional VA loan. However, the VA only guarantees your loan up to the relevant loan limit minus the entitlement you have used.
VA Loan vs. Traditional Credit: Closing Costs
Closing costs are various fees you pay your lender to process your loan. Included in these costs are incorporation fees, home appraisal fees, title search fees, and more.
While VA loans limit their origination fees to 1% of the total loan amount, traditional loans typically only have those fees between 0.5% and 1%. Appraisal fees for traditional loans are typically lower, typically ranging from $300 to $400 for a single-family home versus $425 to $875 for a VA appraisal. It’s important to note that appraisal fees for a home financed with any loan can cost over $600 or even $2,000 depending on where you live, the size of your home, etc.
Overall, you will generally pay 3% – 5% of your loan amount to complete your VA loan and you will likely pay 2% – 6% to complete your traditional loan.