Conventional Loan vs. VA Loan: The Pros and Cons in 2022

Conventional Loan Vs VA Loan Overview

When choosing between a conventional loan or a VA loan, the obvious choice would be a VA loan if you are eligible. But when it comes to mortgage loans, there isn’t a one-size-fits-all, and each person’s situation may be different. For example, certain homeowners might benefit more from one of the conventional loans, even when they are VA-qualified. 

Luckily, there is a simple way to weigh up your options. Your chosen mortgage lender should be able to run a few numbers when it comes to a conventional loan vs a VA loan to assist you in finding a suitable product that matches your situation. Let’s dive in!

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In this article:

  • VA Loan vs. Conventional Loan
  • The Differences of the Loans
  • VA Loan: Pros and Cons
  • Conventional Loan: Pros and Cons
  • When Is a VA Loan Better?
  • When is a Conventional Better?
  • What Do Sellers Prefer?
conventional loan

VA Loan vs. Conventional Loan: Which Is Better?

If you qualify for a VA Loan, it is usually a better option when compared to conventional loans. 

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The Primary Benefits of VA Over Conventional

With a VA loan, you can purchase a home without the need for a down payment. You can also have a higher debt-to-income ratio, and you won’t need private mortgage insurance. 

The mortgage rate will also probably be lower and your monthly payments might be cheaper. These are benefits that are difficult to beat. 

However, conventional loans tend to be more flexible. You can also use one of these loans to purchase almost any type of property, including a vacation residence or a second home. These loans are also not attached to any special eligibility requirements in order to qualify. 

At the same time, many VA-eligible borrowers are only permitted to have one VA loan. So if you are wanting to buy a second home, you would have to go for a conventional loan even when you have veteran status. Of course, each of these loan types also has its own set of drawbacks too. It is important to weigh up the pros and cons relating to each loan before you make a final decision. 

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Conventional Loan vs. VA Loan: Comparison Chart

To make it easier to compare a conventional loan to a VA loan, check out this chart:

VA Loan:

  • Minimum Credit Score: Typically 580 to 620
  • Special Eligibility: Eligible Military service history
  • Minimum Down Payment: 0%
  • Private Mortgage Insurance: Not required
  • Upfront Funding Fee: 0.5 – 3.6% of the loan amount
  • Closing Costs: Often 2-5% of the loan amount
  • Maximum Loan Amount: None
  • Eligible Properties: Primary residences
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Conventional Loan:

  • Special Eligibility: None
  • Minimum Credit Score: 620
  • Minimum Down Payment: 3%
  • Private Mortgage Insurance: Required when the down payment is less than 20%
  • Upfront Funding Fee: None
  • Closing Costs: Often 2-5% of the loan amount
  • Maximum Loan Amount: $647,200 for a 1-unit home (in most areas)
  • Eligible Properties: Primary residences, investment properties, and second homes

Differences Between Conventional Loans and VA Loans

Conventional loans and VA loans have many differences. The one that stands out the most is that VA loans require a service history with the military in order to qualify. 

Al Moreira, from the Moreira Team, says that with a VA loan, you will need VA eligibility through reserve service, military service, the National Guard service, or the surviving spouse of a veteran that was killed in combat or from a disability or illness that is service-connected. These same people are able to apply for conventional loans, but the majority of individuals that choose conventional loans generally don’t qualify for a VA loan. 

The second difference is that VA loans allow for 100% financing, while most conventional loans usually require a minimum of 3% down. 

Thirdly, a conventional loan also requires that you buy PMI (private mortgage insurance) if your down payment is less than 20%. 

Al Moreira also states that the majority of individuals that settle for conventional loans aren’t eligible for VA loans. 

A VA loan won’t require PMI, but the applicant will be charged a “funding fee”, which is usually between 1% and 3.6% of the total loan amount, which also depends on the down payment. 

Fourth, you can only use your VA loan to buy your primary residence. Conventional loans are more flexible and allow you to use the loan for a primary residence, an investment property, or a second home. 

Fifth, VA loans are guaranteed and backed by the DVA (Department of Veterans Affairs), while a conventional loan is usually not backed by a government agency, says Al Moreira from the Moreira Team. 

Moreira continues that when looking at the similarities both these loan programs typically require debt-to-income ratios that are under 50% (but preferably closer to 41%)

He adds that both loan programs also have 30-year fixed-rate options, adjustable-rate options, and 15-year fixed-rate options, which will depend on the need of the borrower, their situation, and how long they plan to live in their home. 

VA Loans: Pros and Cons

VA loans have bad and good points. Some of the pros are that you won’t need a down payment, there is no maximum when it comes to the loan amount, and you won’t need PMI (private mortgage insurance)

Some of the downsides of VA loans is that appraisals could take longer and this can make VA offers a bit less competitive in comparison to conventional or cash buyers, explains Al Moreira, the CEO of the Moreira Team. 

There is also a funding fee that will be charged. However, this can be included in the loan if you don’t have enough money to pay for this fee upfront. 

At the same time, you have to be eligible for a VA loan, which can leave many borrowers out. 

Moreira explains that, in order to qualify, you have to meet one (or more of these) requirements:

  • You are a veteran that served a minimum of 90 days during wartime.
  • You served 90 continuous days of active duty. 
  • You are a veteran that served a minimum of 181 days during peacetime. 
  • You have served 6 (creditable) years in the National Guard or Selected Reserve.
  • You are the surviving spouse of a service member that died while on duty, prisoner of war, missing in action, or when the person died from a disability that was service-related. You are not allowed to be remarried if you want to apply for a VA loan. 

Moreira adds that you might not qualify for a VA loan when you received a dishonorable or an other-than-honorable bad conduct discharge. You can apply to the VA to have this discharge status upgraded. 

Conventional Loans: Pros and Cons

Conventional loans tend to close faster when compared to VA loans. Moreira says that conventional loans usually also receive appraisal-waivers, which lowers closing costs while increasing the assurance of closures for real estate purchases. There are also no funding fees attached to conventional loans. 

As we mentioned above, investment, second, and primary properties can be purchased when using conventional loans. Home sellers also look at conventional loans with more favor than the VA loans

Al Moreira, the CEO of The Moreira Team says that conventional mortgages will require the purchase of PMI (Private Mortgage Insurance) when the down payment is less than 20%. And unlike the VA loans, the down payment is usually 3% or more. 

Another setback to conventional loans is the limits placed on maximum loan amounts. This limit is set by every county, but in the majority of counties, the maximum loan amount that can be borrowed is $647,200 for the single-family homes. 

When is a VA Loan Better?

If you are eligible for a VA home loan, you will probably be able to secure a much better finance deal when compared to conventional loans. This has to do with not needing a down payment, paying for PMI, or having to worry about whether you have exceeded the maximum loan amount. 

Moreira uses an example of a veteran that is interested in buying a $300,000 house (as a first-time buyer). Assume the applicant only has $6,000 in savings (not enough to buy a home with an FHA loan or conventional loan). The applicant can use their VA benefit to buy the home without having to fund the down payment and then structure this loan with either seller credit or lender credit to assist with covering the closing costs. 

This is when a VA loan would be a better option, especially for those that do not have enough money to put down. 

Another example of when a VA loan would be a better choice is when a borrower’s credit score is below 620 and they do not have any savings for their down payment. Moreira says, that a VA loan would be the best choice in these situations. 

When is a Conventional Loan Better?

Even though VA loans have many perks, conventional loans can also be the best solution for certain circumstances. 

Use the same example of a borrower wanting to buy a $300,000 home (as a first-time buyer). But in this case, they have $60,000 for the down payment, and there are already 15 other people that have put an offer on this house. 

Moreira explains that this is when a VA loan will usually not win over conventional offers since the perceived risks are greater when it comes to appraisals. And since the borrower has the 20% for the down payment, they can buy the property without having to take out PMI. 

Moreira adds that if you really want to secure a home, then one of the conventional loans might be your best option, even when you are eligible for both VA and conventional loans. 

Do Sellers Prefer Conventional Loans or VA Loans?

One of the challenges that veterans face when they want to buy a home is that many sellers favor the conventional loan over a VA loan. 

Moreira cautions that in the market of today, with a lot more offers available to sellers, many sellers tend to prefer conventional financing when compared to VA financing. 

In most cases, appraisals for conventional financing list properties “as-is”, while VA appraisals usually have other requirements, which can turn the deal sour for a seller. 

But VA loans usually provide better deals when it comes to buyers (especially first-time buyers) when compared to conventional loans. So it can be worthwhile to work with the agent of the seller and your agent to find out whether you can secure the offer as-is. 

Ensure that you explain to the seller along with the agent how a VA loan really works, so they are not acting according to misconceptions when it comes to the VA mortgage program. This can help to get the seller to accept your offer. 

How to Choose a Mortgage That Works for You

The correct financing option is going to depend on multiple factors, including:

  • Whether you qualify for a loan
  • The home type you are interested in buying
  • Your personal finances
  • The real estate market in your area
  • How urgent you are to buy a home

Moreira recommends consulting with a professional and experienced loan officer so that they can help you choose the best loan and how to structure the financing. There are no one-size-fits-all approaches, so what works for one person, might not work for you.