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VA vs. conventional loans: What’s the difference?

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VA loans offer 100-percent home financing to qualified veterans, active-duty servicemembers and surviving spouses. If you’re eligible for a VA loan, you might assume it’s undoubtedly a better option than a conventional loan. However, it’s not always all upside. Here’s how they compare.

VA loans: Overview

A VA loan is a mortgage for members of the military and veterans that can be used to purchase, build or refinance a home. It’s backed by the U.S. Department of Veterans Affairs (VA), meaning the VA guarantees the loan on behalf of the mortgage lender in the event the borrower stops making payments.

The benefits of a VA loan include no down payment and no mortgage insurance requirements. VA loans also tend to have lower interest rates and looser credit standards.

VA loan borrowers pay a funding fee, however, a one-time charge ranging from 1.4 percent to 3.6 percent of the loan principal. The home must also be a primary residence (meaning you’ll live there), not a second home or investment property.

VA loans are available from VA-approved mortgage lenders. There are national lenders and even some credit unions that specialize in this type of loan.

Conventional loans: Overview

A conventional loan is the most popular type of mortgage. In contrast to a VA loan, it isn’t backed by the government. It’s available through many kinds of mortgage lenders, including banks and online lenders.

If you qualify, you can obtain a conventional loan with a down payment as low as 3 percent. However, if you put down less than 20 percent, you’ll need to pay for private mortgage insurance (PMI) for a time. You’ll most likely pay the premiums with your monthly mortgage payment.

Unlike a VA loan, conventional loans also have a minimum credit score requirement of 620, although to get the best interest rate and terms, you’ll need a 740 or higher.

VA loan vs. conventional loan requirements
VA loan Conventional loan
Eligible properties Primary residence only Primary and secondary residences; investment properties
Credit score minimum No formal minimum set by VA; many lenders look for 620 or higher 620
Debt-to-income (DTI) ratio maximum No formal maximum set by VA; many lenders look for 41 percent or lower 43 percent
Down payment minimum Zero percent 3 percent
Loan limits No limit unless borrower has defaulted in the past or has two or more VA loans $647,200; $970,800 in costlier housing markets
Mortgage insurance No mortgage insurance Mortgage insurance required if down payment lower than 20 percent
Fees Closing costs plus funding fee ranging from 1.4 percent to 3.6 percent of loan principal Closing costs

Which is right for you?

If you qualify for both a VA and conventional loan, begin by comparing mortgage offers. The rates on VA loans can sometimes be more attractive than conventional loan rates, but it depends on the mortgage lender you work with and other factors. If you can get a lower rate with a VA loan, that might make it worth it, especially now as rates move up.

If your credit score needs work, however, a VA loan might offer more flexibility than a conventional loan. (The most flexible loan in terms of credit, though, is an FHA loan — here’s how VA and conventional loans compare to FHA loans.)

Rates and credit aside, if you can afford to put 20 percent down, it might be better to go with a conventional loan to avoid the VA funding fee. Unlike a VA loan with no money down, you’ll also have some equity in the home right away if you get a conventional loan with 20 percent (or any amount) down.

Keep in mind that with a VA loan, you can’t buy a vacation home or investment property, either. If that’s your goal, you’ll need to shop for a conventional or investment property loan.

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