What are the main differences between VA loans and conventional loans?
Conventional loans generally have stricter loan requirements than VA loans and other government-backed loans — such as FHA and USDA loans — because lenders assume most of the risk with conventional loans.
Let’s dive deep into the different requirements for VA and conventional loans so you can decide which mortgage product is best suited to your home buying needs and goals.
VA Loan Vs. Conventional Loan: Property Type
One of the biggest differences between VAs and conventional mortgages is the type of property you can finance with each type of home loan.
- VA Loans: According to the VA loan occupancy requirements, if you are financing with a VA loan, the home or property must serve as your primary residence. Although you cannot use a VA loan to directly purchase a second home, investment property, or vacation home, you can purchase a multi-family property of up to four units for rent – as long as you occupy one of the units as Principal residence. .
- Conventional loans: Conventional loans do not require you to occupy the home you are buying as your primary residence. This means you can use a conventional mortgage to buy a second home, vacation home, rental home, or other investment property with no strings attached, as long as your lender approves it.
VA Loan Vs. Conventional Loan: Credit Score
Because your credit score represents how well you’ve managed your debt, mortgage lenders rely on this three-digit number to assess your risk as a borrower.
And while the VA doesn’t set a minimum credit score requirement, you’ll still need to meet your lender’s minimum credit score requirement, no matter what loan product you’re applying for.
Here are the credit score requirements for conventional and VA loans:
- Conventional loans: The minimum benchmark credit score varies by lender, but in general you will need a score of at least 620 to qualify for a conventional loan.
- VA Loans: Since the government insures VA loans, lenders may offer lower credit score requirements than conventional loans. Some lenders may still require a score of 620 credits, but a score of 580 may qualify you for a VA loan with Rocket Mortgage®.
VA Loan Vs. Conventional Loan: Down Payment
One of the coolest features of VA loans is that they generally don’t require a down payment, although some lenders may require a small down payment if your credit rating is low.
For conventional loans, most lenders will require you to pay at least 3% of the purchase price, depending on your financial situation and credit score. However, if you make a down payment of at least 20%, you can also waive paying for private mortgage insurance (PMI) at the start of your loan term.
VA Loan Vs. Conventional Loan: Mortgage Insurance
Depending on your loan type, down payment amount and other factors, lenders may charge you mortgage insurance to offset the risk of default. Mortgage insurance can be a one-time cost you pay at closing, a regular fee built into your monthly mortgage payment, or both.
Let’s look at the mortgage insurance requirements for conventional versus VA loans:
- Conventional loans: Lenders will require you to pay private mortgage insurance (PMI) on a conventional loan until you reach 20% of the equity in your home. Although the exact amount varies from lender to lender, the PMI is generally 0.1% to 2% of your loan amount per year. Once you reach 22% of your home’s equity, your lender should automatically remove PMI from your monthly payments, but you can ask them to do so once your home’s equity reaches 20%.
- VA Loans: Although VA loans do not require mortgage insurance, they do require you to pay a VA financing fee, which is an upfront cost of 1.4% to 3.6% of the loan amount. Like mortgage insurance, finance charges offset the potential risk of default and can be rolled into the total loan amount.
PV Loan Vs. Conventional Loan: Debt to Income Ratio (DTI)
Your debt-to-income ratio (DTI) is a percentage representing the portion of your gross monthly income spent on recurring monthly debts such as rent, student loans, auto loans, and credit card payments.
Your lender reviews 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 Loans: Although VA loans do not have specific requirements for DTI, most lenders prefer a DTI of 41% or less. Lenders are also required to review compensating factors — such as your credit score, cash flow, or military benefits — so you can potentially qualify with a DTI above 41%.
- Conventional loans: Although most lenders prefer your DTI to be below 40%, you may qualify for a conventional loan with a DTI as high as 50% – although your lender will likely increase your mortgage interest rate to compensate for the risk that your high DTI may pose.
VA Loan Vs. Conventional Loan: Mortgage Rates
Housing market conditions, inflation and even the Federal Reserve are all factors that affect current mortgage rates. The interest rate on your personal mortgage will also be influenced by the amount of your loan, your down payment and your credit score, as well as whether you are applying for an adjustable rate mortgage (ARM) or a fixed rate mortgage. fixed.
VA mortgages generally offer lower interest rates than conventional loans, with a percentage difference of 0.25% to 0.42%. For example, for a 30-year fixed rate loan ending at the end of July 2022, the average mortgage rate for a VA loan was 5.375% compared to 5.5% for a conventional loan of the same duration.
However, if you took out a 15-year fixed-rate conforming loan at the end of July 2022, you might have locked in an interest rate as low as 5.125% in exchange for a higher monthly payment.
VA Loan Vs. Conventional Loan: Loan Limits
For a single-family home in most US counties in 2022, you can use a conventional loan to finance a home for up to $647,200. The conforming loan limit increases to $970,800 for high-cost areas in California, Alaska, Hawaii and other states. If your property exceeds the conforming loan limits for your area, you will need to use a jumbo loan – a type of conventional non-conforming loan.
VA loans technically have no loan limits. Instead, they have VA loan rights. If you’ve never used your VA loan benefit — or if you’ve fully repaid a VA loan — you’re fully entitled, which means the VA will repay up to 25% of any loan amount you’re approved for. .
However, if you are making payments on a VA loan or have defaulted on a VA loan, you have partial entitlement. You can still buy a home with a VA loan using a partial entitlement. The VA, however, will only guarantee your loan up to the conforming loan limit minus the entitlement you are using.
VA Loan Vs. Conventional Loan: Closing Costs
Closing costs are various fees you pay to your lender to process your loan. These costs include origination fees, home appraisal fees, title search fees and more.
While VA loans cap their origination fees at 1% of the total loan amount, those fees also tend to range only from 0.5% to 1% for conventional loans. Appraisal fees for conventional loans are generally lower, typically ranging from $300 to $400 for a single family home versus $425 to $875 for a VA appraisal. It is important to note that the appraisal fee for a loan financed home can cost north of $600 or even $2,000 depending on where you live, the size of your home, etc.
Overall, you’ll typically pay 3% to 5% of your loan amount to close your VA loan, and you’ll likely pay 2% to 6% to close your conventional loan.