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VA Loans vs. Conventional Loans
Buying a house is exciting, but it can get confusing when you start comparing all of the different types of loans. If you’re a veteran or active service member who qualifies for the VA loan, that’s one more option that you need to consider. You might find yourself wondering which is better — VA loan vs. conventional loan? What are the perks of an FHA vs. conventional loan? Which one is best for me? What’s the best mortgage lender to use?
Luckily, there are concrete answers to these questions that you can use to determine the best and most affordable option for you and your family to buy a house.
VA loan eligibility
VA loans require a certificate of eligibility (CoE). However, the requirements for getting a CoE, vary according to a number of factors. For service members currently on active duty, you qualify as long as you have been on active duty for 90 days or more. Most other cases require minimums of 90 days, 181 days, or 24 months depending on the time period in which you served. For National Guard and Reserve members, the minimum requirements are 90 days of active-duty service or 6 creditable years with some additional qualifiers. However, if you’ve received a dishonorable discharge, you are likely not eligible.
The descriptions here are only rough sketches — the full details of eligibility are complex. For complete details, check out VA.gov’s list of eligibility requirements.
VA loans vs. conventional loans
|VA Loans||Conventional Loans|
|Minimum down payment||0%||3%|
|Loan maximum limits?||No||Sometimes|
|Private mortgage insurance?||No||Yes|
|Available for owner-occupied housing?||Yes||Yes|
|Available for new construction?||Yes||Yes|
|Available for investment properties?||No||Yes|
|Additional fees/closing costs?||Yes||Yes|
- Down payment — One of the biggest benefits of a VA loan vs. conventional is the absence of a down payment. While you will still have a funding fee, you are not required to put up a down payment. With a conventional loan, the minimum down payment is 3%.
- Loan maximum limits — With some conventional loans, you will be subject to maximum loan limits (convention 97 loans). In the past, VA loans also had maximum loan limits in line with the national conforming limits. However, as of January 1, 2020, those limits have been erased by H.R. 299. Be aware, though, that your mortgage lender still may impose its limits based on your creditworthiness and income.
- Private mortgage insurance — Another major positive of VA loans vs. conventional loans is related to private mortgage insurance (PMI). With a conventional loan, you are required to pay PMI until you have 20% equity built up in your home. With a VA loan, you have no PMI from day one.
- Type of property you can buy — Conventional loans can be used to purchase any type of property, including a house you’re going to live in, investment property and even new construction build. With a VA loan, you’re not able to use the loan to purchase an investment property. You will need to plan on living in the residence that you purchase with your loan.
- Fees/Closing costs — Even the best VA loans do come with an additional fee that you won’t see on conventional mortgage loans. The fee is called the VA funding fee and is a percentage of your total loan value. There are quite a few unique situations where the fee may be waivable, but in most circumstances you’ll have to pay the funding fee. The fee may feel similar to a down payment, but the big difference is that you won’t be getting the fee back like you would if you sold your house and collected your equity. But the funding fee is still smaller than the down payment requirement of a conventional mortgage. Additionally, you’ll be recouping a lot of that fee with what you save not paying PMI. Both a VA loan and a conventional loan come with closing costs.
Benefits of a VA loan vs. a conventional loan
Pros of a VA loan
- No down payment required — One of the biggest holdups for new homebuyers is the need to put down a sizable down payment. VA loans do not require a down payment at all. But remember that down payments help lower the cost of your monthly payments, so they’re still a good idea if you can afford them.
- No private mortgage insurance (PMI) — With most loans, you are required to pay PMI when you have under 20% equity (conventional) or the entire life of the loan (FHA). With VA loans, there is no PMI from day one, no matter how much you choose to put down.
- No mandated purchase limits — In the past, there were limits on how much you could borrow through a VA loan. However, thanks to a new bill passed in 2019, there are no longer uniform limits on how much you can borrow. Your mortgage lender will still have their limits, but they’re no longer capped by the program itself.
Pros of a conventional loan
- No VA funding fee — While you still have fees and closing costs, you don’t have to pay the VA funding fee that’s required with that type of loan. You still pay a down payment, but that down payment builds instant equity in your house.
- Can be used for investment properties — If you’re looking to buy or build a house as an investment property that you’re not planning on living in, you can accomplish that with a conventional loan.
- Available to anyone — VA loans are only available to people who have served in the military or are active and have met the eligibility requirements. Conventional loans are available to the military and the general public.
Cons of a VA loan
- Only available to eligible military — The VA loan is a benefit given to those people who have served. If you don’t meet the criteria, you can’t use the loan.
- VA funding fee — While you don’t have to put down a down payment, you are still required in most situations to pay the VA funding fee.
Cons of a conventional loan
- Private mortgage insurance — As long as you have under 20% equity in your home, you will have to pay PMI. Often, this can add up to several hundred dollars monthly.
- Required down payment — You are required to make a down payment with a conventional loan. While this can sometimes be as low as 3%, it’s still a sizable amount of cash you need to have on top of money for moving and closing costs. The one positive, though, is that the down payment goes into your home as equity, unlike the VA funding fee.